David R. Henderson  

Mankiw's Strange View of Japan

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In his New York Times column today, Greg Mankiw writes:

The economists in the Obama administration are also well aware of the Japanese experience [slow growth since the early 1990s]. That is one reason they are pushing for more stimulus spending to prop up the aggregate demand for goods and services.

But in the article on Japan, written in 2005, in The Concise Encyclopedia of Economics, Ben Powell writes:
Most of Japan's policies have focused on the traditional Keynesian prescription of increased government spending to boost aggregate demand for goods and services. Since 1992, Japan's government has tried ten different fiscal stimulus packages totaling more than 135 trillion yen. These packages have accounted for approximately 3 percent of the Japanese economy. None was able to cure the depression, but the spending programs have caused Japan's official public debt to exceed 150 percent of GDP, up from 40 percent before 1992 and currently higher than that of any other developed nation.

In other words, the Japanese government used stimulus spending and it didn't work. So how is the Obama administration showing that it is "aware of the Japanese experience?"

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CATEGORIES: Fiscal Policy

COMMENTS (16 to date)
Richard A. writes:
Eric Morey writes:

Funny. I came away from this thinking, "what a strange strange view of Japan and 'traditional Keynesian prescription' Ben Powell presents".

My biggest issue with Mankiw's article was his false equivalence of of various risks.

Daniel Kuehn writes:

re: "Funny. I came away from this thinking, "what a strange strange view of Japan and 'traditional Keynesian prescription' Ben Powell presents".

My thoughts exactly Eric. Although I have to say - the whole article by Powell is worth a read. I've never heard the Austrian version of Japan before. Normally the Concise Encyclopedia entries come across as fairly straight-shooters, but this article is a very obviously Austrian piece.

Daniel Kuehn writes:

Japan experts can duke it out, but Mankiw's position is pretty typical. "Mankiw's view of Japan that differs from Powell" would have been a better title than "Mankiw's Strange View of Japan". It gives the impression he made some blatant logical error.

JPIrving writes:

Thank you richard. Japan is not depressed, it has a shrinking, aging population. GDP per worker has grown in line with other developed countries.

David R. Henderson writes:

@Daniel Kuehn,
Two things:
1. Mankiw seemed to suggest that the Japanese government had not used fiscal stimulus. It did.
2. Are you suggesting that an Austrian economist can’t be a “straight shooter?”

andy writes:

Japan unemployment rate in the 90's was never over 5%. Now this may be a big deal for culture like Japan, but please, could someone explain me how crowding-out would supposedly not occur in almost-full-employment economy? How is this even comparable to current problems in Europe?

Have you ever been to Japan? Have you seen how Japan works? Have you spoken with the people?

Japanese people work a lot. They don't take vacations (although the government mandates 20day vacations). They spend more time at work than they have to, often they work on saturdays. If anybody would take Japan as an example how to do it, beware: you wouldn't want to work in such society.

From what I have seen, Japan is full of things that we (at least people in Europe) would consider wasteful employment. There are no self-service gas stations in Japan (there are almost no service-stations in Europe). The place is full of 'organizers', people showing you were to park a car, where to go, where not to go...when you are buing a ticket in a big city, an organizer comes to you and helps you (which is actually quite helpful, although well-written english description would do the same service). I visited a small specialized shop (they basically placed orders for the customers, offered some small advice, sold the ordered goods): on saturday there were 4 people in the shop. They told me they get about 70 customers that day. You generally don't need to spend more than 5 minutes with a customer, 10 minutes at most, if you want to be really really friendly.

Japan is simply not a country you would want to copy. And I would say it's not even a country, that is comparable to the 'western countries'. I would say that concentration on macroeconomic aggregates hides the profund differences that are among our countries.

rpl writes:


Is 135 trillion yen over almost 20 years a lot of stimulus? At about 100 yen to the dollar, that's $1.35 trillion, which, stretched out over 20 years, doesn't seem like that much. I don't pretend to know whether fiscal stimulus works or not (or even what "works" means in this context), but Japan's story looks to me to be consistent with the claim that feeble, half-hearted stimulus leads to lost decades.

David R. Henderson writes:

One reason I mentioned the date in the article is so that the reader could see that it was stretched out over about 13 years or so. For convenient math, let’s make it 13.5 years. $100 billion a year is a lot of “stimulus" in an economy that size. In the first years of the “stimulus,” Japan’s GDP was well under $3 trillion (I think: I can’t find the data quickly). That would make the “stimulus” about 3% of GDP.

Michael Turner writes:

*Sigh*. Ben Powell never got the memo? After all these years?


Japan didn't do 135 trillion yen of stimulus spending. It didn't even do 65-75T JPY as often claimed. It only spent 23T JPY.

And a lot of the Japanese government debt was taken on in the form of bailing out banks, not by deficit spending per se. Remind you of anything?

