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.
Don’t we have to consider something I read a lot here, that there are cultural differences between the U.S. and other countries. When Japan hit hard times, did consumers pause momentarily in their spending before resuming spending more than they were making? Call it a moral judgment, I think we are more like Greeks than East Asians. We will reep our own justice.
I think you need to distinguish between private thrift and public thrift, PD. Although traditional Japanese culture certainly encourages private thrift, almost excessively so, that doesn’t seem to filter into the public sector and the Japanese public sector has been incredibly profligate, at least over the period of the last couple of decades.
“What Dr. Krugman fails to mention is that the Japanese tried massive spending programs to turn things around, too.”
A- effing – men. Nary a pothole or stained public building facade in Japan these days, but little growth.
“We have [done] 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 banksâ€, 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.
A- effing – men. So, can we for once and all conclude that massive govt stimulus (tax and spend) can prevent depression, but it cannot spur entrepreneurial spirit and growth. The Japanese initiated a holding action. Obama and company are initiating a holding action.
But there is no offense here. There is no go-go. Its slog along, at the tit and direction of government.
I’ll be fine (financially) as will several commenters here. But Joe Lunch Bucket won’t. And that’s a crime in my book.
PD – we are spenders, the Japanese are savers. I think these purported green shoots are driven by the US culture to spend, yet they are driven by drawing down savings, and perceived stock market wealth, that is dissolving as we speak. Good luck with that.
The Japanese lived on their savings culture. (Until recently.) We will live at the whim of foreign investors, until they decide they want a better return. Then the interest rate choke.
At the highest level of analysis we must end tax and spend; The transfer of resources from private to public must end. And yet under the current Administration and Congress we are going in a 180 degree direction.
Can you say train wreck?
“And yet under the current Administration and Congress we are going in a 180 degree direction.”
The coming increase in debt comes very largely from health care entitlements. Even if we reform spending there, we still face the distortion of having way too much, IMHO, of our economy going towards health care spending. So, we are very different from Japan in this area. Solve health care spending and we solve our debt problem.
Our longer term economic problem stems from a lack of new products and businesses. In the 2000s we had what should have been the ideal environment, the right would have us believe, for job creation. What we got was very slow job growth and economic expansion focused in the financial sector.
Steve