As mid-term elections approach, the Conventional Wisdom has it that the U.S., thanks to President Barack Obama’s excessive spending on stimulus measures and other things, is presenting the U.S. with up to $2 trillion extra in long term debt. Thus, we are being set up for a big financial mess later on.
There’s also a school of thought that, on the contrary, the U.S. has not spent enough to get itself out of recession and on the road to recovery where rising revenues will help erase the deficit spending so far.
The big example that many are pointing to is Japan, which was on top of the global economic world back in the 1980s but then collapsed into the “lost decade” of deflation. The Convention Wisdom had held that Japan could not respond to recovery panaceas of a monetary policy nature because the keiretsu of interlocking banks, companies and government agencies made it too ossified to do so.
But today there’s a new realization that this view may not have been correct since much of the inflexibility of the Japanese structure had been evident a decade or two before. The leading proponent of the Japanese deflationary re-think is Richard Koo, head economist for Nomura Securities.
Koo says that Japan got trapped in what is called a classic “Balance Sheet” recession which is said to have been coined by Edward Frydl of the New York Fed. In it, companies react to recession by amassing cash which they use to pay down debt on their balance sheets. Paying back loans becomes an obsession so pervasive that the companies stop using the cash for expansion or investment. Borrowing flows to next to nothing, despite near-zero interest rates. Asset prices fall further, leading to more corporate bankruptcies and so on. Unemployment, already high, goes up even more with no end in sight.
This, Koo says, is what really went wrong with Japan. The mess would have collapsed into depression, Koo has said. “Had there been no fiscal stimulus, the Japanese economy today would have contracted by 40-50 percent, if the U.S. experience during the 1930s is any guide
The U.S. seems to present similarities. Despite some stimulus spending (although much of it has remained unused), unemployment is still near 10 percent and won’t go down. Interest rates are near zero. Big corporations are hording more than $1 trillion in cash while small businesses, accounting for about two thirds of jobs, can’t get loans.
The panacea, presented by conservatives, such as James A. Bacon, and some moderates, is to slam the brakes on government spending because of some far-off looming catastrophe that they envision.
Koo has a different view: “Since the government cannot tell the private sector NOT to repair its balance sheets, the only thing the government can do to keep the economy going is for the government to borrow and spend the unborrowed savings in the private sector and put them back into the economy’s income stream. Moreover the stimulus must be maintained until private sector deleveraging is over.”
A big problem, Koo acknowledges, is that it is really tough to maintain stimulus spending in a democracy. But failing to spend is equally dangerous. “Not realizing the critical danger posed by private sector deleveraging at zero interest rates, those who push for fiscal consolidation argue that a big government is a bad government and that the wasteful deficit is jeopardisding the future of our children and grandchildren.”
Sound familiar? It shouldn’t be. That’s the anti-Obama and anti-stimulus argument of just about every conservative these days from pistol-toting “patriots” at Tea Party conventions or Jim Bacon, who paints an excessively and inaccurately gloomy picture of government spending in his book “Boomergeddon.”
If you want to envision a deflationary future for the U.S., take a look at a front page article in Sunday’s New York Times. It describes the fall of Japan from the hey day years of the 1980s to today’s disillusionment. The “New Fru” that slick marketers such as those at Richmond’s Boomer Project project takes hideous new turns. Young Japanese are forced to live in tiny, three story homes with the dimensions of a sport utility vehicle and kitchen “that probably belongs on a submarine.”
This is not to say that any new government spending should be random or careless. There is, right now, a huge new for new infrastructure projects in the U.S. Other countries such as China, and even Russia, are spending more on new roads, dams, airports and railroad trains than the U.S. is. Such spending would be useful here.
ome Nov. 2, a Republican sweep is likely. What isn’t known is how big it will be or what type of Republicans will prevail. If they are the tea baggers or Boomergeddonites, there will be a great feeling of “New Fru” rollicking through the land. But if you give these people the keys, we could all end up living in little huts in a few years with no Ginza to take our mind of our troubles.
Peter Galuszka
