Message Font: Serif | Sans-Serif
No. of Recommendations: 0
Japan, after 20 years in this situation (high unemployment, zero inflation), is just now (over the loud objections of their fiscal debt hawks) reversing course and has started spending. And, surprise, surprise! preliminary indications suggest their economy is improving!

Japan's unemployment really hasn't been that bad. Over the last 20 years, the worst it's been is 5.5%, and the average has been about 4-4.5%.

At the same time, while Japan's GDP growth has been low, the standards of living for consumers have still been rising. The difference has come from the state and corporations, mostly. It really hasn't been that bad over there.

It has been irrefutably demonstrated that cutting spending in this situation -- interest rates are zero, unemployment high -- is deflationary, and will harm GDP substantially more than the spendings cut. There is now *no* credible academic support for the proposition that cutting government spending will help the economy. Nor are there any credible case histories showing this.

Well, GDP isn't really a great measure of standard of living or wealth. We could spend billions of dollars paying people to build houses and tear them down again, and it would add to GDP, but it wouldn't materially improve our country. (Heh, that sounds kinda familiar..)

But, still, the root point is mostly valid: People are out of work, and not able to find jobs. Why is that?

The labor market works by supply and demand and price, like everything else. Right now, for some professions, the supply or price is still too high, so prices "should" fall to the point where the markets clear; to where demand and supply meet up again. There's a huge body of economic research on why markets don't clear as quickly under deflation, and I think there are things we can do to help that, like letting people clear student loans in bankruptcy, or not letting banks price bad assets however they like.

Overall message: we certainly have to strike a balance in cutting wasteful gov't spending during deflationary times. Still, wasteful spending is wasteful spending, even if it inflates GDP, so we should still ultimately be looking to phase it out.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.