Shades of Greece or Japan?

By: The James Madison Institute / August 5, 2010

The James Madison Institute


August 5, 2010

By DJ Menz, JMI Intern and Florida State University Graduate in International Affairs with Economics Concentration
Much recent debate centers on our rising federal deficits. Fiscal conservatives urge austerity and point to Greece as the poster child for the disastrous effects of irresponsible government spending and unsustainable entitlements.Meanwhile, political liberals echo Keynesian theories, suggesting that what we really need is more deficit spending to end the recession. They add that the relatively low rate of inflation justifies even larger stimulus packages to boost demand. Indeed, pro-stimulus economist Paul Krugman argues that “the truth is that policy makers aren’t doing too much; they’re doing too little” and instead of looking more like Greece, “we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth” in which fiscal restraint would only make matters worse.Regardless of the validity of these respective positions, it’s worth noting that there are serious flaws in comparing the U.S. to either of those troubled countries. The U.S. is a global power, issues the world’s most widely used currency, has the largest GDP, has a long reputation for investor confidence and financial stability, and has considerable potential for future economic growth. Neither Greece nor Japan has these advantages.Moreover, Krugman’s comparison to Japan is especially erroneous because that nation’s savings rate has been historically very high, allowing for more countercyclical spending during slumps than our status as a net debtor allows us. Yet even though Japan’s stimulus spending has been larger and more sustained than ours, it has yet to lead to an economic recovery.Much of Krugman’s argument is based on the same faulty logic that prolonged the Great Depression. The fundamental question we should be asking is this: Even if more top-down manipulation and intervention in the economy could produce short-term benefits, since when do government bureaucrats have the right to meddle with, in the name of any higher agenda, the lives and business of free people?While it’s sometimes easy these days to forget that this country was actually founded on the principles of limited government and individual liberty, we shouldn’t settle for simply shifting the economic debate to “which variety of big government do we want this term?” The goal of fostering economic prosperity is undoubtedly important, but it’s not more important than maintaining our individual liberty in the face of constant government growth.