January 12, 2009

Collective American Denial and the Prior Japanese Experience

I have mused over the parallels between the imploding American economy and the deflationary spiral which gripped Japan in the early 1990s.  The considered opinion of most American economic experts is that our fast and massive response to the bursting of the housing bubble will avoid the prolonged malaise in the Land of the Rising Sun.  To put the Japanese problem in perspective, to this day the real estate market in Japan has only recovered to a level of about 40% of the 1989 high (when land around the Imperial Palace was said to equal all the real estate in California), and the Japanese Nikkei Index is still only 80% of its value for the same year.  This is a very long time to get stuck in deflationary quicksand.  

One frequently-voiced criticism of the Japanese approach is that the banks were "enabled" in their perfidy by the government; instead of forcing the bad real estate loans to the surface, the government helped hide them.  This simply prolonged the damage to financial liquidity.  I suppose sometimes the cultural mandate to "save face" can be counterproductive.  Here, of course, any sense of honor is completely irrelevant to the banksters who brought on our own mortgage-backed security catastrophe. Instead of committing sepuku, they were more likely to pay their bonuses early before the federal regulators could seize the money.

Anyway, the analogy fascinates me, probably a sign that writing this blog is making me increasingly weird.  Japan is the second largest economy in the world, despite its difficulties over the last twenty years, and the world's largest creditor nation. It has many of the same "structural" problems of the U.S., e.g., a reliance on imported oil and an aging work force, but is in much better shape in terms of its balance of trade and its national savings. Nevertheless, it has a large national debt, larger than the U.S. in terms of a fraction of GDP.  To say the least, however, America is going to close ground fast once we start posting those $1.5 trillion annual budget deficits, as we seem fated to do.
"One more thing: even with the Obama plan, the Romer-Bernstein report predicts an average unemployment rate of 7.2 percent over the next three years.  That's a scary number,  big enough to pose a real risk that the U.S. economy will get stuck in a Japan-type deflationary trap."

Thus spake Paul Krugman in his Monday opus.  So everyone seems to have Japan on the brain because, when you get right down to it, we can of course draw distinctions between ourselves and the Japanese (they speak Japanese, we speak English, for example), but the actual determinative factors seem more favorable to the Japanese situation, not less.  The Japanese have a vibrant export economy, as one factor, which allows them to earn money in international trade.  72% of our economy depends on consumerism, and a lot of that is based on domestic trade in imported goods.

So I understand that the U.S. has "aggressively" tackled the problem of its failing financial institutions by appropriating colossal sums of money to recapitalize the banks and shore up the insurance and mortgage guarantor companies.  Now Obama promises to follow that up with a large "stimulus" program to "jump start" the economy.  What I still don't get is this: how is all this supposed to help in the long run?

I sometimes think that the quality of national discourse on matters of profound importance has become so impoverished by a culture of sound-bites and cheesy political sloganeering that public dialogue has simply parted company with logic and coherence.  "Jump starting" the economy sounds swell, as one example, but does the phrase have any meaning?  

Prior to the accelerating collapse of the economy in mid-summer 2007, we inflated a huge housing bubble with cheap mortgage loans and used the "income" derived from lines of credit and refinance to supplement inadequate earnings.  Nothing about the "recovery package" is going to change that much.  As I've said before, putting people to work rebuilding a lot of failed and failing infrastructure is in and of itself a good thing.  It's miserable to be broke, for one thing, and our tax-cutting mania over the last 28 years has left us with a severely underfunded public realm.

What Congress is slapping together is a public works program (and direct subsidies to state and local governments which are also broke and have no means to borrow the deficits) based on borrowing massive amounts of cash wherever the Treasury can get it.  They're doing this not because anyone necessarily believes this is an optimal approach but because they can't face the Awful Truth: this is a crash program designed to conceal the underlying reality that the fundamental basis of the economy is shot.  A consumer economy doesn't work unless the consumers have cash to buy stuff with, and now, because wages have been stagnant for the great majority of Americans for the last thirty years, the wherewithal to keep the "growth economy" going has disappeared.  Can't earn it, can't borrow it?  Okay, the government will borrow it for you, based on "taxpayer" money, and then you can repay us with...with...Look, don't ask so many questions.

I've been reading an enlightening book called The Bridge at the End of the World by Richard Gustave Speth, who teaches environmental science at Yale.  His thesis is that an ecology-based sustainable economy is possible now using renewable energy and green technology, and that unless we move in that direction life on Earth will simply be unlivable by the end of this century. Books such as Prof. Speth's, when written in the 1970s by Barry Commoner and others, were of course laughed off as alarmist fantasies, especially by people heavily invested in the old regime of extractive industries and heavy pollution.  Now the things he describes are part of our day-to-day reality; on January 12, 2009, it was 82 degrees in downtown San Francisco.  We now have heat waves three weeks after the winter solstice, which is nice since it never rains anyway.  So we should have used the last 30 years to move in the direction of a transformed energy economy, as President Carter urged us to do.  Our predilection for basing opinions on the limited cranial space alloted to public affairs sealed Carter's fate: he couldn't rescue the hostages from Tehran.  He was therefore wrong about everything. Ah, what a frivolous people!

Oh, and I suppose it's worth asking what the Japanese themselves think about our immediate future:

"I don't think the Americans quite realize yet that behind this hill lies the Himalayas," said Takashi Watanable, a top official at the Bank of Japan in the 1990s and now a professor at Tokyo's Bunkyo University. "The U.S. is going to go through a lot more before this is over." 

Deft, spare, evocative - just like Japanese line art.

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