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Lessons from Japan: Past public works projects hint at what to expect as IMF urges governments to loosen purse strings

On the northern Japanese island of Hokkaido, the motorway from Honbetsu to Ashoro is engineered to the highest standards: stretches of dual carriageway for overtaking, a hard shoulder, and no minor intersections. What it lacks is vehicles.

Intended as the first stage of a highway reaching almost to the Sea of Okhotsk, the 13.2km stretch is used by about 1,300 vehicles a day, similar to a main road in Scotland’s remote Outer Hebrides.

The motorway marks the apex of Japan’s massive programme of public works in the 1990s and early 2000s — and as pressure mounts on other countries around the world to embark on major spending drives to combat the economic impact of coronavirus, it also offers a lesson in what can go wrong.

Last month the IMF urged advanced economies to spend big and quick on simple capital projects to boost demand and jobs, and then plan longer-term digital and green technology infrastructure to increase the future scope for growth. And governments should worry less about rising public debt, it said; higher growth would make it more sustainable.

It appears the message is being heard: US president-elect Joe Biden has pledged to “build, back, better” and the EU has promised “the largest stimulus package ever” with its planned €1.8tn budget and recovery fund.

But the lesson they should draw from Japan’s public spending is nuanced.

In the decade after the bursting of its financial bubble in 1990, Japan wrestled with sluggish demand and declining interest rates and fought back with public works.

Those projects left a legacy of concrete and easily-financed public debt — but they revived neither growth nor inflation.

“People thought there was a temporary fall in demand because of the bursting of the bubble and through economic stimulus they’d be able to get back to 5 per cent growth,” said Toshihiro Ihori, a professor at the National Graduate Institute for Policy Studies in Tokyo, and an expert on Japanese fiscal policy.

“There were short-term results but it didn’t produce a lasting revival.”

Veterans of the era point to a number of reasons for the failure. The spending packages were intermittent and seldom matched their headline size. Pork-barrel politics sent cash to the least productive projects in rural areas. Meanwhile the bad debt crisis in Japan’s banks festered, and the underlying pace of population and productivity growth continued to slow.

The question for any country now tempted to launch its own spending campaign is whether Japan made errors that can be learned from, or whether efforts at fiscal stimulus in a democratic system inevitably get channelled into less productive uses.

The broad academic consensus is that spending did stimulate the economy, said Prof Ihori. “Most of the applied work finds that the multiplier was a bit greater than one,” he said. The fiscal multiplier measures how much a unit of fiscal stimulus increases output. “With public works the multiplier is one almost by definition.”

But it did not spur a notable recovery in the private economy. Consumption rose a little but private investment went down and politicians periodically became alarmed about the budget deficit.

Meanwhile the efficiency of Japan’s public works packages declined — some of the new infrastructure was sparsely used and struggled to pay for itself with user charges, leading to complaints about “bridges to nowhere” and gratuitous concreting of the countryside.

Some of the money that went into construction may have been better spent on education or support for families, which might have relieved Japan’s declining birth rate.

What is important, said Randall Kroszner, former Federal Reserve governor and now deputy dean of the University of Chicago’s business school, is “getting the most bang for your buck” in terms of raising productivity. It is a mistake to assume that building infrastructure will ensure future growth, he said: “Japan illustrates that doesn’t work.”

On the face of it the EU, which has its own bridges and airports to nowhere, has heeded the lesson. It wants member states to use its new €750bn recovery fund to promote energy efficiency, low-carbon technologies and digital skills.

Infrastructure needs vary widely across the bloc; Germany and Italy, which ran tight budgets for a decade, need to invest in transport and broadband connections. By contrast Spain, the European economy hardest hit by the pandemic, has among the best high-speed rail, broadband and road networks on the continent.

But, said Alicia García Herrero, economist at Natixis and senior fellow at think-tank Bruegel, spending to raise productivity requires long-term planning which runs counter to the need for speed. She feared that European governments would turn to infrastructure investment because it is what they know well after decades of EU cohesion programmes.

Instead, governments should focus on supporting incomes and small businesses, she said: “This is a demand shock. No bridges are being destroyed. This is not a war. You don’t need to build more.”

The main lesson from Japan’s public works drive is that, eventually, Japan abandoned it.

But the lure of grand projects continued to be almost irresistible to politicians. In recent years under then-prime minister Shinzo Abe public works made a comeback, including the $85bn plan to build a maglev train from Tokyo to Osaka.

