Oh No, Not Like Japan!

Everyone's worried we could end up like Japan. In his press conference the O-man admonished the country what fate could await should we say "No, we can't":

I think that what I've said is what other economists have said across the political spectrum, which is that if you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of. We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade" where essentially for the entire '90s they did not see any significant economic growth.

I think if that should be our fate - a decade of 1.5% real growth - we ought to declare a national holiday. I'm afraid what lies in store is something much worse than that, and Obama's stimulus can't possibly prevent it. But where do people get the idea that comparisons to Japan are remotely valid?

Around 1990, Japan suffered a sever asset bubble crash. But aside from this, both nations having advanced modern economies ranking first and second in the world, the U.S. and Japan could hardly be more different. Japan has few natural resources, yet exports heavily (17% of GDP vs. the U.S. at 9%). Japanese companies invest more heavily (22.5% of GDP vs. 14.6% U.S.) and at the time of the crash a very high personal savings rate. Japanese foreign investments ($597b) vastly exceed foreigners' investments in Japan ($140b). And Japan's reserves of foreign currency and gold dwarf those of the U.S.A ($954b to $71b).

With these high rates of saving and investment, there is some logic to Japan attempting some government stimulus to offset all the money being socked away. And given the huge current account and investment surpluses, Japan could surely afford to throw some money around to try and jump start things. But even given these favorable conditions, government spending had little impact when tried.

Here in the U.S., on the other hand, we've just gone through one helluva spending spree. We carry an immense trade deficit ($568b in 2008, a big improvement over prior years), and foreign entities - foreign governments in particular - hold immense stockpiles of U.S. treasuries as well as other American assets. (Our foreign debt amounts to 84% of GDP - and that's as of June 2007 before our recent $1 trillion deficit. Japan's foreign debt is 33% of GDP). We have no excess savings to free up, nor do we have any reserves stockpiled we can tap into. What in God's name would lead anyone to believe such a stimulus package could work here?

Source: CIA World Factbook.

Oh, and one more thing - Japan's per capita GDP is listed as $35,300, while the U.S. is listed as $48,000. What makes us think our standard of living should be 33% higher than the Japanese? Of course I'm glad it is, and fully intend to enjoy it while it lasts.

Related: Dr. Housing Bubble's look at the "Is this another Japan" question.