Today Paul Krugman warns of the possibility that the U. S. economy is looking increasingly like that of Japan’s did after its economic downturn twenty years ago:
Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.
So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.
It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.
What Dr. Krugman fails to mention is that the Japanese tried massive spending programs to turn things around, too.
We have down virtually everything that the Japanese did after the collapse of their own asset bubble economy with very similar consequences: propping up banks whose balance sheets show that they should have been closed, creating zombie banks, quantitative easing (expanding the money supply internally via the central bank rather than printing money), Keynesian stimulus. Public debt in Japan is now nearly 200% of GDP.
What the Japanese haven’t done is what most needed doing: regulatory reform and reforming their tax system. Will we follow Japan’s lead in that regard as well?
What would continuing to follow the path that Japan has blazed mean for the United States? It would mean decades of slow or no growth. That would further complicate our fiscal situation since federal government revenue and spending assumptions call for an economic rebound.