Across Europe and the US, this history shows how difficult it is for politics to stay focused on government investment that has the best return — rather than concrete, which is rapidly visible to the electorate. 

Biden’s pick for Treasury secretary has done it all in economic policy, and if confirmed will face new tests on debt and spending in a deeply divided Washington

When she led President Clinton’s Council of Economic Advisers in the late 1990s, Janet Yellen confided to her husband, economist George Akerlof, about the challenges she faced navigating Washington’s political storms.

Those storms are about to become Ms. Yellen’s headache again. As President-elect Joe Biden’s pick for Treasury secretary, Ms. Yellen is looking at the most political role she has had in nearly three decades of high-profile policy making. Her job will be to formulate and defend Mr. Biden’s policies at a time when the economy is at a crossroads and the capital is deeply polarized.

Tough debates loom about how much more the government should borrow and spend to advance a recovery that is slowing and vulnerable as Covid-19 spreads, but also is poised to bounce back if vaccines are successfully and quickly distributed.

Ms. Yellen’s resume was a draw for Mr. Biden. No past Treasury secretary has served both as leader of the Federal Reserve, which she did from 2014 to 2018, and head of the President’s Council of Economic Advisers, her job from 1997 to 1999 in the Clinton administration.

Yet her previous experiences with Washington politics were insulated by comparison with the task at hand. Compared with the Treasury Department, the Fed is a cloistered and academic institution. At Treasury, politics is often one of the first considerations.

Progressives in the Democratic Party are pushing for aggressive new spending programs. Republicans appear poised to push for spending restraint. And new administrations often involve their own factions. President Trump’s team sparred over trade, and President Obama’s over spending and deficit reduction. Assuming she is confirmed as Treasury secretary, Ms. Yellen will be at the center of it all.

“Treasury is designed to generate opinions on hundreds, thousands of different questions, many of which are known and others that arise in completely unsuspected ways,” said Nathan Sheets, a former Obama administration Treasury official and Fed economist. “The saying is that the Treasury moves 10 times faster than the Fed, and the White House moves 10 times faster than the Treasury.”

As Treasury secretary, Ms. Yellen would oversee a bureaucracy that handles matters ranging from tax collection to the implementation of international sanctions to the U.S. dollar policy, issues she didn’t publicly address in detail during her long career at the Fed.

Ms. Yellen’s relationships with congressional Republicans have at times been strained. When she went to Capitol Hill for meetings with lawmakers in her first year as Fed chairwoman, she tended to focus on Democrats, a course she later corrected to address frictions with congressional Republicans. GOP lawmakers routinely pressed her on a range of issues, including allegations of leaks from the central bank about interest rate decision-making.

Republicans also were rankled by her attention to matters such as inequality and the participation of women in the workforce. It seemed to some a diversion from issues the Fed was mandated by Congress to address: unemployment and inflation.

“You’re sticking your nose in places that you have no business to be,” then-Rep. Mick Mulvaney of South Carolina said at a 2015 hearing.

In the end it turned out there were links between unemployment, inequality and workforce participation. As the jobless rate fell in recent years, women were drawn into the labor force and Black unemployment rates hit lows not seen before—among President Trump’s signature achievements.

On the international front, Ms. Yellen is poised to play a significant role in Mr. Biden’s planned efforts to strengthen ties to traditional U.S. allies in Europe, North America and Asia. As Fed chairwoman and before that vice chairwoman, Ms. Yellen was one of the central bank’s point people in international finance gatherings for nearly a decade. In the process she built a network of connections with central bankers and finance ministers around the world.

An exception might be China. The Trump administration has imposed trade tariffs on imports from China that Mr. Biden doesn’t seem eager to unwind. A range of U.S. grievances with China remain unresolved, including its subsidies to state-owned enterprises and competition for new technologies with significant national-security implications.

“We have very difficult issues that lie ahead” with China, Ms. Yellen said in Hong Kong in January.

Ms. Yellen, a Democrat, likely wouldn’t be in her current position if Mr. Trump had offered her a second term as head of the Fed. He considered her, approving of her inclination to keep interest rates low, but chose Republican Jerome Powell instead. Mr. Trump suggested to associates that one of his concerns was that the roughly five-foot-tall Ms. Yellen might be too short to convey stature, according to people familiar with the matter. The White House declined to comment.

Raised in a Brooklyn brownstone by a mother who kept meticulous records of the family’s stock portfolio and a physician father who made house calls, Ms. Yellen was an A student known for prodigious note-taking.

