Indispensable Economics Stimulate This!

Jul 24, 2009

It is very seldom that economists have a laboratory in order to test theories. For an Austrian, this is not a problem because the axioms of economics are apodictic, meaning they are self-evident. But even so, to the average non-economist, some verification is nice as an illustration. Normally, a specialist in economics is necessary to delve beyond the host of activities in the economy and the government to isolate the economic factors that lead, say, to a recession. Praise God! Besides the Great Depression, which I find easy to diagnose, we have such a laboratory—JAPAN.

The Wall Street Journal recently summarized the Japanese recession that has gone on from about 1991 to today. When we older people think of Japan, we think of an up-and-coming, technologically savvy nation—a competitor of the United States. But in this article entitled "Obama-san" (the "san" is a respectful way of addressing people in Japan), it shows that Japan embarked on the exact same Keynesian path that President Obama and his Congressional allies are embarking on today, and that was started by President Bush. That path is to cure a recession by dumping large amounts of tax monies, through deficit government spending, into the economy.

Well, how did the spending program do? Japan’s GDP, adjusted for inflation, rose 16%—wait for it!—in 14 years. That means that the Japanese GDP rose slightly more than 1% per year. The Japanese economy is a corpse that does not know it is dead yet. The government, with the blessing of John Maynard Keynes, has spent $1 trillion (double this figure to see the U.S. amount to date) and got what? Nothing. Even the United States from 1929-1939 had an annual GDP growth of a paltry, nevertheless better 3.05%.

So, you the reader, tell me, will this gigantic stimulus plan work? As any economics student knows, productivity only grows by investment, not consumption. If you doubt this, take the rest of the summer to read Jesús Huerte de Soto’s book Money, Bank Credit and Economic Cycles, available at Mises.org. What President Clinton started to call "investment" was a euphemism for the same kind of government spending we have now, just smaller. It was not investment at all. Take the recent housing boom. It was caused by expansion of the money supply by the Federal Reserve, artificially lowering interest rates, making buying houses more attractive, and because of rising demand, building them, and putting a huge strain on the building industry, forcing wages and prices of everything used to build, up until it became too expensive to buy a house.

And what is investment, really? It is using savings to purchase capital goods, goods such equipment and plant and inventions and the like. You can’t get that by massive government deficit spending. Well, you might add, if that is true, why is such a path so popular? Economists who haven’t sold their soul, and there are very few of those, know the truth of it. But the ordinary people have no clue about the necessity of investment, and politicians don’t care for anything except votes and polls (with few exceptions). So the politicians say that they can cure our economic ills with this massive government deficit spending, and the people believe it. There it is. Vice-President Biden, whose gaffes usually contain much truth that he lets slip out, said the other day that people can’t spend their way to prosperity, but government can! HA, HA, HA, HA, HA!