Economists frequently cite Japan's "lost decade," the period from 1991 to 2000 when the Japanese economy gradually collapsed into a deep recession following an asset price bubble. Naturally, many American economists are wondering whether the U.S. is experiencing its own "lost decade" in the wake of the financial crisis that began in 2007. What are the lessons of Japan's experience for the U.S.?
Politics Can't Constrain Economics At the Conference on America’s Fiscal Choices at the Newseum in Washington, DC, New York Times columnist Paul Krugman said that the lesson of Japan is to push against political constraints that prevent unpopular but necessary measures. In other words, we need more stimulus.
There's a trap, and it's the same thing that happened with fiscal stimulus. You do something in the right direction that's inadequate, and then people say, well, that didn't work, and instead of increasing the dosage and proving it right, you give the thing up altogether.
All of this is very familiar if you studied Japan in the '90s. In fact, we're doing worse than the Japanese did. Our monetary policy is a bit more aggressive, but our fiscal policy has been less aggressive. We have a larger output gap than they did, and we've had a surge in unemployment that they never had, and our political will to act has been exhausted much faster than theirs was. On the current track, we're going to look at Japan's lost decade as a success story compared to us. What we should be doing is a really big dose of stimulus on all of these fronts. Throw the kitchen sink at it. But if you ask me for ways to solve this problem that lives within the constraints of policymakers who don't want to be bold, I don't know that I have an answer for that.
- Don't Ignore The Problems at Hand The Atlantic's Megan McArdle writes, "One can argue that Japan's propensity for avoiding short-term pain meant they avoided a short, sharp crisis in exchange for a lengthy period of stagnation. And no, I don't mean that they should have pursued some sort of Mellonite 'work the rot out' strategy, but their banks spent a long time not merely avoiding recognizing their huge losses, but actively throwing good money after bad--starving new firms of capital while they poured more loans into the bloated, failing incumbents that already owed more money than they could repay. This kept Japan's unemployment figure low, but also kept it from growing."
- The Important Cultural Difference Econoblogger Tyler Cowen writes, "Japanese politics is less competitive and Japanese rent-seeking is less competitive than in the United States. Sustained near-zero growth in the United States would mean that interest groups tear apart the social fabric and grab too lustily at the social surplus. Whether we like it or not, we are 'built to grow' and we use the fruits of that growth to buy off interest groups as we go along. Japan in contrast has greater capacity to stifle these grabs for new redistributions because their politics is more of an insider's game."
- Japan's Crisis Exacerbated by Demographic Change The Atlantic's Megan McArdle adds, "Japan's also in the middle of a staggering demographic transition, and since workforce growth is a substantial component of GDP growth, this has clearly played some role in the country's economic doldrums. How much, like everything else about Japan, is still in dispute. But these sorts of differences between us and Japan mean that you can't simply say that we're obviously worse off because our unemployment rate is higher."
- Fiscal and Monetary Policy Not Enough Economist and syndicated columnist Gary Shilling writes, "Although investor views of the economy have reversed in the last five months, the reality probably hasn’t. The good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector, starting in the 1970s and in the early 1980s among U.S. consumers. That leverage propelled the dot com stock bubble in the late 1990s and then the housing bubble. But now those two sectors are being forced to delever and in the process are transferring their debts to governments and central banks. This deleveraging will probably take a decade or more – and that’s the good news. The ground to cover is so great that if it were traversed in a year or two, major economies would experience depressions worse than in the 1930s. This deleveraging and other forces will result in slow economic growth and probably deflation for many years. And as Japan has shown, these are difficult conditions to offset with monetary and fiscal policies."