Opinion

Mohamed El-Erian

Could America turn out worse than Japan?

By Mohamed El-Erian
October 31, 2011

By Mohamed El-Erian
The opinions expressed are his own.

It is time to say goodbye to the confident reassurances from American policymakers that Japan could not “happen here.” It is also time to regret the smug assertions that Japan’s “lost decade” of growth was due to a combination of uniquely Japanese failings – from insufficient policy activism to weak corporate governance and poor political leadership.

American policymakers, together with their European counterparts, are realizing something that Japan has been experiencing for a while: It is very difficult to manage well an economy hobbled by structural impediments and balance sheet excesses. Absent a major change in the effectiveness of the policy approach, this realization will likely lead to broadening societal concerns about the possible “Japanization” of America and, with that, worries that under such circumstances the country would not be able to navigate such a phenomenon as well as Japan has.

The US continues to find it difficult to generate meaningful economic growth and to create enough jobs. Despite multiple fiscal and monetary stimulus programs – indeed, record breaking ones – the economy has failed to recover decisively from the sharp contraction that followed the global financial crisis.

With insufficient growth, un- and under-employment remain distressingly high while the average duration of joblessness hits one unfortunate record after another. To make a bad situation even worse, it is the most vulnerable segments of the labor force – the young and the less educated – who are being hit the hardest. In the process, society experiences a further deterioration in already excessive inequalities in income and wealth.

Low growth means that America is unable to “safely de-lever” from the financial excesses of the last decade. As a result, the economy faces a risk of tipping into another recession.

A recession at this time would be terrifying – from an economic, social, political and institutional perspective. In addition to the country’s unemployment crisis, almost a quarter of homeowners owe more in mortgage debt than the value of their houses. With policy interest rates floored at 0% for quite a while now and the fiscal deficit hovering at almost 9% of GDP there is limited policy flexibility.

What America is discovering is something that Japan has painfully known for awhile: Post-bubble economies are both complex and perplexing.

It is not easy to bring back to sobriety an economy that overdosed on leverage, debt and credit-entitlement. It is doubly difficult when it faces structural impediments to economic growth; when the political system undermines all attempts at reform; and when the global economy is weakening and being subjected to renewed financial fragilities.

I suspect that quite a bit will be written in the months ahead about the possible Japanization of the American economy. That is the easy prediction. More difficult – and controversial – is the prediction that the emphasis of such work could well evolve over time to also assessing the similarities and differences between America and Japan when it comes to coping with many years of low growth without tipping into greater economic degradation and heightened social tensions.

The US lacks two important characteristics that have enabled Japanese society to cope relatively well with a difficult situation. First, it does not have the level of social cohesion that prevails in Japan. As such, it does not have the same extent of societal safety nets that can be beneficial during a time of sluggish growth. Second, America has neither the net creditor status of Japan nor the ability to generate surpluses on its balance of payments. As such, it has less of a cushion, thereby increasing its medium-term vulnerability to capital from abroad.

With these attributes, the US would find it much harder to deal with many years of slow growth, sluggish job creation and further income and wealth inequalities. The economic costs would be higher, the financial frailties greater, and the social consequences much more material.

This is yet another reason why the elected representatives of the American people, and their appointed policy makers, must do more today to internalize in their thinking the growing risk of economic “Japanization.” They must also realize that the country has fewer financial and societal cushions to deal with this risk should it materialize.

The sooner that happens, the greater the chance America can use its still-considerable strengths to overcome its policy paralysis and embark on much needed – and much discussed – measures to remove structural and debt impediments to job creation and to higher and more inclusive, economic growth.

Against this background, it is encouraging to see the Administration recently propose a number of steps that, assuming congressional cooperation, would serve as a foundation for further progress. This is especially true for the jobs proposal, and also for the reforms to housing. But much more needs to be done to urgently improve the key enablers of sustained expansion: namely, the functioning of the housing and labor market, the process of credit intermediation, productivity-enhancing infrastructure, and balancing immediate fiscal stimulus with medium-term reform of both the revenue and spending side.

There was a time when America looked down on Japan for the latter’s inability to deal with its economic problems. No more. Like Japan, America is now realizing how difficult a post bubble economy can be. The fear is that it will also find out that that it lacks some of Japan’s attributes needed to cope with long years of economic stagnation.

The US has no time to waste to build on the important, albeit small progress that has been made in recent weeks. If it does not, there is a risk that the country’s economic fate could end up being even worse than what Japan has experienced. Everything possible should be done to minimize this risk.

