The last couple of days I’ve been examining the muddled thinking that is driving the debate over how to get us out of our current economic funk. The solution de jure seems to be more government intervention in the economy, such as the economic stimulus package being worked on by President-elect Barack Obama.

Dr. Arthur Laffer, the author of our Thinking Economically series, recently sent me an email commending a December 16th Wall Street Journal editorial (subscription required) on the efforts to create a stimulus package as “the single best editorial I’ve ever read.” The editorial outlines stimulus package after stimulus package passed by the Japanese Kokkai, or Diet, as their parliament is called in English. Here is a brief excerpt:

“In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment.”

Here is a listing of what Japan did over the decade: August 1992: 10.7 trillion yen ($85 billion); April 1993: 13.2 trillion yen ($117 billion); September 1993: 6.2 trillion yen ($59 billion); February 1994: 15.3 trillion yen; September 1995: 14.2 trillion yen ($137 billion); April 1998: 16.7 trillion yen ($128 billion); November 1998: 23.9 trillion yen ($195 billion); November 1999: 18 trillion yen.

What did Japan get for all this? Well, mainly a lot of government debt. Japan’s debt-to-GDP ratio started out this period at about 63%. By the time all this spending was through, it had reached 128.3%. It finally peaked in 2006 at 180%. Compare this to the U.S. level that has hovered between 35% and 40% for most of this decade.

What Japan didn’t get was an improved economy. Its economy grew anemically during the 1990s; all of the “stimulus” and negative interest rates didn’t help a bit. As the WSJ said, “Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.”

We face the same situation today in the U.S., and may also have to deal with this in Texas if our economy starts to falter because of the drop in oil prices. Our only hope for a turnaround is turning to the market – rather than the government – to lead us back to prosperity. Our paper, The Economy, part of our Influential Issues series, offers some thoughts and ideas about how to do this in Texas.

– Bill Peacock