Krugman: Japan Is Us

Japanese economy expert Adam Posen said earlier this week that the Obama team is proposing actions “disconcertingly similar” to Japanese government during the Lost Decade era. Linking to the Posen article on his New York Times blog, economist/pundit Paul Krugman had this to say:

“To be fair: the Obama team really does face huge political obstacles in doing the right thing… But we shouldn’t kid ourselves. Japan is us.”

Spot on Mr. Krugman. Probably the more accurate way to put is that America is fast becoming Lost Decade-era Japan, but we aren’t far off. The Japanese Lost Decade was preceded by an asset boom, an over-leveraged financial system, and excessively optimistic expectations of future economic growth. Sound familiar? Then their stock market crashed, asset values plummeted, and the economy rapidly dropped into a recession with heavy unemployment. To fight back the Japanese government spent years trying to spend and borrow their way back to economic health–all to dismal results.

Consider this:

“From 1992 to 1999, Japan spent over $500 billion (in today’s dollars) on public works projects. Despite this infrastructure spending, Japan’s unemployment rate more than doubled and the economy remained stagnant.”

This stat comes from my recent study on the Japanese Lost Decade (with fellow Reason staff Mike Flynn and Adam Summers). We found that, despite 10 fiscal stimulus packages totaling more than $1.4 trillion (in today’s dollars) and dropping their interest rates to virtually zero, all Japan got in return was debt that exceeds 200 percent of GDP.

Compare that to what we are doing today: total spending and loans targeted at fighting the recession is closing in on $12 trillion in taxpayer obligations stemming back to January 2009. Unemployment has steadily declined during that time and we are facing a bleak future at the current rates of spending and taxation. The answer is not to try and top Japanese spending or pass stimulus packages quicker than they did to fight the recession. The answer is to back down, decrease taxpayer obligations, and let the business cycle clear the market (at least, thats the one sentence generalization).

Read the whole Reason study here. Read my summation article in here.