The Japan Syndrome

Are you ready for the big spin? The Keynesian dogs are salivating at the latest crisis too good to waste. The radiation fallout hasn’t even settled yet and already the broken window trained economists are fanning out to spread the word of the tremendous opportunity now in front of Japan. They would never say it, but I’m sure there’s quite a bit of envy that the earthquake wasn’t centered off the U.S. coast instead of Japan. That way, we would be the beneficiaries of a boon of economic stimulus spending that would make the A.R.R.A. look like play money.

Japan has the world’s third largest economy behind the U.S. and China. Yet , they have a debt equal to over 200% of their GDP. Now they are faced with infrastructure repairs of an unknown amount, hundreds of billions to be sure. Before the earthquake, they had 54 nuclear reactors functioning. It remains to be seen how many will be destroyed permanently through the efforts required to prevent the cores from melting down. That’s one huge difference from a normal recovery from a natural disaster. Generally, it’s only a matter of days or weeks before the power is back on. Japan faces no less than years to replace the destroyed power grid in some areas of the country. If the nuclear option is taken off the table for those rebuilding efforts, the costs from alternative sources will certainly be higher.

It will take months just to get a handle on cost estimates to repair the damage. The construction industry now has job security for many years to come. What will not result from this epic disaster is economic growth. Yet that is what you will hear ad nauseam. It is such a baseless argument. Just like in 2008, we asked the question. If nearly a trillion in stimulus money is good, wouldn’t two trillion be better? Ten trillion? Why stop? If it really creates jobs that can create wealth and grow the overall economy, why would we ever limit the program at all?

The official answer goes something like this. Stimulus funding is intended as a temporary stopgap measure to inject demand that would otherwise not exist. The government can provide what the markets cannot. Liquidity in times of crisis, and demand where none exists. The theory then goes that the artificial stimulation is then later retracted when the economy can stand on its own again and the debt repaid in times of good economic growth without unduly harming it. Nice theory on paper. What really happens in reality?

As we’ve seen with the Obama stimulus, much of the funding was sent to reward the Obama election supporters. Much was sent to the states to prop up their budgets until this year. As we’ve seen with Wisconsin, when the gravy train ends, reality sets in and this will happen in many states across the country in the next couple of years. Some was returned to the taxpayers in the form of a tax rebate check. Some do spend it, but many sat on it for a rainy day fund. So we can see that much of it gets redirected to unintended areas. What’s worse though is what you see with the budget that Obama has put forward. That temporary, one-time stimulus money suddenly becomes part of the annual budget. Spending addicts tend to get used to their spending habits and don’t like to give the money back.

Worst of all, this type of spending doesn’t result in creating the private sector, wealth creating jobs that are absolutely necessary in growing the economy. Every single penny of taxpayer financed, including debt financed, stimulus spending on infrastructure repairs or other public-sector projects must be taken back out of the economy at some point and with interest. This serves to mitigate growth later on. There is no free lunch. This is the dilemma now facing Japan. They must take on new, massive amounts of debt to rebuild their tattered nation. You won’t even hear anyone discuss ways in which to get private industry and private investors involved in the process, at least on any scale of significance. Those methods already exist, yet they don’t provide the flexibility for political payoffs and redirecting public monies that stimulus funding does. In short, the politicians can’t screw the public.

What a shame that following such a disaster in humanitarian terms, in some respects, the worst is yet to come. The Japanese people will bury and mourn their dead. Some will now suffer the rest of their lives. Many will never recover from this tragic event. Yet, the sharks are already circling to move in and make their killing. What effect this will have on the Japanese and even the world economy can only be speculated upon. It’s not a positive despite the thinking of Larry Summers and his ilk. If it were, we should just carpet-bomb the entire planet every so often and just sit back and bask in the stimulus growing the world economy in the aftermath.

What happened in Japan is what it is. An unmitigated natural disaster that will forever scar the world. You can’t replace the lives lost and the pain from those left behind. You also have an obligation to be responsible to future generations in the manner you pick up the pieces from here. Obama and the big-government spenders would fit right in taking advantage of the crisis “opportunity” facing Japan now. It’s a lesson so many of us still haven’t learned here back at home. One can only hope that Japan will choose a better fate. However, since the PM is already throwing out the “New Japan” talk, I doubt it.


5 thoughts on “The Japan Syndrome”

  1. Well put. It highlights the fundamental rift between Keynesian theory and more free market ideas. Keyenes emphasizes spending, as if that is the end-all purpose of economic activity. Free marketers such as myself want wealth creation. I like my house. It has been one of the reasons my wife and I work. Don’t tell me that bulldozing it will produce some “greater good” by forcing me to rebuild it (with insurance money, of course).

    The Japan tragedy has put the Keynesian immorality fornt-and-center.

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