Japan was once on a stellar track to economic prosperity. The end of the twentieth century saw promising chances for the island nation's economy. In 1991, the government spending was one of the lowest the Organization for Economic Co-operation and Development (OCED) and 31.6% of the nation's GDP (Utt 2008). That same year, Japan's national income was at 86% of the U.S. gross national per capita income, a big improvement from just 20 years ago when the nation was only making 66% of the U.S. per capita income. This was an impressive feat for the nation to embark on. Yet, this was to change in the following years dramatically. During the later decade of the 1990s, the Japanese government took on the practice of vastly increasing government spending as a way to stimulate an economy that was beginning to lag. As the growth of the economy began to go stale, the government took to a policy similar to that of FDR and his administration's New Deal. The government hiked up its spending and reinvesting dramatically in order to help structure much desired future growth for its economy. Research shows that "Beginning in 1991-1992, Japan adopted the spending approach now advocated by many in the U.S. Congress when it embarked on a massive nationwide program of infrastructure investment," (Utt 2008). Over 30.4 trillion yen, or $254 billion USD was spent on such programs (Utt 2008). This actually resulted to a decline in Japanese economic performance. From 1997 to 2000, only small increases in economic productivity. What eventually resulted was a "consequence of two decades of economic stagnation," (Utt 2008). Per capita income fell to 73.7% of the U.S. per capita income levels (Utt 2008). Research states that "Although the benefits of a costly, infrastructure-focused stimulus package based on massive gov-ernment spending may be intuitively attractive, past evidence suggests that the impact of govern-ment spending programs that are intended to encourage economic growth is very modest and unlikely to enhance recovery or deter recession," (Utt 2008). Thus, it was clear that the policy implementation of increased government spending was incredibly unsuccessful.
Overall, the policy has its benefits in certain situations, but can prove to be a failure in others. It is clear that intense government spending will not prove as successful as one might think. As more and more legislation currently being passed in the United States today turn toward increasing government spending, it is imperative that we do not rely on it entirely.
In lieu of government spending, many economists advocate another fiscal policy as an option to help spur economic growth -- cutting individual and corporate taxes. This is basically the opposite approach when looking at increasing government spending. Cutting taxes decreases the central power of the government. This actually takes money out of the domestic treasury, even in times of crisis. Yet, still cutting taxes provides stronger buying and bargaining power for individuals and businesses in that the policy saves them much needed money. Cutting taxes gives people money back into their hands when they need it most. Research suggests that "Many economists believe lower taxes and lower interest rates would help stimulate the economy, though it could take another six months before the impact is felt," (Redeker 2010 p 1). Such a policy helps increase corporate profits, and therefore corporate reinvestment back into a broken economy. This policy goes straight to the pillars of the economy, rather than trying to start from the ground up at the consumer level as in the case of expansionary fiscal policies. The policy of cutting taxes creates a stimulus within the tax cuts themselves (Redeker 2010). This is done by increasing aggregate demand. In fact, "it can lower taxes and hope that consumers take their tax breaks to the mall," (Wolfers 2009 p 1). And so, cutting taxes is supposed to help save the economy through passing the savings to the consumers.
Several American Presidents have dabbled in utilizing tax cuts as a primary fiscal policy. Ronald Reagan in the context of the 1980s was one that was heavily associated with Republican orientated tax cutting policies. There were primarily aimed to lower inflation (Egan 1980). Yet, still many economists saw these tax cuts as "one-dimensional, simplistic and without any apparent cohesion or depth," (Egan 1980 p 6). Notoriously, President George W. Bush was also associated with one-sided tax cuts. Still, despite the notion that they will increase spending power, such policies have had limited results. It is clear that alone, tax cuts cannot solely rebalance an economy to prepare it for growth.
