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Avoiding a Lost Decade
Avoiding a Lost Decade
January 10, 2012
Originally published in The Washington Times
Remember Japan’s “lost decade” of the 1990s? For the United States, 2011 was the “lost year.” Congress and President Obama are engaged in a standoff that will see 2012 go the same way unless they both get out of the way and let the private economy grow.
Consider what they have spent the past year doing. Mr. Obama proposed a budget so laughable that his own party unanimously rejected it. He has pushed one idea after another to boost government spending. Even after the end of a major war and the announcement that the Army and Marine Corps will be slimmed down, there will be no monetary savings in the defense budget.
The Senate has not passed a budget since 2009, while Congress has funded the government only through continuing resolutions, narrowly avoiding (partial) government shutdowns on at least three occasions. As a whole, neither party has made any serious attempt to reduce the deficit, even as another year has passed with government expenditures increasing.
The Federal Reserve continues its absurd policy of near-zero percent interest rates through 2012. In September, Fed Chairmen Ben S. Bernanke announced the “twist,” a $400 billion binge on long-term U.S. bonds - a policy that failed even to receive a token blip from the stock market.
Executive agencies have continued their regulatory assault at a torrid pace: 300 major rules were finalized in 2011 and 144 new major rules are in the works, including ones from the Environmental Protection Agency, Dodd-Frank financial regulations and Obamacare. Last year was another record year for the size of the Federal Register. American business is being strangled by new red tape.
Congress, the Fed and the president have failed to advance any policies that will create long-term stability in the market. Instead, they persist with gimmicks like the “twist” and two-month payroll-tax holidays while accomplishing nothing substantial. It’s long past time they got serious.
Japan’s 1990s were lost for all the same reasons America’s 2011 was lost - the status quo prevailed. In 1986, Japanese economic growth fell from 4.4 percent to 2.9 percent. In response, the Bank of Japan slashed the discount rate in half, from 5 percent to 2.5 percent. During the next three years, Japan created one of the largest economic bubbles in history. It didn’t last. Real estate prices fell by 80 percent from 1991 to 1998, and the stock market collapsed to a quarter of its 1989 high.
Throughout the 1990s, Japan tried at least 10 fiscal stimulus programs and left interest rates below zero, while economic growth kept marching southward. None of this did anything other than ruin Japan’s fiscal health, taking the country from the best fiscal position in 1990 to annual deficits of 7 percent of gross domestic product and a national debt of 227 percent of GDP. Sound familiar?
The president has vowed that his new pile of programs will be different. He has called for new publicly funded infrastructure projects, and yet that’s exactly what Japan tried in the 1990s, repeatedly on a massive scale ($1.4 trillion in 2011 dollars). Rural towns were paved over, given grand new bridges, and a huge highway system was built. All of it failed to spur growth, and similar schemes are bound to fail as well.
Economic growth is not created from the top down. Government’s main job is providing a constant, consistent playing field - something Washington lawmakers have done much to undermine over the past decade. Americans can create wealth. Extending unemployment benefits indefinitely, playing around with new gimmicks or suggesting more stimulus won’t help in the long run. Leaving individuals free to use their talents and keep what they earn will. The recovery will only start with significant regulatory relief.