So there's nothing "strange" about Mankiw's view. He is, after all, a Keynesian of some stripe, one who can follow Posen's reasoning. He has probably read Posen's paper. He has probably read Posen's more recent LSE lecture:

In my experience of linking Adam Posen's work on various blog comments, in response to the "look-at-Japan-see-stimulus-spending-doesn't-work" is that NOBODY is able to say why Posen's analysis is wrong. They just sort of pretend it's not there. It would be interesting if this blog were an exception. But I'm not holding my breath.

Daniel Kuehn writes:

re: "2. Are you suggesting that an Austrian economist can’t be a “straight shooter?”

Not at all. In fact I'm very vocal in my praise of many Austrian economists out there.

In the encyclopedia article, though, the crisis was presented from a very narrowly Austrian interpretation. Japan's lost decades plays a significant role in modern macroeconomic thinking. Any encyclopedia article that introduces and dismisses the idea of a Japanese liquidity trap in a single sentence (as Powell does) is not educating readers about the subject adequately. Period.

It's one thing to ultimately have a position that is leaned towards. That's unavoidable and not only is that unavoidable but that's perfectly acceptable. But Powell doesn't do that. He skims over the interpretations of Japan that most people accept, and he spends a lot of time on a very narrow view. That doesn't seem right in an encyclopedia article. That's a disservice to the readers.

Michael Turner writes:

"Japan is simply not a country you would want to copy."

Andy, I live in Japan and I know exactly what you're talking about. But the effectiveness of fiscal stimulus is pretty independent of Japanese employment policies and cultural factors.

A little-known fact about how they achieve such apparently low headline unemployment here in Japan: the canvasser goes door to door, asking if the head of household is employed. If the answer is "yes", he ticks a box counting that household as fully employed and moves on to the next door. It doesn't matter that the woman who answered the door that day is unemployed. It doesn't matter how hard she might have been looking for a job. It doesn't matter how much the family might need her additional income. She doesn't count in the statistics.

David R. Henderson writes:

@Daniel Kuehn,
Thanks for clarifying.
@Michael Turner,
Thanks for that info. I’ll read the chapter you cited. Also, the unemployment data story is amazing. Thanks.

Shayne Cook writes:

Something Arnold Kling asserted not long ago on one of his posts (when I find it again, I'll post a link) is that PRICES may be of some relevance - at least to real economists. I'm paraphrasing Arnold just now as I haven't found the exact post, but his statement was as least close to the following: "I'm always leery of Demand/Supply [AD/AS] models that ignore price." (Bracketed insert and emphasis, mine.)

Suffice to say, discussing D-S or AD-AS in the context of price levels is the stuff of real economists, like Arnold. Discussing D-S or AD-AS absent the context of price levels is the stuff of policy wonks, like Mankiw, Krugman, et.al.

More "stimulus"? Yes, let's do that. Let's borrow or print every single dollar the U.S. economy is most optimistically capable of producing for the next 100 years or so, in order to prop up current PRICES well beyond those that could be had in an environment of real sustainable Demand - Aggregate or discrete!

Doing that should completely divorce price levels from actual demand such that the policy wonks can be right after all. I'm certain that will work right up until it doesn't. It's completely silly for folks like Arnold to even bring up annoying concepts like price levels, or even sustainability (the second "S" in his PSST model) for that matter, in the face of the current and seemingly perpetual crisis/catastrophe/Armageddon/meltdown/your-favorite-superlative/dah, dah, dah.

(Apologies to all for my rant.)

Bob Murphy writes:

Is anybody disputing Powell's figure about Japan's debt-to-GDP ratio going from 40% to 150% during this period? Is that consistent with the "Keynesian stimulus has yet to be tried" move?

Michael Turner writes:

"Is that consistent with the "Keynesian stimulus has yet to be tried" move?"

Posen's paper (I'm assuming you aren't determined to ignore it) doesn't say Japan never tried Keynesian stimulus. Read it. Indeed, he's at pains to point out quite the opposite: in the single year in which the dribbled-out fiscal stimulus was theoretically adequate in Keynesian terms, the Japanese economy improved. In effect, Japan is one of the best recent "natural experiments" supporting Keynesian policy, because Japanese economic results pretty neatly correlate with Keynesian predictions.

Also (unless you're equally determined to ignore it) let me repeat: bank bailouts accounted for a lot of the government debt accumulated during the period of study. Counting this as part of a stimulus program is bad accounting. Indeed, as Krugman argued at the time,


there was no reason to think these bailouts would be stimulative per se; at best they would only help restore some confidence in the financial system.

Counting ALL deficits as if they were stimulative in purpose is silly - there's a difference between fishing somebody out of the water and applying the paddles to start their heart again. (Beats trying to use the paddles while they're still IN the water.)

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