Skeptical by nature, I am always cautious about accepting arguments that a major change is taking place, especially with respect to Japan.
But I am hearing some things from newly installed Prime Minister Junichiro Koizumi that leave me wondering.
Actually, it was Koizumi's new finance minister, Masajuro Shio-kawa, who on Wednesday grabbed my attention when he said he wanted to "restrain" the amount of public works spending in the government's budget. In a companion statement, Shiokawa said "there is no need to mull an extra budget now," presumably meaning that no supplemental spending budget is under consideration.
Past Japanese governments have adopted so-called "supplemental budgets" to pursue large spending programs justified as necessary to promote economic growth. This is the No. 1 prescription of Keynesian economics, though that body of work also advocates lowering taxes, something Japan has been reluctant to do. But when it came to spending public money, Japan was taken in, hook, line, and sinker.
Milton Friedman, famed University of Chicago economist and Nobel economics laureate, has more than anyone else helped debunk naive applications of John Maynard Keynes' economics to public policy. Friedman once gave a succinct explanation for the popularity of Keynesian economics: "Here was one of the most famous and respected economists in the world [Keynes] informing governments that the way to full employment was paved with higher spending and lower taxes. What more attractive advice could politicians wish for? Long regarded public vices turned into public virtues. Marvelously simple, yes. But also simply marvelous."
Thanks to Keynesian logic, Japan's government has managed to go deeply in debt. Japan's government received encouragement, if not outright pressure, from the Clinton Administration to spend more money. The mantra of the previous administration was Japan is not doing enough to stimulate its economy.
What did they get for it? A big pile of debts, that's all.
Japan has little to show in the way of economic growth despite the six stimulus packages between 1992 and 1998 that totaled ?76.3 trillion (US$623 billion) of spending.
Now it is well known that the governing Liberal Democratic Party stands accused of ulterior motives in promoting these spending projects. The political support for the LDP comes from the construction industry, among other places.
At the rankest level, the projects financed by the supplemental budgets were what I refer to as reverse bribes. In a normal bribe a person or company pays bribe money to a politician for political favors. In a reverse bribe, a politician uses government money to award pork barrel contracts to his constituents to ensure their support.
Given this backdrop, you have to wonder whether Koizumi and his band of reformers can make reform happen even in a small way.
Still there is an ironic twist to the story concerning the new George W. Bush administration. The Bush State Department seems to have a new spending project of its own in the making for Japan.
Though in office less than 16 weeks, the new administration has turned its focus on some of the larger issues and Asia is a huge preoccupation. President Bush and his Secretary of State Colin Powell, have a grand strategy to elevate the bond between the US and Japan.
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