Could the U.S. Become Like Japan?
The United States responded to the 2008 crisis faster than the Japanese did in the 1990s.
At one point, U.S. politicians did not know when the crisis would stop. However, there is one point on which there is absolute agreement: The United States cannot follow Japan’s course.
The economy was very flexible, the crisis response was dramatic and the electorate was quite certain that a Japanese-style stagnation was occurring in the United States.
In a recent speech, Ben Bernanke, Chairman of the Federal Reserve (the American version of Banco Central), said that he does not expect the potential for the United States’ long-term economic growth to be severely affected by the crisis.
But Bernanke also says that in order to avoid this type of damage, the political classes must make a series of difficult decisions. The disbelief in the ability of the politicians to handle the crisis has resulted in many, both inside and outside the United States, to question whether or not the country is heading down the same path as Japan.
As recently as six months ago, such pessimism seemed to be an exaggeration. Although the problems of the United States financial system triggered the global recession of 2008-2009, the loss of the national product in the United States has been less than that of other developed countries, and the recovery of the United States had been faster than that of the majority of Europe and Japan.
Even if the U.S. recovery has been slower than in previous crises, the authorities feel that they had little authority to prevent the country from going in Japan's direction.
The Federal Reserve cut interest rates to nearly zero in less than a two-year period, something that the Bank of Japan took six years to do in the 1990s.
The fiscal response to the crisis in the U.S. has also been more dramatic, although it has damaged relations between the country’s two main political parties.
The recent revision of GDP forecasts show a further decline in the economy with a 5.1 percent drop in domestic production and not 4.1 percent as previously thought.
In the end, the national income has not returned to pre-crisis levels as it has in Germany.
Statistics suggests a lost decade (at least in terms of the actual economy) due to high unemployment.
Unemployment
In terms of economic growth, the U.S. performance in the five years after the crisis has not looked better than what was reported in Japan after the bursting of the asset bubble in the late 1980s.
The American job market is bleak, with the unemployment rate close to 9 percent and 40 percent of the unemployed being out of work for more than six months.
In the past, economists tended to praise the flexibility of the American job market. Now what? Is it over-regulated? The German job market seems to show unparalleled performance.
.
Some U.S. statistics show that there is fatigue about job creation. In 1958, 85 percent of men of working age had jobs; today only 64 percent do. This has nothing to do with the entry of women into the job market, because the proportion of the entry of both sexes in the job market is lower than what it was in 1980.
This is not just about work. According to the International Monetary Fund, the fall in production, employment, investment and growth in personal income was more severe in the two crises of the 21st century (2001 and 2008) than in any of the previous eight recessions.
The median income of U.S. homes fell 3.6 percent between 2001 and 2009, while inflation has risen and wages have remained the same. The weakness in revenues is eerily similar to what happened in Japan.
Moreover, analysts see another similarity in the United States of 2011 and Japan of the 1990s: the political paralysis that worries most credit rating agencies more than the actual U.S. deficit.
The level of corporate saving has been growing, which is good news for the United States.
Moderate Recovery
Many economists predict a moderate but steady recovery for the U.S. during the upcoming year. As Bernanke warned, this will only be the result of many difficult decisions, such as a plan to reduce the American debt on a long-term basis.
There is however, a good chance that there will be disagreement between the Republicans and the Democrats. For these reasons, it is easy to get depressed about the future of the United States and to understand why Standard’s & Poor lowered the U.S. credit rating a notch.
But there also exist reasons to think that the pessimists are portraying the U.S. on only a short-term basis.
Why? Politics aside, many of the adjustments that the U.S. economy needs to stop borrowing from the rest of the world are being made.
The level of corporate savings has risen dramatically and the productivity among American workers has increased. The actual deficit account is declining, which means that almost all of the huge budget deficit is now being funded by the American people.
According to Diana Choyleva of Lombard Street Research, the cost of labor in the American industry fell 2 percent in 2009 and 2.8 percent in 2010 thus increasing American competitiveness; on the other hand, the costs are rising in China.
An Asian Future?
One of two great dangers is political paralysis is the radicalism of opposing sectors.
Perhaps the 21st century will belong to China and India as many have suggested, but the U.S. has seen worse times before. The digital industry has done well in the past decade, leaving room for creativity. For better or for worse, the U.S. is better off than China or Germany.
Unlike the U.S., the economies of the eurozone, do not have demographics on their side. In most European countries, the workforce is shrinking, reflecting negatively on the potential for economic growth.
Investors may have reason to worry about the future of the U.S. economy, but presently, the world revolves around the U.S.
If events occur that result in a definite reduction of the U.S. economic ranking, this would be troublesome news not only for Americans but for the rest of the world as well.
