Government Spending Claims Two More Victims


Recently, two more countries have felt the bite of Keynesianism. Today, the credit ratings agency Fitch downgraded Japan's economy and the AP reported that the Argentinian economy is likely to decline sharply. While Japan and Argentina might be different kinds of economies performing differently in different markets, their recent bad news can be attributed in part to a fondness for government spending.

Japan's explosion in government spending is in part a response to the March 2011 tsunami caused by a once-a-millennium earthquake that released energy equivalent to 600 million times that released by the Little Boy bomb and knocked the globe a few degrees off its axis. The Japanese government spent a huge amount of money on reconstruction, and the Prime Minister, Yoshihiko Noda, has pledged 20 trillion yen ($259 billion) more on reconstruction — money that has to be borrowed. Even before the tsunami, Japan had a worrying debt to GDP ratio. Japan has the world's highest debt to GDP ratio, 211%. This figure is more staggering when you consider that in 2002 the debt to GDP ratio was 151.7%. Long before last year's tsunami Japan was developing a taste for expansive government. The only reason why Japan is able to last with this level of debt is that most of the country's debt is held domestically. 

In Argentina the future is looking grim. The Argentine government has engaged in government spending on welfare programs and industry subsidies that were only made possible after President Kirchner refused to pay back lenders in full. A low rainfall and the devaluing of the Brazilian currency have not helped the economic situation in Argentina, but it is unlikely that even without these unforeseen circumstances that Argentina would have been able to insulate itself from the consequences of its overspending, especially with major economies in recession.

Of course Japan and Argentina are not the first economies to face diminished growth or downgrades. The U.S. and France have both been downgraded, and the U.K recently entered a double-dip recession. However, more and more economies are seeing the consequences of fiscal and monetary expansion. It would be nice to think that governments might learn from the current situation and not repeat the mistakes that contributed to the current crisis. Events in Europe in particular do not seem to be offering any indication that we might be able to look forward to such a future.