The French economist, statesman, and author Frédéric Bastiat wrote in 1850 that “there is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
Well, apparently, we are stuck with more than our fair share of “bad” economists. A few years back I read an article in the Huffington Post titled “The Silver Lining of Japan’s Quake,” claiming that the tragedy that resulted from the earthquake and tsunami that hit Japan on March 11, 2011—killing almost 20,000 people, leaving 450,000 homeless, and destroying the Fukushima nuclear power plant—might actually have been good for their economy. According to the article, the “rebuilding will stimulate domestic growth and global demand while helping integrate East Asia.”
Perhaps Thomas Carlyle, the nineteenth century Scottish essayist, historian, and philosopher who referred to the discipline of economics as the “dismal science,” was actually on to something.
But where have I heard such nonsense before?
Oh, yes, from none other than the mathematician John Maynard Keynes, who wrote that “pyramid-building, earthquakes, even wars may serve to increase wealth.”
The idea that we can increase the public wealth by destroying the private wealth we already have has a long and torturous history, and it has been refuted many times. But perhaps its clearest refutation comes from Bastiat in what has become known as the “Parable of the Broken Window.”
He asks,
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass?
If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. (emphases mine)
Bastiat got it precisely right. Spending for the sake of spending does not create wealth. It just moves money from one pocket to another. Break a pane of glass, and the money that would have been spent on a pair of new shoes goes to the glazier instead. No new wealth is created; there is just a shifting of resources from here to there—the economic equivalent of musical chairs.
But back to Japan, which has been moving a lot of money around over the past three decades in a vain attempt to prove Keynesian economics right—and when governments spend, borrowing is sure to follow. Since 1980, Japan’s government debt has ballooned from 20 percent of gross domestic product (GDP) to over 200 percent of GDP—a 900 percent increase! As of March 2023, Japan’s government debt stood at more than 226 percent of nominal GDP—the second highest in the world after Venezuela (350 percent).
Japan’s debt is almost twice that of the United States (123 percent), and its debt has been downgraded by Standard and Poor’s from its lofty AA rating to a single A. By way of comparison, Australia, Canada, and Denmark each have a AAA rating, as do Switzerland and Germany. (On August 1, 2023, Fitch Ratings downgraded the US debt from AAA to AA+, a first ever US downgrade by Fitch.)
And what did Japan get for all that so-called economic stimulus (much of it occurring even before the 2011 tsunami)?
Economic Stagnation
Many in the financial sector referred to the period that lasted from about 1991 to 2001, which saw a significant slowdown in Japan’s previously robust economy, as the “lost decade.”
According to Reason, “between 1992 and 1999, Japan passed eight stimulus packages, totaling roughly $840 billion in today’s [2009] dollars. During that time, the debt-to-gross domestic product (GDP) ratio skyrocketed, the country was rocked by massive corruption scandals, and the economy never recovered.”
Japan built roads, bridges, tunnels, dams, ports, rails, airports, and more to little effect. According to Facts and Details.com, “cities are full of vacant public buildings and government-funded museums and concert halls that no one uses. In the countryside there are expensive government-funded projects that have been dubbed tunnels and bridges to nowhere.” Perhaps they should have taken Mr. Keynes’s advice and built a few pyramids too! Surely that would have done the trick.
The World Bank reported that Japan’s GDP growth in 2012, a year after the tsunami, was just 1.37 percent. Between 2012 and 2022, Japan’s highest GDP growth rate occurred in 2021 at just 2.14 percent, but that came just after the 4.28 percent decline of 2020. In 2022, Japan’s GDP growth rate was just 1.03 percent, a decline of 1.11 percent from 2021.
Another barometer of Japan’s economy can be found by a quick look at the Nikkei 225—Japan’s equivalent to the US Standard and Poor’s 500 Index. Note that its stock market peaked in 1989 at ¥38,957, never to return to its former glory. It has been in a downward trend since then, at one point losing more than 80 percent of its value. Recently, it traded at ¥32,060. And this is in nominal terms! If you factor in inflation and the opportunity cost (another Bastiat invention) of not having invested elsewhere, Japanese investments to date have been an unmitigated financial disaster. Keynes would have been quite at home in this investment climate, however, since he made and lost two fortunes speculating on commodities and currencies. The CFA Institute revealed that after his second lost fortune, and duly chastened, “he became what we would now refer to as a buy-and-hold value investor.”
It has been reported that “by the late 1980s, the Japanese economy experienced an asset price bubble of a massive scale. The bubble was caused by the excessive loan growth quotas dictated on the banks by Japan’s central bank, the Bank of Japan, through a policy mechanism known as the “window guidance.” In a homage to Bastiat, perhaps it should have been called the “broken window guidance.”
This collapse in prices was not confined to the financial sector but affected the residential real estate market as well. Using 2010 as a benchmark (100), the Bank for International Settlements reported that by the second quarter of 1991, the Japan Residential Price Index stood at 183—an increase of 83 percent, but by the first quarter of 2023, the price index stood at just 135—a decline of more than 26 percent over 32 years.
I would be remiss if I didn’t point out that Japan’s economic problems go beyond fiscal and monetary mismanagement. Japan suffers from a low birthrate and aging population (as do China and others), and the demand for its products has been buffeted by slowing overseas growth and moribund domestic consumption, to mention just a few issues. But none of this refutes the fact that Japan’s stubborn reliance on Keynesian economics has proved once again to be little more than the application of economic snake oil to a sick economy.
Clearly, Japan’s fiscal and monetary problems preceded the tsunami that struck its shores in 2011, leaving it precious little wiggle room to deal with the immediate catastrophe. Having maxed out its national credit card in a vain attempt to stimulate its economy, Japan’s necessary rebuilding came at the risk of destroying its currency and credit rating. It may yet prove to be true, I fear, that Japan’s lost decade will become its lost century. Japan, you see, has been victimized twice: first by bad economics and then by bad luck. The first should have been foreseen.