At one point, U.S. politicians did not know when the crisis would stop. However, there is one point on which there is absolute agreement: The United States cannot follow Japan’s course.
The economy was very flexible, the crisis response was dramatic and the electorate was quite certain that a Japanese-style stagnation was occurring in the United States.
In a recent speech, Ben Bernanke, Chairman of the Federal Reserve (the American version of Banco Central), said that he does not expect the potential for the United States’ long-term economic growth to be severely affected by the crisis.
But Bernanke also says that in order to avoid this type of damage, the political classes must make a series of difficult decisions. The disbelief in the ability of the politicians to handle the crisis has resulted in many, both inside and outside the United States, to question whether or not the country is heading down the same path as Japan.
As recently as six months ago, such pessimism seemed to be an exaggeration. Although the problems of the United States financial system triggered the global recession of 2008-2009, the loss of the national product in the United States has been less than that of other developed countries, and the recovery of the United States had been faster than that of the majority of Europe and Japan.
Even if the U.S. recovery has been slower than in previous crises, the authorities feel that they had little authority to prevent the country from going in Japan's direction.
The Federal Reserve cut interest rates to nearly zero in less than a two-year period, something that the Bank of Japan took six years to do in the 1990s.
The fiscal response to the crisis in the U.S. has also been more dramatic, although it has damaged relations between the country’s two main political parties.
The recent revision of GDP forecasts show a further decline in the economy with a 5.1 percent drop in domestic production and not 4.1 percent as previously thought.
In the end, the national income has not returned to pre-crisis levels as it has in Germany.
Statistics suggests a lost decade (at least in terms of the actual economy) due to high unemployment.
Unemployment
In terms of economic growth, the U.S. performance in the five years after the crisis has not looked better than what was reported in Japan after the bursting of the asset bubble in the late 1980s.
The American job market is bleak, with the unemployment rate close to 9 percent and 40 percent of the unemployed being out of work for more than six months.
In the past, economists tended to praise the flexibility of the American job market. Now what? Is it over-regulated? The German job market seems to show unparalleled performance.
.
Some U.S. statistics show that there is fatigue about job creation. In 1958, 85 percent of men of working age had jobs; today only 64 percent do. This has nothing to do with the entry of women into the job market, because the proportion of the entry of both sexes in the job market is lower than what it was in 1980.
This is not just about work. According to the International Monetary Fund, the fall in production, employment, investment and growth in personal income was more severe in the two crises of the 21st century (2001 and 2008) than in any of the previous eight recessions.
The median income of U.S. homes fell 3.6 percent between 2001 and 2009, while inflation has risen and wages have remained the same. The weakness in revenues is eerily similar to what happened in Japan.
Moreover, analysts see another similarity in the United States of 2011 and Japan of the 1990s: the political paralysis that worries most credit rating agencies more than the actual U.S. deficit.
The level of corporate saving has been growing, which is good news for the United States.
Moderate Recovery
Many economists predict a moderate but steady recovery for the U.S. during the upcoming year. As Bernanke warned, this will only be the result of many difficult decisions, such as a plan to reduce the American debt on a long-term basis.
There is however, a good chance that there will be disagreement between the Republicans and the Democrats. For these reasons, it is easy to get depressed about the future of the United States and to understand why Standard’s & Poor lowered the U.S. credit rating a notch.
But there also exist reasons to think that the pessimists are portraying the U.S. on only a short-term basis.
Why? Politics aside, many of the adjustments that the U.S. economy needs to stop borrowing from the rest of the world are being made.
The level of corporate savings has risen dramatically and the productivity among American workers has increased. The actual deficit account is declining, which means that almost all of the huge budget deficit is now being funded by the American people.
According to Diana Choyleva of Lombard Street Research, the cost of labor in the American industry fell 2 percent in 2009 and 2.8 percent in 2010 thus increasing American competitiveness; on the other hand, the costs are rising in China.
An Asian Future?
One of two great dangers is political paralysis is the radicalism of opposing sectors.
Perhaps the 21st century will belong to China and India as many have suggested, but the U.S. has seen worse times before. The digital industry has done well in the past decade, leaving room for creativity. For better or for worse, the U.S. is better off than China or Germany.
Unlike the U.S., the economies of the eurozone, do not have demographics on their side. In most European countries, the workforce is shrinking, reflecting negatively on the potential for economic growth.
Investors may have reason to worry about the future of the U.S. economy, but presently, the world revolves around the U.S.
If events occur that result in a definite reduction of the U.S. economic ranking, this would be troublesome news not only for Americans but for the rest of the world as well.