As Europe's economies stagnate, or even decline a little, Japan has just turned in as stunningly bad a quarter of economic performance as one can conceive. The Financial Times reports here that Japan suffered economic contraction at an annual rate of 6.8% in the second quarter.
How is it even possible to have an economy shrink at such a rate? Well, perhaps we should mention that since early 2013 Japan has been engaged in a world-leading blowout Keynesian economic experiment of rapidly increasing government spending and taxes, aka "fiscal stimulus." The program is often referred to as "Abenomics," after Japanese Prime Minister Shinzo Abe.
Here from the Council on Foreign Relations in June (before these latest disastrous numbers were out) is a backgrounder on "Abenomics" and how it was supposed to end close to two decades of economic stagnation in Japan. Abenomics includes both monetary and fiscal "stimulus." CFR describes the fiscal side of the program as follows:
Abe . . . ordered a hefty 10.3 trillion yen short-term stimulus package, approved by the cabinet in January 2013, which will go toward infrastructure projects with a focus on building bridges, tunnels, and earthquake-resistant roads. . . . Abe announced in October 2013 that he would raise the consumption tax in April 2014 from 5 percent to 8 percent; this is projected to increase to 10 percent in 2015.
Rapidly increasing government spending and taxes, on top of an economy with a debt to GDP ratio already exceeding 200%. What could go wrong?
The FT correctly points out that there is likely a not small element of statistical aberration in the 6.8% quarterly decline. Abe announced the tax increase several months before it took effect, giving the people the opportunity to game it by making their purchases in advance of the increase and stopping all purchases as soon as the increase took effect. Thus there had been a reported 6.7% gain in GDP in the first quarter.
Yet the contraction more than wiped out the earlier gain: growth from January to March was revised down in Wednesday’s report, from 6.7 per cent to 6.1 per cent, while the government also said it now believed the economy had shrunk slightly in the final quarter of 2013.
So the net, net is, three quarters in the thick of Abenomics, and Japan's economy has not grown, but rather has declined. And remember, they count government spending on goods and services, no matter how wasteful, at 100 cents on the dollar in the GDP calculation. If you figure (as I do) that government spending is worth at best half of what private spending is worth, then the economic decline is several points worse than they are reporting.
Needless to say, Official Manhattan Contrarian Worst Economics Writer Paul Krugman wasted no time in coming out with an article arguing that Europe and Japan were in stagnation because they still would not engage in enough "stimulus."
The not-enoughers — a group that includes yours truly — have argued all along that the clear and present danger is Japanification rather than Hellenization. That is, they have warned that inadequate fiscal stimulus and a premature turn to austerity could lead to a lost decade or more of economic depression, that the Fed should be doing even more to boost the economy, that deflation, not inflation, was the great risk facing the Western world.
How about making government spending 100% of GDP? Would that be enough "stimulus" for you, Paul? In that direction of course lies North Korea, where everybody starves.
At National Review, Kevin Williamson comments:
I’ll bet you your next unemployment check that if Japan continues to slide, the answer from the Left will be: “Abe was on the right track, but he didn’t go far enough."
Hard to make a safer bet than that. No amount of real world demonstration of failure of their recommended policies can ever make the likes of Krugman and the IMF recognize reality. Is there any escape from this mass hysteria?