If Japan’s lost decade is our future, it will not be due to the same failures in fiscal or monetary policy. Ben Bernanke dumped too much money into the economy (and is looking for new ways to add even more) to say the response has been inadequate in the way the Bank of Japan’s was. The federal government’s trillion-dollar deficit should put paid to Paul Krugman’s claim that the spending response was too weak — it won’t, but that says more about his arrogance than about the validity of his claim.
US corporate balance sheets are stronger now than Japan’s were in the 1990s, so they won’t drag us down. But we consumers have been paying down debt since January 2009. (Did somebody say Ricardian equivalence?) Banks have done their part not to foreclose on residential or commercial property so their financial health is questionable even as regulators have closed 110 banks this year, including two in Wilmington. Consumer borrowing is based on optimism, as can be seen in the late 1990s debt explosion. When federal government debt exceeds GDP and states around the country can no longer afford the promises they made, it is hard to be optimistic.
So high debt and weak banks are a potential source of concern, but the greatest similarity between Japan then and the US now is the belief that government is the only thing that can expand the economy.
For twenty years, Japan has refused to unshackle its economy from excessive regulations. Instead the government has continued to try deciding what the economy should look like, picking winners and guiding investments. Washington and Raleigh are following the same mold.
Countries around the world have shown the way to avoid a lost decade: Reduce spending and the footprint of government.
