On the Record

Is the U.S. Headed for Japanese Style Stagnation?

Both the U.S. and Japan suffered a major financial shock, and both nations tried monetary and fiscal stimuli. With both nations’ growth stagnant in spite of these policies, it seems clear both need to fundamentally restructure their economies, says Barry Bosworth. But he notes that it is better to have the United States’ economic problems than the Europeans’ because we have more tools at our disposal to fix them.

“I think both the United States and Japan are caught in a lot of similar economic circumstances. Both of us had severe financial crises that initiated a lot of the problems. In the case of Japan it was a grossly overvalued equity market and a real estate boom. Well, this sounds a lot like the United States where real estate prices got too high. Probably a lesser problem in the U.S. was the stock market. That caused a financial crises in both countries. There has been a big decline in economic activity. I think both the countries are similar in that we’re both (sort of) stuck in a stagnating economy with little hope that it is going to recover anytime in the near future. In the case of Japan this has now gone on for 20 years. They have never been able to return back up to the growth rate that they were achieving before the crisis.”

“I think other similarities are that both countries have tried monetary policy (driving interest rates to zero), and in both cases they failed to get the economy back to a high growth path. In the case of Japan, interest rates have been at ridiculously low levels almost now for nearly fifteen years. We have now done it for about four [years]. Both countries have tried to use fiscal stimulus as another alternative to try to get the economy growing, again. I would think, on balance, they haven’t worked for much the same reason. You can get fiscal stimulus that stimulates the economy and growth picks up for a period of time, but you cannot sustain fiscal deficits. In the case of Japan after an episode of strong fiscal stimulus, they would grow faster but then they are forced to cut back on the size of the budget deficit. When they do growth would slow back down, again. They go through these cycles of tightening fiscal policy and easing fiscal policy. The United States hasn’t had quite as long of an experience with it, but it certainly looks the same.”

Both economies need fundamental structural changes (2:22)
“Increasingly, the argument is becoming that we treated this as a typical business cycle here in the United States and I think, originally, Japan saw its problems as the same. You think of a business cycle as a quick down, and then right back up again; and in the ‘V’ of that decline we had a lot of fiscal stimulus thinking that we just needed to transition through the bad times and we would revert to the growth. That has not happened here in the United States. The problems we face seem to be much longer-term. Similarly, in Japan they did not [revert back to growth].

So I think that in both countries, if we are going to recover from this, we are going to have to restructure our economies. It is not simply a problem of stimulus or (as people put it) job creation. We have to change the fundamental structure of our economy. In the case of Japan, I think the stagnation has been caused by an excessive reliance on a few very efficient and well-run export industries – automobiles is the most famous example. But what people did not know is that Japan was sort of like a dual economy – that in the more domestic side (services and such) it was terribly inefficient with (always) low levels of productivity mainly caused by excessive regulation. People talked about the need for Japan to restructure its economy to shift more towards increasing the efficiency in these domestically-based economy industries.”

“In the case of the United States the problem is a little bit different, but we look back at what we were doing and we now realize we were devoting way too much in way of resources to consumption. We were on an unsustainable consumption binge here in the U.S. as we spent our wealth trying to sustain the economy. Similarly, here in the U.S. we had way too much reliance on this housing boom building a lot of houses against what was actually a backdrop of a slowing rate of growth in the population. That, too, is gone and it is not going to return; and I don’t think we can afford, as a country, to go back to one of these consumption-led booms again.”

“For the U.S., we also have to restructure our economy. We have a very efficient domestic sector and we do not have the same regulatory problems as in Japan. In the case of the U.S. we are very inefficient in the area of exports. We have relied for far too long on these large trade deficits as we sucked resources in from the rest of the world. We have to start over now, and we have to learn to export. We have to learn how to balance our imports and our exports to be of comparable magnitude. We are basically looking for some way to become far more successful in the global economy than we have been in the past. That has turned out to be very difficult to do here in the U.S. just as the regulatory changes and other means have been very difficult to accomplish in Japan. So both countries are similar, and it is hard to gain momentum to undertake the structural changes that we have to make.”

Better to have the U.S.’s problems than Europe’s (5:40)
“Europe, right now, faces much more of an immediate crisis because of the fiscal situation that it caught itself in. As a group of countries they gave up independent monetary policies. They are not able to change their exchange rates. So they have very limited tools that they can use to recover from the situation that they find themselves in. The U.S. is not in that situation. We have flexible exchange rates. We have a monetary policy that can ensure that there is no threat of the government going bankrupt as seems to be the pressure in Europe. I would much rather have the U.S. problems than the European problems. I think they are more solvable.”

“But Europe is also a group of countries that, in the past, (sort of) adjusted to low growth I think. They found that that was okay. They accommodated it, so Europeans tolerated a more equal society, but a society with a lower rate of growth. I think they thought that was a reasonable trade-off. Right now they face the problem that they cannot sustain what they were doing before.”

The U.S. has always been much more a country that is based on a known high level of inequities which we tried to deal with by growing fast. We didn’t do anything about trying to level the playing field here in the U.S. Instead we emphasized growth. To see growth disappear from the U.S. is a traumatic experience because to make the system work, Americans have to have a job. Jobs are far more fundamental to living here in the United States than they are in Europe. We do not have the social safety net that Europeans have.”