John Maynard Keynes was an economist whose opinions have shaped government policies throughout the 20^th century. Joseph Sternberg of the Wall Street Journal explained an interesting link this week, between Keynesian policies and the fate of bankrupted Japan Airlines.

Keynesian policies suggest that during a period of depressed economic growth, a chronic lack of the demand is a core problem that couldn’t be solved with supply side policies. Instead he advocated for demand stimulus packages including infrastructure developments.

The Japanese economy has experienced a turbulent past. Throughout the 1960’s, 70’s and 80’s the level for GDP grew at impressive rates, but growth began to slow in the 1990’s due to the effects of an asset bubble. An asset bubble was caused by an abundance of cheap credit caused by exceptionally low interest rates. This lead to the prices of shares, houses and land rising very quickly as buyers speculated and outbid each other. The government responded by sharply raising interest rates in 1989, which crushed the bubble and stalled the economy.  Depressed wealth caused spending to stall, and the Japanese thrift and savings culture to return.

In the 1990’s the government attempted to stimulate the economy but this was largely unsuccessful. The result was low real growth (compared to the past), zero percent interest rates set by the Central Bank and a deflationary spiral. Politicians used a variety of policies, including Keynesian ideas to boost aggregate demand.

During the economic boom, the development of the aviation industry was an important pillar of the countries infrastructure development as Joseph Sternberg of the Wall Street Journal explains.

Starting in the 1960s, successive governments concocted aviation plans focused on building new airports. Perhaps this was justifiable back then, when Japan was an Asian tiger economy with a growing population. But in 1964, even before the bulk of the airport construction, the bullet train appeared. At that point, and especially as the shinkasen high-speed-rail network developed, it might have been prudent to ask whether air would invariably be the most efficient way to connect domestic destinations.

Unfortunately, by then the airport boom had taken on a life of its own. During the lost decade of the 1990s, airport construction popped up in many stimulus plans. National and local politicians, not to mention the politically powerful construction lobby, wanted to put an airport in every prefecture. And ordinary airports wouldn’t do. Because Japan’s relatively small flat surface area is in such high demand, one airport after another was built on reclaimed land in the middle of the ocean at enormous expense. Despite periodic public fulminations about out-of-control costs, in practice “expensive” seemed to be viewed as a net positive.

Boosters touted airports as creators of short-term construction jobs and longer-term boons to their areas. This airport binge has continued right up to today. Japan’s 98th airport opened last year: Shizuoka-Mt. Fuji, roughly 50 miles from the famous mountain. California, with a larger land area, has around one-third as many airports in regular commercial service, with another 35 or so “reliever airports” to handle business jets and general aviation.

The author reflects on the cost of the Keynesian stimulus. Whilst in the short term, development of the airport network provided jobs and helped the construction industry; in the long term the projects have created an inefficient and expensive transport network. Japan Airlines has been forced to offer flights from each of these 98 regional airports, often paying high landing charges, and operating flights at below capacity. Overtime this pressure may have caused Japan Airlines to slide into bankruptcy.  Perhaps this is a unique one off case, but the author predicts some interesting links to current developments in China.

Lest anyone think this is a uniquely Japanese problem, consider all the other places in the world currently undergoing their own Keynesian infrastructure booms—and especially China. For instance, a new high-speed rail line is due to connect Beijing to a station an inconvenient 45 minutes from the downtown commercial center of Guangzhou in southern China. The train will take somewhat less than eight hours to connect cities reachable in under three by air. Will enough passengers ever make that trek for the train to operate in the black?

Discussion Questions:

1. Why does John Maynard Keynes suggest that demand stimulus is an appropriate response, for a country stuck in a deep recession, with depressed demand?
2. If central bank interest rates are very close to zero, what other policies could the government use to stimulate growth?
3. How could supply side policies actually make the recession worse in Japan?
4. Outline the advantages and disadvantages of demand-side policies used in Japan.

About the author:  Andrew is an International School educator based in Singapore, who specialises in teaching Economics and leading change in a 1:1 Apple laptop environment. He enjoys teaching the International Baccalaureate curriculum and has taught the Diploma Economics course to both Higher and Standard Level students. Previously Andrew taught in New Zealand as a Geography and Economics teacher and eLearning coach. He is an adventurous New Zealander, who enjoys running, travelling and spending time with friends and family. Andrew is currently the head of Educational Technology at the United World College of Southeast Asia. Read more posts by this author

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