Tuesday, February 17, 2009

Deconstructing the Lost Decade

There has been much talk of Japan's "Lost Decade" recently. In the IBD this morning, Robert Samualson lays out a few pertinent facts.

First and foremost is that, historically, government stimulus has a mixed record. Sometimes it works and sometimes it doesn't, and nobody knows why. Each situation is different enough that there is no conventional wisdom that applies to all.

Today, on one side of the argument, President Obama warns of a Japanese style stagnation; on the other, conservatives argue that the Japanese government instituted eight stimulus packages, none of which accomplished anything. They are both right and wrong at the same time. The Japanese experience has little to do with what we are going through now for the simple reason that we are not Japanese.

Japan has what Richard Katz, editor of the Oriental Economist, terms a "dual economy." On the one hand, export industries (autos, steel, electronics) are highly efficient. They face intense global competition. On the other, many domestic industries (food processing, construction, retailing) are inefficient and sheltered from local competition by regulations or custom.

Since the early '80s, U.S. economic growth has depended on a steady rise in consumer spending supported by more debt and increasing asset prices (stocks, homes). Just as the mid-'80s signaled the end of Japan's export-led growth, our slump signals the end of upbeat consumption-led growth.

The problem in both cases is, once the formula has played itself out, where to find new areas of growth. Our government has been driving out manufacturing, or inviting them to leave, for decades. Americans really don't make much anymore. Now that consumers are staying home, we don't buy much anymore either. If we don't make anything or buy anything, then what are we doing?

This problem is bigger than any stimulus can solve. If we bring back the factories, we'll bring back the jobs, and bring back the growth. Anything less is wasted effort.

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