Revaluation of Currencies
The revaluation of a currency is a drastic step to take for a nation in dire straights. Yet, many nations have utilized such strategies in order to regain some footing in the international arena in terms of their economic collateral of their own domestic currencies. According to research, revaluation "can stabilize the value of the domestic currency by refixing the value of the domestic currency in terms of foreign currency whenever a large deviation in the market rate and the fixed exchange rate occurs," (Pailwar 2010 p 417). This can help bring stability in a developing nation which finds itself in a precarious situation rampant with extreme inflation. Revaluation is a drastic move, but one which economists say can help improve the value of a currency based on curbing inflation. Research suggests that "Continuous inflammatory pressures in the economy and the continuous surplus on the current and capital account may necessitate a revaluation of domestic currency," (Pailwar 2010 p 417). Revaluation is supposed to also have an impact on how the currency can stand against other nations' currencies. With this, economists suggest that revaluation can help make domestically produced good more expensive in foreign markets (Bozyk 2007). An example of China shows that some nations can pull of revaluations, and since revaluating the yuan the Chinese economy has continued to grow.
Yet, revaluation often proves a failure. Case in point here is the recent move of North Korea to revaluate its currency, the won. In a severe move to curb inflation, North Korea swiftly revaluated the won. North Korea is a devout Communist nation, and so the decision to revaluate was strictly from within the government's perspective. Thus, the revaluation was done with government aims in mind, as well as spurring economic growth. Yet now, North Korea is "a Communist system under severe economic stress," (Eberstadt 2007). Today, North Korea has actually witnessed increased inflation, based on increased food and rice prices in the region. The move to revaluate has actually placed North Korea in a much worse position that it was previously (Associated Press 2010). As food prices continue to increase, many North Koreans are finding themselves scrambling to feed themselves. Even more damaging to the fledgling nation's economy is the fact that the North Korean government essentially destroyed small businesses with the revaluation of its currency. The limited exchange the government was allowing took away much needed capital from small businesses. This also comes at a time where the government itself is unable to provide enough for its people without the presence of small business merchants. This is definitely an extreme example of how an economic policy can actually cause more harm than good, despite its intentions to spur further economic growth and prosperity.
Several popular economic policies aim to help spur the growth and prosperity of a particular economy. However, even the best laid plains can have issues. In fact, in many cases, these policies turn into failures. Even the current strategy the American presidential administration is embarking on proves to be dangerous. Increasing government spending has become the primary foundation of modern American fiscal policy. Yet, the lessons learned in the late 1990s in Japan show that this can also end in failure. Thus, it is cleat that governments need to tread lightly when revaluating fiscal policies. The specific elements of each individual situation must be properly considered and addressed, or the fiscal policy chosen will fail regardless of whatever previous successes it has shown in the past.
Associated Press. 2009, 'North Korea 'Panic' After Surprise Currency Revaluation,' Guardian [Online] Available at http://www.guardian.co.uk/world/2009/dec/03/north-korea-won-currency-revaluation
Bozyk, Pawel. 2006. Globalization and the Transformation of Foreign Economic Policy, Ashgate Publishing Ltd.
Chait, Jonathon. 2010, 'The Budget-Cutting Cycle: Delusion, Failure, Recimination,' the New Republic, [Online] Available at http://www.tnr.com/blog/jonathan-chait/78735/the-budget-cutting-cycle-delusion-failure-recrimination
Eberstadt, Nick. 2007, the North Korean Economy: Between Crisis and Catastrophe, Transaction Publishers.
Egan, Jack. 1980, 'Why Reagan's Tax-Cut Bonanza May Backfire,' the New Yorker, vol. 13, no. 29, p. 6.
Keynes, John Maynard. 2006, the General Theory of Employment, Interest and Money. Atlantic Publishers & Distributors.
Redeker, Bill. 2010, 'Will Rate, Tax Cuts Revive the Economy?' ABC News, [Online] Available at http://abcnews.go.com/WNT/story?id=131173&page=1
Utt, Ronald. 2008, 'Learning from Japan: Infrastructure Spending Won't Boost the Economy', the Heritage Foundation, [Online] Available at http://www.heritage.org/research/reports/2008/12/learning-from-japan-infrastructure-spending-wont-boost-the-economy