Japan's Recession Has Nothing to Do With Keynes

copyright © 2014 by Thomas Gangale
@ThomasGangale

The familiar advice to spend more and raise taxes fails Japan again, says an editorial in yesterday's Wall Street Journal titled "Japan’s Keynesian Recession."

What else would you expect from the Wall Street Journal? They love Milton Friedman, and naturally they're going to trash Keynesian deficit spending every chance they get. A less simplistic, more nuanced, and more honest analysis would admit that Keynesian spending is a proven strategy for an economy that is growing over the long term, as every industrializing economy was a century ago when Keynes published. His strategy is meant to propel an overall growing economy through a short-term downturn. Keynes never would have advocated that a government spend like a drunken sailor for 20 years!

Keynesian spending cannot solve Japan's fundamental problem, which is demographic: the population is aging and dwindling. South Korea is going to have the same problem. China's "one child policy" will also cripple its economy. In the US the consequences are somewhat mitigated by immigration, which pumps new people into a nation with a declining birth rate, but even there the demographics are not as favorable as they were a century ago.

At the same time, I am not convinced that Friedman has a solution for what happens to capitalism in a matured industrial--as opposed to an industrializing--economy, in which markets cease to expand and begin to shrink. I am not convinced that he has a solution to the fact that resource extraction inexorably becomes more energy-intensive (and therefore more expensive) as we have already scooped up all of the easy stuff... and at the same time our energy reserves are dwindling (and therefore becoming more expensive)! What does Friedman do when nearly all of the terms in his equations have negative values?

A common error with economists is that they are like generals fighting the last war rather than like doctors confronted with a mutated virus; they prescribe solutions that worked in the past to current economic problems whose symptoms in part resemble the past, but they don't know how to treat the new pathologies that have evolved. Supply-side economics' pat answers are just so much patent medicine.

But by all means, blame it on Keynes if you think that will comfort you as you grow old in the cold and dark.