Mark Sadowski is the only guy I know who actually understands the fiscal data put out by governments. Here is a great comment he recently left, discussing how fiscal stimulus failed in Japan, whereas fiscal austerity succeeded:
Izabella Kaminska discusses the Japanification of the Euro Area:
May 16, 2014
Charting Europe’s Japanification
By Izabella Kaminska
“…Meanwhile, there’s also an eye-opening comparison — which should be of interest to anti-austerity campaigners such as Paul Krugman — setting out real GDP in terms of investment, GDP and consumption data for the two countries:
As the analysts note, a powerful fiscal stimulus in Japan helped to counter the demand shortfall. That caused personal consumption to continue to grow until 1997 and investment to rebound almost to its previous peak in just six years — something which isn’t slated for Europe any time soon…”
This caught my eye because the charts, which come by way of Credit Suisse, fail to take into account the idiosyncrasies of the System of National Accounts (SNA), which both Japan and the Euro Area use. Under SNA, investment spending includes both private and government investment spending. The item labeled “government expenditures” in the graphs is actually just government consumption spending, and doesn’t include government investment spending.
Why does this matter? Because in the 1990s the Japanese government engaged in a massive old school Keynesian fiscal stimulus, heavily tilted towards government investment spending (i.e. “infrastructure”). The Credit Suisse graphs totally miss that, and imply that the decline in Japanese private investment spending was much smaller than it actually was.
In fact, David Andolfatto did a post on Japanese government spending, and after I alerted him to how SNA treats government investment he did a followup post:
In particular, I want to draw attention to the following graph:
Japanese real government investment spending increased by over 50% in between 1992Q1 (the peak in RGDP before the recession) and 1996Q2. This was not a trivial amount because unlike in the US and the Euro Area, where government investment spending is only 3.4% and 2.1% of GDP respectively, Japanese government investment spending reached a staggering 9.9% of GDP in 1996Q2.
Now, one can argue that things would have been much worse in the absence of this massive infrastructural spending, but as Kaminska goes on to note, Japan didn’t lose monetary policy traction until much later. In fact the BOJ’s call rate didn’t really hit the zero lower bound until March 1999.
One other thing that I think is worth calling attention to is the fact that the failure to disaggregate Japanese investment spending leads to the failure to notice that private investment spending soared during the Koizumi Boom in the 2002-2008. This is because while private investment spending increased, public investment spending decreased, obscuring a boom in private investment within the aggregate investment statistic. Thus I encourage people to compare the Credit Suisse graph with David Andolfatto’s.
And of course we all remember when Japan did its first ryōteki kin’yū kanwa (QE). That was from March 2001 through March 2006. Coincidence?
Incidentally, in the case of the Euro Area, government consumption and investment spending is the only major component of GDP that is higher in real terms than it was in 2008Q1 (the peak in RGDP before the recession), over six years ago. In contrast, in the case of the US, the only major component of GDP that is lower than it was in in real terms in 2007Q4 (the peak in RGDP before the recession) is government consumption and investment spending.
The difference is obviously attributable to the fact that the US has done QE, and that the Euro Area is only now considering its possibility.
BTW, Izabella Kaminska ends her post by arguing that Mr. Draghi needs to step up to the plate if the eurozone is to avoid Japanese-style stagnation. I completely agree.
PS. My only quibble with Mark’s comment is his characterization of Kaminska’s view on the monetary transmission mechanism. She doesn’t really say when it broke down, only that it was clearly operative at least until the mid-1990s.