Economic Stimulus in Japan: Priming a Gold-Plated Pump

November 25, 1999

Economic Stimulus in Japan: Priming a Gold-Plated Pump

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By STEPHANIE STROM

OKYO -- In its ceaseless effort to prod its maddeningly lifeless economy into action, Japan has spent more than $1 trillion, much of it on bridges, tunnels, airports, concert halls and pavement aimed at propping up the economy and satisfying political promises.
The goal has been old-fashioned pump priming in the manner of John Maynard Keynes, whose prescription for reviving an economy was, more or less, dig a hole and fill it up, again and again if need be. That is an oversimplification, but he was the leading proponent of government spending as a means of restarting economic growth.
So in Japan, airport runways have been added when an extension would suffice. Tunnels are dug instead of simple roads. The cobblestone sidewalks in a graceful old graveyard have been dug up -- and re-laid. Many a town is getting a multimillion-dollar concert hall that would be the envy of Lincoln Center.
Then there is the new Tokyo subway line. After waiting decades for a new underground rail line that would relieve overcrowding on the above-ground train that encircles the central city, Tokyo now seems to have produced yet another boondoggle.
At a time when local population and subway ridership trends are flat, it will cost taxpayers a stunning $10 billion -- 50 percent more than originally projected in 1989 -- and completion is two years behind schedule.
By one estimate, tickets will have to cost about $9.50 for the city to recoup its investment, a price that makes Tokyo's infamously expensive taxis look like a bargain.
But that is just the half of it. What has really raised temperatures here is the fact that the new line will not live up to its billing when it opens, because it does not run in a complete circle. Riders seeking the most direct route from the northern part of the city to the southwest, or vice versa, will have to get off the train at one point, walk across the platform to another track and wait for another train.
"It's like a Rolls-Royce that you can't shift into reverse," Shintaro Ishihara, Tokyo's outspoken governor, said recently in one of his milder critiques.
Route 12, as the line is known, is just one of many public works projects here that seem extravagant, wasteful, pointless or just plain dumb, especially if one is unfamiliar with the complicated politics that brought them to life.
"At least 50 percent of the spending has been useless at stimulating further economic activity beyond the initial investment," said Tadashi Nakamae, a prominent economist here. "And maintenance costs for it all will be huge."
This month, the government announced yet another stimulus package, its ninth, which included a minimum of $24 billion to $28.5 billion at current exchange rates for traditional public works.
No one is certain how many jobs or how much economic growth has been created by such lavish spending, but economists generally agree that it has kept the Japanese economy from slipping into a severe recession or even a depression.
Indeed, a good portion of it has come at the behest of the United States Treasury, which believes that a healthy Japan is good for the world and certainly for the United States. Never mind that in today's political climate, Washington would never be allowed to spend so freely were the American economy to slip.
Unfortunately, many economists argue, much of the money has been spent profligately, staving off inevitable and necessary changes in the economy but failing to put it back on its feet so that it can move ahead.
Some also have suggested that Japan would have been better served if the money had been used to help more start-up companies or to create a better safety net for the unemployed instead of propping up failing construction companies.
"I'm not totally against public works," said Masaaki Kanno, chief economist at J. P. Morgan Securities. After all, he notes, it is hard to find a pothole in Tokyo's streets, and most public facilities are clean and in good condition. "But the government should focus on projects whose returns on investment would be much higher, like encouraging the construction of taller buildings in Tokyo to enhance land usage."
That would require changes in the tax code -- which penalizes those who replace small ramshackle buildings with skyscrapers -- as opposed to outright spending. Instead, money keeps getting spent, often in places where it seems to make no sense.
Consider the colored asphalt that is now used to keep Tokyo's streets flawlessly paved. The roads are beginning to resemble patchwork quilts, with stretches of red and green pavement alternating with ordinary gray.
A square yard or so of the green asphalt used by the Minato Ward, Tokyo's wealthiest district, costs about $238, compared with $146 for regular asphalt, said a ward spokesman. The green pavement's rough surface helps keep cars from slipping, he said, and is also used to distinguish the part of the road intended for pedestrian use.
But in an adjacent ward, a green stretch of pavement means there is a school nearby and red pavement is used to prevent slippage and warn drivers of blind curves.
