America's move to act swiftly and boldly misses the point. Bank
bailouts and fiscal stimulus bills don't work because they strive to
maintain the status quo. But the status quo is the problem and exactly
what needs to be corrected.
The U.S. housing bubble drew too many workers and too much capital
into construction and related industries. So funding public works
projects to keep those companies in business is the wrong solution.
Powell also shares some surprising facts about Japanese fiscal policy:
Between 1992 and 1995 the Japanese passed six different stimulus
packages totaling 65 trillion yen. The average yearly stimulus amounted
to a little more than 3 percent of the total Japanese gross domestic
product (GDP). The nearly $800 billion U.S. stimulus bill amounts to
about 6 percent of GDP.
Yet bigger is not better. In 1998, Japan's stimulus effort amounted to about 8.5 percent of GDP. The results were negligible.
It's important to keep these facts in mind when Krugman dismisses Japanese fiscal policy for its stinginess. What's small by Krugmanian standards is large by almost anyone else's.