Treasury Secretary Says Stimulus Plan Is Hopelessly Inadequate

Between 1991 and last fall, the Japanese government spent $6.3 trillion on myriad construction projects in an attempt to revive the country's sluggish economy. According to a front-page story in last Thursday's New York Times, 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." Many economists, the Times notes, view this "stimulus" spending as a "colossal waste" that "did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations….Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs."

But Treasury Secretary Timothy Geithner draws a different lesson. As the Times paraphrases his position, "Japan's experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy." The problem, according to Geithner and other advocates of stimulus spending, is that Japan spent too little money too slowly; wasted a lot of it on useless projects (including more than a few bridges to nowhere); and did not spend enough on education and social services. "One lesson Mr. Geithner has said he took away from that experience," the Times reports, "is that spending must come in quick, massive doses, and be continued until recovery takes firm root."

Leaving aside the (rather important) question of whether Geithner is right, the implications for the "recovery" package making its way through Congress right now are pretty clear: There is no way it can possibly work. The amount of money involved, not quite $1 trillion, is huge, but it pales in comparison to what the Japanese spent, and much of it will trickle out over several years, rather than "in quick, massive doses." Furthermore, given public skepticism of the current package, Congress is quite unlikely to authorize another $1 trillion, then another, and then another, if necessary, "until recovery takes firm root."

It's awfully convenient for stimulus supporters that every time a government has tried to spend an economy out of a recession, the failure was due not to the fundamental unsoundness of this approach but to poor timing, inadequate funding, and/or bad investment decisions. But even if they're right, there's little reason to believe these factors will not doom the current plan as well.