Here in the United States we tend to think we are a little smarter than everyone else in the world. That’s not unusual; so do people in China, Germany, France, Japan and many other nations. So it is not necessarily harmful self-indulgence.
But there are times when a sense of superiority blinds us to important dangers. That was evident in a recent article in U.S. New & World Report titled “Why Our ‘Lost Decade’ May Only Last 5 Years.”
The “lost decade” refers to the 10 years of near-zero growth Japan experienced after its real estate and stock price bubble popped at the end of 1989. Economic growth barely reached 0.5 percent per year through the 1990s and its economy remains fragile 21 years later, despite years of low interest rates and government deficit spending that took Japan from nearly the lowest national-debt-to-GDP ratio of all the industrialized countries to the highest.
Many economists, including me, have warned that our own nation may well fall into a similar prolonged stagnation. In a forthcoming article, James Bullard, president of the St. Louis Federal Reserve, warns “The U.S. is closer to a Japanese-style outcome today than at any time in recent history.”
But U.S. News argues that because we are managing our response to a popped bubble so much better than the Japanese, we will get through the adjustment in five years instead of 10. Well, let’s hope so!
It argues that the Fed goosed the money supply more quickly and effectively than the Bank of Japan. Moreover, our capital injections into big banks via the TARP supposedly were more effective than Japan’s response. Perhaps, although I am skeptical on both points.
But there are other factors the article ignores that point to a more difficult rather than an easier course for our country compared to Japan.
First, the United States is the largest economy in the world. Back in 1990, U.S. output was about four times that of Japan. And our country’s real output grew faster in the 1990s than it had in the two preceding decades.
What this meant was that Japan, as it had for 40 years, could depend on strong U.S. demand for its exports to pull its economy along. Even if Japanese household demand tanked, as it did, and Japanese business spending on new plants and equipment slumped, as it did, as long as U.S. consumers kept buying Japanese autos, electronics and other goods, the “net exports” component of Japan’s GDP would offset weakness in its consumption and investment.
Japan was a much smaller fraction of the global economy. The better the rest of the world economy did, the more favorable it was for Japanese economic growth. The fact that this growth proved so meager reflects the depths of the hole into which the Japanese had dug themselves, but not adverse external conditions.
At four times the size of the next largest economy (now China) and with an economy long structured as a net importer rather than a net exporter, the United States has no chance on hitching a ride on the rest of the world. Yes, China, some other Asian countries plus Australia and Brazil are all doing pretty well right now. That is good. But the sheer size of our national economy relative to the rest of the world means the benefits of favorable conditions anywhere else are proportionally much smaller than they were for Japan 15 or 20 years ago. And we are not an exporting nation.
A second important difference is that Japan had one of the world’s highest savings rates before its 1989-90 crash and throughout the ensuing decade. That meant that any deficit spending was financed by internal savings, not by borrowing from other countries. Almost all of Japan’s national debt was owed to its own financial institutions and citizens. And Japan’s households carried very little nonmortgage debt.
Moreover, Japan was a net creditor nation. Other nations owed Japan substantially more than Japan owed to other nations. All of this gave Japan’s government and central bank more degrees of freedom in dealing with their problems than we have today.
That is because we are a net debtor nation, owing more to others than they owe to us, and our national savings are low. Nearly half of our national debt “held by the public” is owed to foreigners. Households are more highly indebted relative to income and net worth than at any time in our nation’s history. The U.S. national savings rate declined to near zero from 1980 through 2007.
Yes, households now are saving more than they were during our big credit binge. Businesses and individuals are de-leveraging. But given the levels of debt accumulated while the bubble inflated and the ongoing decline in the value of housing, the biggest asset on most household balance sheets, it will be years before U.S. family financial ratios are as good as they were in the 1990s.
This is not to say that Japan did things right nor that everything our government, including the Fed, has done over the past three years is wrong. But it is extremely premature to congratulate ourselves for greater wisdom than Japan or to predict that we will be out of the woods in a couple of years. There is still a lot of denial about the magnitude of the problems we created.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.