Wasteful “Stimulus” Packages by Government Don’t Work

Only in Washington could politicians and bureaucrats dump more than $2 trillion into bail-out money holes and then claim that the federal government needs to spend several hundred billion more to “stimulate” the economy.  If a little of something fails, goes the mantra in Washington, do a lot of it!  Especially if it is money.

But the Japanese government tried the same strategy to bring the country out of its economic slump, with disastrous results.  Editorializes Investors Business Daily:

In the marketplace, money naturally gravitates toward real needs, signaled by the willingness of people to pay for goods and services out of their own pockets.

In government spending, money follows power. It is channeled by key officeholders to favored constituencies. So when a national government tries to breathe life into an economy with massive spending, the result is massive economic inefficiency.

It’s an undying Democratic Party myth that Franklin Roosevelt’s New Deal spending helped end the Great Depression (or at least relieved suffering). The hard fact is that unemployment stayed well into the double digits until the early stages of World War II.

There seems less argument over a more recent case of failed big-government stimulus, that of Japan in the 1990s. The incoming administration should study that lost decade well, because it started with disturbing parallels to our own time and place.

Japan got into trouble with the collapse of a real-estate bubble and a subsequent breakdown of its banking system.

The Japanese government made one mistake that U.S. policymakers are at least trying to avoid now: It did not move aggressively to clean up the bad debt on banks’ balance sheets.

Then it made another error that the pending Obama administration seems tempted to repeat. It tried to revive the economy by increasing the government’s share of it.

The result was plenty of pork and almost no growth. Japanese government spending (at all levels) grew from 31% during the ’90s to 38% of GDP more recently.

Meanwhile, average Japanese annual economic growth fell from 4.1% in the ’80s to just 1% in the ’90s. From ’92 to ’99, industrial output grew only 0.7% compared with nearly 40% in the U.S., which spent the decade reducing government spending as a share of GDP (this was the era of a GOP Congress that took its job seriously).

There’s a cautionary tale here for Barack Obama, but also a reminder that he has a choice. The current crisis is serious enough to excuse, even demand, changes in positions he had staked out during much different conditions on the campaign trail.