Photos, top to bottom: An employee of a foreign exchange trading company passes a graph showing the movement of the Japanese yen’s exchange rate against the U.S. dollar, at a dealing room in Tokyo October 31, 2011. Japan intervened unilaterally in the currency market to weaken the yen after it scaled another record high against the dollar on Monday, Finance Minister Jun Azumi said. REUTERS/Issei Kato; An employee of a foreign exchange company walks past a monitor displaying the Japanese yen’s exchange rate against the U.S. dollar in Tokyo October 31, 2011. REUTERS/Yuriko Nakao

Comments
27 comments so far | RSS Comments RSS

Japan and the US share some of the same attributes during the financial crisis – lack of political compromise, short term financial solutions versus long term solutions which may create much more pain. Both countries will see standard of living fall.

But the differences are too big to put the two countries in one bucket. First of all America is an immigrant country. Even in a total right wing scenario if we cut all illegal immigration, built a wall, cut refugees in half, cut work visa’s in half, cut student visa’s in half, etc, etc. This would really hurt our economy but we would still have more immigration then than if Japan was to increase their immigration by 1000%. Its a huge gap and it means Japan is rapidly aging and cannot get out of their debt trap and a large scale wealth reduction and loss of power to china is probable. The US however has the younger people and kids to keep up a reasonable tax and revenue solution. It is possible if you just put a few reasonable people around the table. The downside is if the US fails to solve the financial crisis and our economy contracts like Japans, we will have too many youth unemployed and unlike peaceful Japan, these youth will eventual riot, revolt and resort to outside the system solutions. Its not because they are Japanese and we are black, brown and white. Its because could have tens of millions more unemployable teenagers and thats a powder keg in any society.

Posted by John2244 | Report as abusive
 

The USA is in the middle of a transition to a non-European heritage country. That cultural transition will trump the economic problems and will in fact be aggravated by them. The result will be social turmoil and a ruling class that is so cut off from society as a whole that it will be near collapse before it acknowledges that it is culturally connected only to a shrinking and aging minority in whatever is being born here.

Japan is doggedly homogeneous and that gives it a strength never to be seen again in the USA. Here we have rising ethnic conflict.

Posted by txgadfly | Report as abusive
 

As the economic power is waning here and in Europe, the military power is still up and high and the temptation to use it for economic advantages increases. The breaking point is when the economy affects the military power and that will be an important event.

Posted by OmarMinyawi | Report as abusive
 

I’m afraid so folks! We’re not a mono culture, we don’t save well, we aren’t humble and our work ethic is marginal! Also, we owe 10s of Trillions in unfunded entitlements, state problems, loan defaults, etc etc and our government is now 40% of GDP now! Deflation for a generaation-we’re living miles above our means and the rest of the planet! Ex: our min wage now pays more than 90+% of what planet earth makes!

Posted by DrJJJJ | Report as abusive
 

Solution: we need to flush progressive world views down where they belong and embrace decent Christian morals/ethics! Now, let’s hear for the dark side why we shouldn’t!

Posted by DrJJJJ | Report as abusive
 

Another major/radical cahnge needed: tax reform! a 65,000 page tax code that favors the rich is a joke and millions are working under the table now!

Posted by DrJJJJ | Report as abusive
 

Hi,

With the world in a financial crisis for almost for three years now, it looks like nobody has a remedy so far. The governments have reduced the bank rates so low, and do not know where to go from there. The budget deficits are hitting the ceiling or have hit the bottom, depending on which way you look at it.

Is it because there is no money available? No, there is enough money in the banks, but there is no incentive for the banks to lend.

How would you tackle such an issue. Of course the governments could insist that the banks should touch a certain level of Credit-Deposit ratio. However, the banks will not be enthused because there is no incentive for them in doing this. How do you get around this problem ?

The governments could give banks incentives for lending the money to the Micro-sector.

For example, in the US the total bank deposits is close to the tune of $7 trillion and if there is an incentive more deposits may flow into the banks and let us say it touches $10 trillion. Even if the government should give an incentive of say, 3% per annum for the average daily owing balances on loans, mortgages and other line of credits on bank loans to the Micro sector and say if all of this money is lend to the Micro-sector, the government ends up paying $300 billion dollars in incentives, which is just 1/5 th of the debt ceiling the Obama government requested for.

Once this money starts circulating, the tax earnings of the governments will increase and in a short period of time the government will be able to come out of the debt spiral.

Now, you may ask me why incentives only to the Micro sector. The Micro sector because the Micro sector production may not create a glut in the market.

Now, you may ask how do you define the Micro sector. Well, each government should be allowed to decide how they wish to define Micro sector in their individual regions depending on market conditions. Well, Micro sector can also include student loans.