As a Ph.D. student at Yale in the 1970s, she was a devotee of James Tobin, a Nobel-winning economist who followed the traditions of John Maynard Keynes, a believer in a strong role for government in economic downturns. One of her small failures in life was starting a textbook that she didn’t finish based on her notes of Mr. Tobin’s classes. The notes themselves became popular with other graduate students.

Ms. Yellen would spend her academic career focused on labor markets and questions such as: How come in a recession companies lay off workers instead of just cutting their salaries? What’s the government’s role in addressing the dislocations that come with these layoffs?

By the time she came to Washington in the mid-1990s to serve as a Federal Reserve governor, Ms. Yellen had been molded as a textbook left-of-center economist. She saw unemployment as deeply damaging to workers and believed in a muscular role for the government to address it. However, she also saw practical limits: If unemployment got too low it could spark inflation, and if the government’s debt got too big it could drive inflation higher, push up interest rates and slow growth.

Ms. Yellen prepares for tasks meticulously and doesn’t particularly like surprises or risks. She tends to arrive hours early for flights to avoid mishaps and to ensure choice space in overhead compartments. When she was a guest at a White House Correspondents’ Association dinner in 2014, she was the first person to arrive at a ballroom that seats thousands.

“When Janet was at the Fed, I supported her as much as possible by taking over household duties,” said her husband, Mr. Akerlof, in a bio for the Nobel prize in economics he received in 2001. “Later when she was at the White House my role in providing psychological support in the daily political storms was yet more important.” He added that they agreed on most issues, though he was more skeptical than she was on the merits of free trade.

Ms. Yellen’s main test at Treasury will involve spending and debt.

The experience of the past couple of decades has called into question a central premise of economics: that rising government debt-loads push up interest rates and crimp private investment. Debt has been soaring, but interest rates have fallen and inflation has remained low, with no obvious negative effects on private investment.

The question for Ms. Yellen is how far to push U.S. borrowing. As Treasury secretary one of her main jobs would be to raise the money that funds the government. That comes mainly through changes in tax policy or increased borrowing.

The federal budget deficit tripled to $3.1 trillion in the fiscal year ended Sept. 30. Republicans pushed back against a big price tag for more Covid-19 rescue programs during the summer. They seem poised to resist even harder with a Democrat in the White House.

Mr. Biden has expressed support for the $2.2 trillion measure passed by the House, led by Speaker Nancy Pelosi (D., Calif.), on Oct. 1. He has also endorsed many of the provisions included in the $3.4 trillion Heroes Act the House passed in May. Moreover, he proposes $2 trillion in spending on climate programs.

Many economists today say a bipartisan impulse to curb spending over debt concerns in the years following the 2008 financial crisis hampered the last recovery. Democrats aim to avoid a repeat of that.

“This is not a good time to have fiscal policy switch from being accommodative to creating a drag,” Ms. Yellen said in a September interview with The Wall Street Journal. “That’s what happened [last decade], and it retarded the recovery.”

She said low inflation has increased the need for and lowered the risks of aggressive monetary and fiscal policy. “There is a huge amount of suffering out there. The economy needs the spending,” Ms. Yellen said.

Another conclusion she has drawn from years of study as a labor economist and then years more as a policy maker: High unemployment imposes large and lasting costs on American households. As chairwoman and in other positions at the Fed, she often pushed the central bank to hold interest rates down to spur growth and hiring. Low rates encourage borrowing, spending and investment.

She also saw limits to how far the Fed could go to stimulate growth. Ms. Yellen urged Alan Greenspan to raise rates in the 1990s to stave off inflation, advice the Fed’s then-chairman ignored. As head of the central bank herself in 2015, she raised interest rates that had been held at near zero for years.

At the Treasury, her lever won’t be interest rates, it will be borrowing. Ms. Yellen has argued strongly for more deficit-financed government spending since the pandemic and related restrictions triggered a severe economic downturn.

However, she is also wary of federal budget deficits in the long run. In one speech last year to a housing trade group, she said that Social Security and Medicare might not get on a path to a solid footing even if taxes are raised to help fund the programs, and warned of painful tradeoffs. “This is root canal economics,” she said.

Some former colleagues say Ms. Yellen’s political strengths are underrated. “People underestimate the internal politics of the Fed,” said Daniel Tarullo, who was a Fed governor from 2009 to 2017. Fed leaders need to manage a large committee to reach consensus on interest-rate decisions. Mr. Tarullo said Ms. Yellen was “persistent and persuasive” in managing dissent at the central bank.