Given the stop-and-start nature of Tokyo traffic, drivers can hardly be bothered to remember that in one district green pavement means one thing while in another it means something else.
While they may well be seeking to improve safety, officials are also under pressure to spend all of the money allocated to them for public works within a fiscal year. If they do not, they get less the next year.
"In the Japanese system of single-year budgets, budget organizers only think about the completion of roads and so forth and do not consider future usage or maintenance costs," said Atsushi Miyawaki, a professor of law at Hokkaido University who specializes in government finance. "Political pork barreling becomes much easier if you disregard future costs."
And public works here, as in many other places, are nothing if not political pork. Most involve construction, because that industry directly and indirectly employs 10 million Japanese workers and voters, said Takayoshi Igarashi, a professor at Hosei University who has been an especially outspoken critic of public works.
"Public works benefit the general contractors, their subcontractors and so on, so that the eventual list of beneficiaries, including the politicians who receive contributions from the construction companies, is a long one," he said. "It's a very strong network."
In the new underground subway, there are 58 general contractors, a fact that, coupled with the cost overruns and delays, led Governor Ishihara to charge earlier this year that the whole project was ridden with "dango," or price collusion.
Municipal bureaucrats denied his accusation, and Ishihara has since chosen his words more carefully by criticizing the difference between what the government agreed to pay and the actual cost of the line.
"I don't know that dango is involved," he said. "I don't think so, but it's very strange, isn't it, very mysterious that such discrepancies in cost would arise, considering there were so many smart people here working on the bidding."
The planning of many public works projects also seems inept. Take the airport in Fukushima Prefecture. The prefecture, about 100 miles north of Tokyo, was less than a year into the construction when it decided that the airport needed a longer runway.
But rather than just add several hundred feet, the prefecture successfully appealed to the national government for money for a new runway.
Makoto Kano, a prefectural official, said a new runway was the obvious answer. Forecasts suggested that there would be a demand for jumbo jet service, he said, requiring not only a longer runway, but also a path for the planes to enter it. The original runway was too close to the terminal building to construct such a path, he said, so a new runway was built. The cost: about $267 million at current exchange rates.
But even before construction could be completed last December, the prefecture decided that the new runway would have to be extended, and it received national government approval for that, too. Fukushima Ombudsman, a citizens' watchdog group that opposes extending the new runway, estimates that the extension will cost anywhere from $380 million to $667 million.
Why is the extension more expensive than the runway? Kano did not have an answer, other than to say the prefecture was still debating the total length. He said he expected the extension to cost a little more than $380 million.
The urge to spend certainly seems to take precedence over planning. In Hokkaido, the northernmost of the four main Japanese islands, the authorities decided to build the Doto Jidoshado, a toll road that will eventually cross the island.
About 32 miles of the new 160-mile highway have been completed, at a cost of about $1.9 billion at current exchange rates. But the road has failed to attract drivers, largely because an existing highway running parallel to it is free.
Officials have tried to attract drivers by offering prizes, golf competitions and the chance to drive a snowplow. The campaign succeeded in increasing the average number of cars using the toll road to 862 a day, but the route still has the distinction of being the least used in Japan.
All this spending has led to a tremendously expensive game of one-upmanship. In Hamamatsu, a city of about 555,000 people southwest of Tokyo, almost $1.9 billion of public and private money was spent to build a concert hall and performance center.
Act City Hamamatsu, which opened in 1994, features a $3 million organ and a high-tech, four-stage performance hall. "It is expensive," a spokesman for the hall said. "There are few stages in the world that use a four-panel stage because of the cost."
So grand is Act City that Hamamatsu's cross-prefecture rival, Shizuoka, with a population of about 471,000, decided that it needed one too.
The Granship Shizuoka, designed by the leading Japanese architect, Arata Isozaki, has a meeting hall with a view of Mount Fuji and six booths for simultaneous translators, and its main hall can be used for sporting events, because all of its 4,600 seats are removable.
It opened in March, about 40 miles from its competitor. The price: $672 million in public money.

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