Is Shinzo Abe the Great Keynesian Hope?

A lot of people were very excited about Shinzo Abe's talk of revoking the Bank of Japan's independence and forcing the Bank to adopt a far more expansionary/easy/inflationary monetary policy. I was not among them. I said that Abe was just "talking down the yen". This now seems to have become the conventional wisdom in the press, though as Paul Krugman points out, talking down the yen is a good (if not revolutionary) idea in its own right.

Now, here comes Abe with some Keynesian magic: an "emergency stimulus" package worth over $100 billion.

Is this for real? Well, sure, it's for real. And it will probably continue. So Keynesians should be happy. But they should also realize that the reason for Japan's new "stimulus" has nothing to do with Keynesian ideas. Instead, it has to do with re-establishing traditional back-scratching relationships between the LDP and its grassroots supporter base.

Shinzo Abe's party, the "Liberal Democratic Party" (the name of which always reminded me of "Holy Roman Empire"), held onto power for 55 years. It was supported by the bureaucracy and big business - the other legs of the so-called "iron triangle". But Japan is a democracy, so the LDP needed to get votes...and with Japan's extremely restrictive campaign financing and advertising laws, this was difficult to do the way Americans did it. 

So instead, as political scientist Ethan Scheiner explains in his classic book Democracy Without Competition in Japan: Opposition Failure in a One-Party Dominant State (see a summary here) the LDP resorted to a system called "clientelism". Basically, Japan's central government gave pork directly to groups who would go and campaign for them. Chief among these were construction companies. These companies employed a bunch of blue-collar dudes, usually in the rural areas (which, like in the U.S., wield disproportionate electoral power). Some of these dudes worked as part-time farmers; some of them belonged to right-wing Tea Party type groups. Most of the companies themselves were mafia-owned. The LDP would dish out pork, and the construction companies would basically become campaign staff for LDP politicians - knocking on doors, putting up posters, making calls, etc. It was a tit-for-tat relationship, and it worked for decades. In the 1990s, Japan's massive (and famously wasteful) construction spending binge, billed as fiscal stimulus, went mostly to these groups.

In the early 2000s, things changed, with the ascent to power of Junichiro Koizumi, the LDP's famous maverick reformer. He tweaked Japan's electoral system to make it much harder to win office by using private armies of door-knockers (Update: A commenter helpfully reminds me that reform of this system actually began in the early 90s, when an opposition coalition briefly took power due to an LDP split). He also cracked down hard on construction spending. This austerity was offset by much looser monetary policy; the Bank of Japan embarked on a program of quantitative easing (actually the world's first). 

Anyway, the tweaked electoral system, lower "clientelist" pork spending, and the disastrous unpopularity of Abe's first tenure as prime minister helped ushed the DPJ into power, breaking the LDP's 55-year run. But now the LDP is back, and they need to re-establish their base of support. This means re-establishing the back-scratching relationship with those construction firms (and, by extension, rural Japan, right-wing Tea Party type groups, and the mafia). The LDP needs to say "Hey, guys, things are back to the way they were." This, I suspect, is the main reason for the "emergency stimulus".

All of which doesn't mean that fiscal stimulus isn't a good idea for Japan. After all, money is still getting spent! But it does mean that we can expect construction pork spending to continue if and when Japan's economy recovers. That knowledge should affect businesses' expectations in the present, making the stimulus somewhat less effective in the present.

(Also there's the side question of whether Japan needs stimulus right now. On one hand, I think there's evidence that pork-barrel spending in the 1990s, while not necessarily worth the ultimate costs, did make Japan's post-bubble slump a lot less painful than it otherwise would have been. And of course interest rates are at the Zero Lower Bound, and Japan could use a little inflation. On the other hand, Japan's unemployment rate is only 4.2%, meaning there might not be that much actual slack in Japan's economy. And a lot of the stimulus spending is likely to be wasteful (much more so than, say, infrastructure spending in the U.S.), both because Japan's infrastructure (unlike ours!) is overbuilt, and because of the political nature of the spending. That will lower the multiplier.)

To sum up: Once again, I think that Abe's appearance as a bold Keynesian experimenter is a cover for a program of traditional mercantilism and corporatism. I guess we'll see how well that program works.


Update: A Japanese translation of this post is available here.