I did give US as an example, but with the acrimonious governance in place, these things may take sometime there. However, Europe and especially Britain could try something like this.

Let me know if this is feasible or where have I gone wrong. I would love to hear your comment.

Posted by JJJ3 | Report as abusive
 

How much does Pimco invest in commodities for its clients, and how is that helping economies to recover when the cost to do business based on out of control commodity futures trading is too high and is undercutting demand?

Posted by sorestloser | Report as abusive
 

time will tell

Posted by redwood509 | Report as abusive
 

Any comparison also has to consider demographics. Japan has an older population and frankly I just don’t see 70 year olds spending their life time savings on a big screen TV because some economist wants to stimulate the economy!

Posted by DavidBrown | Report as abusive
 

I only wish Mr. El-Erian was Fed Chairman, Treasury Secretary, Chief Economic Advisor, Leader of the House and Senate…and hell, why not President.

We need someone who understands, business, economics, world politics and sees the big picture as he does. Let someone with real answers get to work.

Posted by jaham | Report as abusive
 

Dr. JJJ, You, yourself illustrate why the U.S. is in for a ROUGH ride. Your first post was 100% “on”. Then you toss religion into the political arena where it does not belong and is, to many, unwelcome and unacceptable. Decent ethics, yes. “Christian morals”? Absolutely NOT!

Those like you are the very reason why “…it is not easy to bring back to sobriety an economy that overdosed on leverage, debt and credit-entitlement…[that] faces structural impediments to economic growth; when the political system undermines all attempts at reform…”.

Posted by OneOfTheSheep | Report as abusive
 

Hello again, Carl

I’ll have whatever you were having before you wrote the post above.

Posted by OneOfTheSheep | Report as abusive
 

It should be self-evident that every-day life is not the same for all, isn’t fair, and never will be. We must accept that, whether we choose to work to change things for the better, or not.

Some are born with autism, some are mentally ill, some encounter medical challenges far beyond ordinary. Even regarding everyday life and the normal process of aging each society has choices that must be made. Sometimes the choice we would prefer is not one we can afford, and so making that choice is difficult. Nobody promised easy.

Native Americans exiled those who could no longer contribute to the well being of the tribe from their camp to freeze or starve. Was that cruel? Not at that time in that place, where resources were few and threats everywhere, from competing tribes or drought, or the plague of the white man. Those “in charge”, above all else, had the survival of their tribe as the “prime directive” and their available choices were constrained by available resources. Today America now faces such reality.

For the great majority of history through tribalism, the ancient republics, monarchies, communism, fascism and socialism, all those in power at any given time was carve up an economic “pie” that was fixed in size. The “American miracle” harnessed individual ambition, which textbook liberals would call “greed”, to Capitalism.

The illusion that anyone had a chance to make their own pizza bigger than their neighbors became reality for those who believed enough to work harder, longer, and smarter. They, by and large, reinvested their increased share such that eventually their reward would be a better life than their less industrious and dedicated neighbors.

I think it’s wonderful that such a simple recipe has made an above-average quality of life possible for so many.
Our society has been quite generous in sharing opportunity with all.

But in our educational “establishment” and in our “poor of mind, body and vision” there are those who see not opportunity but injustice. Instead of opportunity shared, they want achievement shared. These people threaten the goose that lays the golden egg, and they must not prevail.

We dumb our school curriculum down to their level and they not only do not give honest effort to the task at hand, but seek to disrupt it. We give those in need breakfast and lunch even through the summer and still they stare out the window because they are not entertained.

We are all born ignorant, but some make a conscious decision to wear ignorance like a badge into and through a non-productive adulthood. Why would any thinking individual choose a journey from ignorance to stupidity? I don’t have a clue, but all too many do.

It isn’t our responsibility to raise those in poverty up. It is our responsibility to give them the tools and opportunities to raise themselves. The effort, resolve and determination necessary can only come from them.

Posted by OneOfTheSheep | Report as abusive
 

Author misses one crucial difference between Japan and USA – demographics. Japan has negative demographics dynamics, while USA does not suffer from this problem. The impact of demographics for the long term performance of the economy should not be underestimated.

Posted by MartynasKriunas | Report as abusive
 

OneOfTheSheep, Kudos on your lengthy yet eloquent rendition of “I got mine buddy…screw you!”. Now, let me get back to finding my piece of that infinitely large pizza you mentioned.

Posted by changeling | Report as abusive
 

At the conclusion of Indian Grand Prix, Ferrari declared that the “recession years – 2008, 2009, 2010″ had been excellent for its business and it’s cars are all booked for the current and next year. I guess, recession is only for working class and poorer segments.