She briefed Mr. Biden and Sen. Kamala Harris, now vice president-elect, by videoconference in August, and encouraged more spending to boost growth by highlighting the prospect for interest rates to stay low for a long time. She wrote an opinion piece around the same time with Jared Bernstein, a member of Mr. Biden’s economic inner circle, in the New York Times that made the same appeal for continued stimulus.

Some economists expect inflation to pick up as the economy recovers, but Ms. Yellen said this summer she saw a bigger risk that policymakers wouldn’t do enough to spur a stronger recovery. “With inflation as low as it is, servicing the debt required by the one-two punch of aggressive monetary and fiscal policies is relatively inexpensive,” she wrote in the op-ed.

“Yellen is a clever choice. She will be able to argue for larger stimulus with an intellectual heft that has eluded Democrats so far,” said Marc Sumerlin, a former economic adviser to former President George W. Bush. She might seek ways “to delegate on the late-night horse-trading and partisan rhetoric,” Mr. Sumerlin said.

Depending on the outcome of two January runoff elections in Georgia, Republicans could maintain control of the Senate, leaving Majority Leader Mitch McConnell (R.,Ky.) as the Senate gatekeeper for legislation and nominations.

Jacob Lew, Treasury secretary from 2013 until 2017, said Ms. Yellen might find allies in moderate Republicans in the Senate. If she wins over three or four Republicans, he said, that could tilt the balance in Mr. Biden’s favor in looming debates.

“If the question is who can force Mitch McConnell’s hand, that’s not a fair test,” said Mr. Lew. “The real question is what does it take to persuade a majority in the Senate, and Janet Yellen has enormous capability” to achieve that.

Mr. Biden has calculated that Ms. Yellen can bridge a range of divides that will confront his administration. She enjoys credibility in global financial markets and foreign capitals. She also has alliances among Democratic Party moderates as well as progressives, due in part to her friendship with Sen. Elizabeth Warren (D., Mass.), who endorsed her expected nomination.

One of her first tasks will be deciding whether to push for a restart of emergency lending programs launched by the Fed this year directing low-interest loans to small and midsize businesses affected by Covid-19 shutdowns. Though managed by the Fed, the programs depend on collaboration with the Treasury, which provides some of the money.

Last week, Treasury Secretary Steven Mnuchin declined a request by the Fed to extend the programs when they expire on Dec. 31. He said that he lacked the authority to provide an extension, a legal opinion not shared by the Fed, and also that money used to backstop Fed loans would be better used on grants for the unemployed and businesses.

In a possible sign of what’s to come, Sen. Pat Toomey (R., Pa.) signaled resistance if Ms. Yellen tries to restart the programs. In a statement Monday night, Mr. Toomey, who is set to head the Senate Banking Committee if Republicans maintain control of the Senate, said he wanted to make sure Ms. Yellen would abide by his interpretation of the March funding law that keeps the Fed’s lending programs “shut down absent further congressional action.”

He added he has nothing against Ms. Yellen herself. “While Dr. Yellen and I had our fair share of disagreements during her tenure as chair of the Federal Reserve, I have no doubts about her integrity or technical expertise,” Mr. Toomey said.

Kuo: iPhone 12 demand strong, new form factor Apple Watch and MacBooks in late 2021

In terms of new products, Kuo indicates that form factor redesigns are coming to the Apple Watch and the MacBook lineup, in the second half of 2021.

As far as the iPad business is concerned, Kuo says demand for the new iPad Air has been strong. He teases that the iPad product lineup will continue to be compelling in 2021 with the addition of mini-LED displays and 5G cellular connectivity.

For the Apple Watch, customer response to Apple Watch Series 6 and Apple Watch SE has reportedly been strong. Kuo says to expect ‘innovative health management functions and improved form factor design’ with new models of Apple Watch coming next year.

Reception to Apple’s first ARM Macs has also been better than expected according to Kuo. The analyst reiterates his previous predictions that Apple will introduce new Apple silicon Macs with all new form factor and industrial design, in the second half of 2021.

However, it is less positive news for AirPods. Kuo says AirPods shipments are lower than originally estimated, with Kuo now forecasting a 5-10% decline in year-over-year sales for the next six month period. Another contributing factor is that Kuo now expects the launch of ‘AirPods 3’ to be delayed from early 2021 to the April-June timeframe.