Could America turn out worse than Japan?
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