Posted by lapwww | Report as abusive
 

changeling, I don’t remember pulling up the rope as I climbed the ladder to success. Keep looking…

Posted by OneOfTheSheep | Report as abusive
 

All this sturm and drang and a quite obvious difference between Japan and the US is totally ignored. The average CEO in Japan makes 11 times what his/her worker does. In the US that figure (I’ve seen different numbers) is 300 to 500 times with a cooresponding level of inequal income right down the line. America has more than enough egregious slop on the revenue side to jump start any economy. The Japanese didn’t have that possiblility.

Posted by RonShook | Report as abusive
 

The U.S. has the distinction of having out-grown it’s britches. The sheer size of the country and it’s economy is buckling under it’s own weight. Because of this, they have also lost a certain amount of their mobility. In short, they have driven the ship to the ground and now find it hard to get loose of the reef and turned around. Japan is smaller and more compact, and more able to function as a whole bot socially and financially.

Posted by nieldevi | Report as abusive
 

Another fine article by Mr El-Erian! Reading it made me realise just how much harm has been done by adopting Shiskin’s definition of recession as the ultimate criterion. Restricting it to 2 successive quarters of negative GDP growth is an easy notion to understand and measure, but really does not describe economic and social conditions very well. For example, it does not take into account how the majority of the population is faring. It doesn’t even take into account population growth which, for some countries, is substantial relative to GDP growth.

But more importantly it contributes to politicians and bureaucrats taking a wrong approach to economic and social governance. It seems to me, from afar, that the US is very much in recession (albeit not in the above narrow sense) and I suspect that most citizens would agree with me. The same applies to much of the developed western world.

One wonders if such a narrow definition were not so universally accepted, would governments, world wide, have been more vigilant and would they have prevented the crisis that we all now face. The lessons of Japan would have surely been more easily learned. Mr El-Erian has pointed out that they were not learned at all. Continuing to concentrate on a wrong, or limited, concept will not help overcome our problems.

Posted by GivaFromOz | Report as abusive
 

As a retired engineer I have a question about “growth”. Would someone enlighten me? Or could someone point me to an economics reference which explaines why growth is good rather than attempting to explain what it is?

This preoccupation with Growth is an economic mystery to me. I mean you can’t grow all the time (unless you happen to be a dinosaur, and they did
get very big indeed). If GDP were to grow in real terms all the time, after a few decades it would become huge. But this has never happened – growth gets wiped out by inflation. So why target growth? The BBC printed an
article saying countries cannot obtain tax revenues without growth. Is that right? Or did the writer mean tax revenues do not grow without growth? Why
should that matter as long as people keep paying their taxes?

Posted by jathought | Report as abusive
 

changeling…the point of OneofTheSheeps comments were in fact the exact opposite of what you suggest – the pie is not infinitely large.

It is up to one’s own faculties to not take for granted their opportunities; to work hard to grow their own pie.

Well put Sheep.

Posted by jaham | Report as abusive
 

I have tremendous respect for Mohamad El-Erian, but I wish he had not picked Japan. There are tremendous differences between us, and Japan is not, nor has it ever been, a very healthy culture. I would suggest he go back and read one of the very best analysts of Japanese business practices, Kenichi Ohmae. Japan was never healthy in its business practices, and when the slump came, all their errors compounded and that more than anything killed them. Follow all of that with the rise of Taiwan, SE Asia and finally China, using Japanese tactics to takeover Japanese markets. There is more to an economy than bonds and interest rates.

Posted by ARJTurgot2 | Report as abusive
 

the differences are too big…. it may be ironical, but one of the greatest strength of the US economy is the high level of unemployment rate. In some quarters, that is called high level of flexibility. That makes US corporations profitable and ready to go when the time is ripe. The initial lost decade in Japan was characterised by a steady rise in the unemployment rate to its peak of around 4.5%. In that decade, there were many opportunities for Japanese corporations to charge and go, but they were able to take full advantage of the situation because they were not lean and mean. Too late now.

Hence, it may not be obvious to many now but what has allowed the US to emerge from so many previous troughs is its willingness to sink really low first.

Posted by Kiterunner | Report as abusive
 

I believe that US did the biggest mistake in US history, they overspent on military in the last 20 years, ignoring the national goals of research, education, health social development.
Mohamed Abdou,
La Verne, CA

Posted by MohamedAbdou | Report as abusive
 

A fine article, Mr. El-Erian.
A smart mind not clouded by prejudice against Japan – that’s the only way to learn their lesson

Posted by Erdos | Report as abusive
 

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