The New York Times Friday raised the specter that the United States might be in for a decade of economic stagnation along the lines of the one that Japan suffered in the 1990s until Junichiro Koizumi became prime minister in 2001 for his exceptionally successful five-year term.
Even then, Japan's road back to recovery was slow rather than spectacular. But against all odds and expectations, Koizumi did succeed in freeing up significant quantities of investment funds and jump-starting technological progress in areas where it had become moribund, particularly in communications technology and IT, where Japan had fallen badly behind other major industrialized nations.
Nobel Prize-winning economist Paul Krugman wrote a column on the issue Friday in which he warned that the Obama "administration's response to the economic crisis is all too reminiscent of Japan in the 1990s." In the same issue of The New York Times, an article filed from Tokyo quotes officials wondering why the United States does not seem to have learned from Japan's mistakes.
The thrust of The New York Times case is that stimulus without an effective cleanup of the banking system -- clarifying which banks hold toxic assets, and which are insolvent, then getting in and propping up the viable while letting the doomed die -- won't produce more than stagnation.
Thanks to Koizumi's bold and uncompromising leadership, the Japanese eventually tackled their banking system in 2001-2003 and their economy began to get some traction.
No one is impressed by the Obama administration's bailout plan, unveiled by new U.S. Treasury Secretary Timothy Geithner this week, because of its sketchiness. Instead, economists are citing Sweden's approach to its crisis in 1992 as the model. The Swedish government actually took over control of certain banks for a period before selling their interest back to the private sector.
Krugman over the past decade has acquired an admirable and deserved record for repeatedly telling unwelcome truths to those in power. He endlessly warned that the irresponsible policies of the Bush administration would lead to ruin and for his pains was endlessly reviled by Bush's then still-impressive legions of supporters. In September 2008 the financial collapse that he had repeatedly predicted and warned against -- as we had in our financial and economic columns in UPI -- finally came to pass.
Krugman is now confirming what his serious readers always knew -- that he is not just a great economic analyst but also an impartial one. He is perfectly prepared to fiercely criticize U.S. President Barack Obama and Geithner when he believes it is necessary.
However, the economic and financial crisis that the United States now faces is not remotely comparable to the one Japan faced nearly 20 years ago. It is potentially far worse, and the kind of decadelong stagnation that Japan then suffered would be mild compared with other all too possible outcomes.
For the underlying financial and economic strength of Japan's economy and society was never seriously at risk during that supposedly "lost" decade. Japan remained the greatest exporting nation in the world, although China was coming up fast to rival and eventually surpass it.
The global financial system remained stable, the yen remained stable, and the fiscal credibility of the Japanese government and its institutions was never remotely in doubt. Japan continued to rack up every year gigantic balance-of-trade surpluses that were the envy of the world. Japan was never in the slightest danger of being unable to pay for food and raw material exports to run its industries and feed its 120 million people.
By contrast, the United States faces the current crisis after decades of remorselessly building up the worst negative foreign trade balance of any nation in recorded history. The federal government, which actually moved back into healthy surplus for the last two years of President Bill Clinton's two terms of office, rapidly fell back into deficit under President George W. Bush, who combined his major tax cuts with an addiction to escalating wild spending that Obama and Geithner have yet to match, although they very well may.
Bush and his economic lieutenants also repeatedly intervened to prevent the natural working of economic forces in one crucial area -- to keep interest rates permanently as low as possible. This, more than any other single cause, generated the gigantic housing/real estate bubble, as Krugman -- and we at UPI -- repeatedly warned at the time.
Japan in the 1990s was able to weather its decade of recession by continuing to export its way out of danger, even during the Koizumi years when no serious banking reform or cleanup was undertaken.
However, the United States does not have any major foreign market that it can export to in comparable quantities. On the contrary, it needs to curb its vast import balance of payments, almost all generated by its gigantic trading imbalance with China or by its annual cost of oil imports.
Most of all, the Japanese government never risked destroying its financial stability or running the dangers of hyperinflation by wild spending. Bush's $700 billion bank bailout, coming after eight years of reckless spending on so much else, followed by the $800 billion Democratic wish list labeled a "stimulus package" that was passed by the Senate this week have weakened the dollar and the international credit assessments of the U.S. government to a degree never before experienced.
Krugman is therefore right: Obama and Geithner have to move publicly, decisively and effectively to try to save those banks that can be saved. But they also have to show a resolve that no Democratic or Republican administration has shown in recent decades to rein in the colossal and soaring budget deficit and mountain of debt to preserve the value of the dollar and the effective functioning of the U.S. government.
If they can do that, a decade of stable stagnation, 1990s Japanese-style, will be a mild price to pay.
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