Pity the poor Japanese.

• Author: Higgs, Robert
• Position: Etceteras ...

All but the very young can still remember the days when the Japanese economy struck fear in the hearts of many Americans. After restoring Japan's war-shattered infrastructure, the Japanese embarked on the most rapid economic growth any large country had ever maintained. By the 1980s, they had transformed their impoverished economy into the wonder of the world, bidding fair to overtake and surpass even the mighty U.S. economy in just a few years. Writers cranked out alarmist books with titles such as The Japanese Challenge (by Herman Kahn and Thomas Pepper, 1979), Japan as Number One (by Ezra Vogel, 1979), The Enigma of Japanese Power (by Karel van Wolferen, 1990), and Power Japan (by William T. Ziemba and Sandra L. Schwartz, 1992). During the 1980s, the prices of Japanese real estate and corporate stocks ascended to astronomical heights, and Japanese investors reached out to acquire ownership of landmark properties in the United States and Europe. It seemed that nothing could stop this economic behemoth.

Then the bubble burst, and Japan fell into a slump that has lasted more than ten years, with no end in sight. The sacrifice of even moderate economic growth for a decade has cost the Japanese people dearly, but that loss has been only one aspect of the failure of Japan's once-vaunted political economy. While asset values have plunged and gross domestic product (GDP) per capita has barely increased, one component of GDP has grown apace: government spending for infrastructure. Indeed, the Japanese government's principal response to the economy's protracted stagnation has been an on-again, off-again program of Keynesian pump priming financed by increased public debt and concentrated on public-works construction projects (Bayoumi et al. 1998, 10, 41, 51; Morsink et al. 1999, 4-9, 14, 24-26). Somewhere in hell, Rexford Tugwell, Harry Hopkins, Harold Ickes, and the other New Deal make-work kingpins must be smiling.

In truth, the Japanese were no strangers to such boondoggles even before the great bust. National accounts data compiled by the Organization for Economic Cooperation and Development (OECD) reveal that as far back as 1965, when Japan still had a relatively low ratio of total government spending to GDP (just 19 percent, compared to an OECD average of 27 percent), the government's spending on fixed-capital projects consumed 5.0 percent of the GDP (compared to an OECD average of 3.5 percent). Such spending rose more quickly than the...