South-Western College Publishing - Economics  
Priming the Pump
Subject Fiscal Policy
Topic International Finance
Key Words Savings, Interest Rates, Debt, Deficit, Investment
News Story

Japan's economy has been floundering for several years. First, it was the recession in 1997 and 1998. After an improvement in 1999 that many believed was the end of the recession, Japan's economy slipped again at the end of the year. The problem today is not only the recession, but also record unemployment. The unemployment rate reached 4.9 percent in February and March. In a move to ease unemployment, the Japanese government announced a plan to spend $3.67 billion to create new jobs.

The Labor Ministry plan calls for the creation of both public and private sector jobs. Incentives will be offered to encourage small businesses to employ up to 100,000 additional workers. Another 30,000 jobs will be created in the nursing care industry and 70,000 jobs in growth industries including health services. The plan also includes provisions for local governments to hire up to 150,000 workers with the central government providing the funding for these temporary positions. A total of 350,000 jobs will be created over the next 12 months. The government has formulated contingency plans and created a special reserve of $550.9 million to be used if the nation's unemployment rate rises to 5 percent.

The Japanese government has approved record amounts of emergency public spending to stimulate the economy. Though these measures have had some success in revitalizing the economy, they have also produced substantial deficits and unprecedented levels of debt. Annual budget deficits are currently 10 to 13 percent of gross domestic product (GDP) and total debt is 116 percent of GDP. By contrast, the U.S. debt to GDP ratio is 59 percent, and Germany's is 61 percent.

(Updated June 1, 2000)

Questions
1. Using an aggregate supply/aggregate demand diagram, illustrate the current position of Japan's economy. Carefully label the curves and the axes. On your diagram show the recessionary gap.
2. The government is planning to stimulate the economy by providing job subsidies. Show on your diagram the impact of the increased government spending.
3. Who is responsible for fiscal policy in the United States?
4.. If the U.S. were planning to implement a job subsidy program, what steps would be needed to implement such a proposal?
Source Associated Press, "Japan To Spend $3.67 Billion on Jobs," The New York Times, May 16, 2000.

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