It didn’t work in Japan, so why will it work here?

This from the New York Times:

“Two decades of generous public works spending have showered this city of 61,000 mostly graying residents with a highway, a two-lane bypass, a university, a prison, a children’s art museum, the Sun Village Hamada sports center, a bright red welcome center, a ski resort and an aquarium featuring three ring-blowing Beluga whales.

Nor is this remote port in western Japan unusual. Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

Now, as the Obama administration embarks on a similar path, proposing to spend more than $820 billion to stimulate the sagging American economy, many economists are taking a fresh look at Japan’s troubled experience. While Japan is not exactly comparable to the United States — especially as a late developer with a history of heavy state investment in infrastructure — economists say it can still offer important lessons about the pitfalls, and chances for success, of a stimulus package in an advanced economy.”

Japan has stagnated and public works is not the answer. We are in danger of turning into a permanently stagnated economy. This is very scary. As I have mentioned in other posts public money will crowd out private money. It would be better if the infrastructure project was done by a private company. Most people can agree on that, but the government believe it has to build it because the private people do not have the money to do so right now and they need to increase jobs. The problem then becomes a dependency issue. How do you fire everyone from the government job so that they can now become private workers?

The rest is here.


Published in: on February 10, 2009 at 1:15 pm  Leave a Comment  
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Free Trade Vs. Protectionism: Japan and Cuba

The debate of free trade vs. protectionism is something that will always be a part of history. Political forces will never allow free trade to reign. Politicians are re-elected so often that the long term industrial adjustment it takes would cause the people to vote the politician out. Instead, the benefits of free trade and the costs of protectionism only goes to those in the long term and they do not vote.

A good example here is Cuba vs. Japan. As most people know, we have relatively free trade with Japan and we have an embargo with Cuba. The purpose of the Cuban embargo is to force them to form a democracy. The purpose of free trade with Japan is that after World War II we rebuilt them and we enjoy the fruits of their labor. Which policy has produced the most democracy?

These two countries are somewhat hard to compare because of the World War II relations with Japan. Some could argue that they got a democracy when we took it over, but regardless, trade has ensured wealth that in turn has assured democracy. On the other hand, Communism has kept the Cubans poor and have assured that democracy will only be followed by economic freedom.

Republicans are pro-free trade and pro-Cuban embargo while the Democrats are anti-free trade and anti-Cuban embargo. Both parties are for democracy. This shows that Republicans do not understand the relations between trade and democracy, while the Democrats don’t understand the relation between trade and wealth.

So to the new President and the future of America, look at these examples over history. I have searched for numbers and cannot find them over time but the human and democracy indexes are much higher in Japan.


Published in: on November 23, 2008 at 10:04 pm  Comments (4)  
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Detroit vs. Japan: Automotive Industry


So what is really the problem with the car companies? First, the quality of foreign cars have continued to rise while domestic cars have stagnated. Second, the United States allows unions to have monopoly power in many states. This means that you can not be hired unless you are in the union and also you can not be fired for being in the union.

Instead of begging for money, they should be begging for the government to release the union monopolization. There is nothing wrong with people coming together to collectively bargain. The problem is when the government gives them a monopoly on that job. The free market will bring peoples’ wages up according to their productivity and how good they are at helping their companies create cheap and quality products.


Published in: on November 23, 2008 at 4:37 pm  Leave a Comment  
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Is there “Free Trade Imperialism?” Part II

This is the final part of a two part series asking the question, “Can free trade be used for Imperialism?” So far, I have said that the over arching thesis of the article discussed (information can be found on the previous post) is probably true. Britain at this time was still imperialistic. The authors define two types of Imperialism, formal and informal. Formal is exactly Imperialism and at this time is being cash in an anti-Imperialistic shadow. Informal is what we are now going to talk about. Do these countries that are agreeing to trade with Britain becoming economically dependent, thus becoming apart of an informal empire?

My argument here is no. Free trade is not imperialism. When countries become more dependent on each other it happens pretty evenly. Once the countries are engaged in trade, it will only hurt both of them to remove themselves from it. Therefore, one country even if more developed will not have any power over the underdeveloped country.

For example, if under developed country ‘A’ trades bananas to developed country ‘B’ which invests into building factories there they both are benefiting. This also plays into the idea of “Comparative Advantage.” If country ‘A’ feels like it is being taken over and losing it sovereignty to country ‘B,’ then they have three choices, tariff, embargo, or do nothing.

Since this post has “free trade” in it, we will assume they will not tariff as these can act like marginal embargoing. If you tariff incoming goods or tax foreign direct investment then the marginal business or investor will stop sending goods and money to this country.

If country ‘A’ chooses to embargo, then they lose all foreign direct investment (FDI) to build these new factories. This would cause job loss and physical capital would have been wasted. If country ‘A’ is wealthy enough it is possible that they could nationalize these factories and keep both the human and physical capital useful. Even though the country would be getting the factories at a discounted rate, it would still costs a lot to run. You would have to hire bureaucrats and government officials to keep it going. These people would have to be very skilled businessmen and more than likely would come with a high price tag.

Since country ‘A’ choose embargo, they also loose customers in their banana exporting. This would also cause a lost of jobs and domestic investment. Entrepreneurs would have seen that the market for bananas had opened up both with more customers and less tariffs. It could be easy to see how this would be a net loss for country ‘A.’ Country ‘B’ definitely loses here because they have lost all of their investments along with a stable and cheap importation of bananas.

Now if country ‘B’ wants to exert force upon country ‘A’ because they may be politically unstable. They could do the same three things, tariff, embargo, or do nothing. If country ‘B’ tariffs it would be the same as country ‘A’ by being a marginal embargo, so lets focus on that.

If country ‘B’ embargo’s country ‘A’ to try and gain political power then country ‘B’ must close down all the factories and stop buying bananas from country ‘A.’ If we assume that the investors of country ‘b’ were private, now country ‘b’ is going to have angry investors. Country ‘b’ has told them that they are no longer allowed to run their factories. Country ‘b’ citizens are not going to be very happy either because they are no longer provided bananas which could be a good and affordable food item. Country ‘A’ is losing here too. They have lost the factory jobs and the banana customers like in the previous example. In fact, country ‘B’ would feel more hostility towards country ‘A’ for doing this and would not cause them to beg country ‘B’ to come back. In fact, there would be more of a chance of war (Smoot-Hawley Tariff). The main reason why country ‘A’ could survive is because of the substitution effect. They could find foreign investors that would buy these factories and enter in the same agreement. Country ‘b’ would have to find a new substitute for bananas.

If country ‘a’ finds substitutes for their FDI then Britain did not gain any political power. In fact, one could imagine that they would lose much power. This is somewhat what we saw with Cuba and the United States. The United States has no more power than they had on Cuba before the embargo. If anything they have less and Fidel Castro has used the embargo as an excuse to his people to turn them against the United States. Japan on the other hand has had very open markets. Shouldn’t they be controlling the world?


Published in: on October 30, 2008 at 9:13 am  Leave a Comment  
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