Could Obama’s America have the kind of lost decade that Japan has suffered?
Thinking the unthinkable can be valuable even for optimists. I am a macro-economist and a realist who expects that, despite excellent programs by the Obama teams and the Democratic Congress, the U.S. and global recovery of real GDP growth and high employment will probably follow a slump measured in years rather than months.
Suppose, however, that I am being too optimistic? Maybe the U.S. could have a “lost decade” like Japan’s “lost decade.”
How could that happen? All you’d need would be a democracy stalemate. In history, those have occurred all too often. In Japan, the different factions in the majority Liberal Democratic Party were ever prone to controversy. Also, the legislators in the Diet fought with Japan’s bureaucrats.
We need only to imagine some lost popularity by President Obama. Without a sustained strong public injection of new purchasing power, a recessionary economy goes from bad to worse. Job cuts cause consumption spending to shrink. Less spending causes unemployment to swell. It is a chicken-egg, egg-chicken vicious circle.
Japan is disproof of the earlier belief that unregulated markets can always generate their own recoveries. An even earlier disproof was provided by lame-duck President Herbert Hoover in the 1929-1932 years. A slumping economy will generate its own downward vicious cycle unless a lot of sustained governmental stimulus is fed into it. A depressed economy generates an unhealthy society. History has reported that story repeatedly.
So far, the U.S. dollar has been surprisingly strong. It could lose that safe-haven status. We cannot rule out a future disorderly run against the dollar. When and if that happens, marching along with foreign hedge funds selling the dollar short will be U.S. hedge funds, too.
Right now, President Obama and Federal Reserve Chairman Ben Bernanke are free from concerns over the dollar’s weakening. (Maybe, secretly, they would welcome that as a boost to U.S. exports?) But later, over-consuming Americans could lose world leadership in currency markets. George W. Bush, during his eight years in the White House, rashly alienated nations abroad. That is his terrible legacy.
Life in a Japan-like sustained sliding could be woeful.
Already outside the windows of my winter home on the west coast of Florida, I see that dismal story. If we drive one mile south, we can count “For Sale” signs on 20 luxury houses.
Retail stores are largely empty. Nursing services are abundantly available because few husbands of nurses can find any kind of a job. One encounters lawyers and engineers who would accept a job washing automobiles, though no such jobs can be found today. Abandoned, half-constructed condos deteriorate month after month.
A distraught local banker, who in all likelihood had voted Republican all his life, surprised me when I heard him say: If the Obama crowd could avoid the Japan trap by tolerating 2009-2012 inflation rates of 10-plus percent, America ought to accept that risk.
Pondering the Japanese disease, not because it is all that likely, but rather so that we know how bad that would be, will clinch the case for extreme stimulus programs. Better safe than sorry.
One further thought experiment concerning the half decade ahead is, I think, worth exploring.
What if anti-free-trade ideology gains in political popularity?
If the EU, North America and Asia generally succumb to heavy tariffs and low import quotas, what will this do to global real growth rates and living standards?
Hardest hit will be China and India. Workers in the U.S. and the EU will not escape some drop in their annual paychecks. Still, many in the EU core countries of France, Germany and Italy might prefer this drop in real wage if that succeeds in, say, halving Europe’s rate of unemployment. In modern times and places, left-of-center societies avoid starvation by temporarily acting to reduce inequalities.
Knowing the follies of the left and the right, I have become a confirmed centrist who knows that private enterprises and public regulators are both essentially needed.
Almost by definition, a centrist must be prepared for compromises. Thus, if the French want to work fewer hours per week and want to slow down on free trade, those are admissible choices that do not threaten to take us back to an Age of Serfdom.
During up bubbles, success today seems to breed success tomorrow. But that knife blade cuts two ways.
In a down bubble, yesterday’s drop in the Dow’s stock prices will generate today’s and tomorrow’s further drop in prices!
Ironically, when the public becomes too scared to spend, their shift to saving kills off enlarged investment.
My generation of macro economists called this “the Paradox of Thrift.” Today’s teachers in the Ivy League got brainwashed by libertarian scholars like Milton Friedman and Friedrich Hayek to forget these realities.
It will be a tragedy — an avoidable tragedy– if today’s democracies permit themselves to stay mired in long slumps.