I guess this scenario is just going to sneak up on O'Niel and Dumbya.....and since the three previous things Krugman says USED to be preventing us from being like Japan are gone....LOOK OUT....since in addition to those things now APPLYING to the US economy...you can tag on NO SAVINGS, MASSIVE CREDIT DEBT, RISING UNEMPLOYMENT and the picture is getting pretty BLACK out there.....yet W continues to hold to tax cuts and spending that is going in the wrong direction.
And don't forget he'll be forever remembered for his incredible DESTRUCTION of the ENVIRONMENT in the next 10 years and on.....
Mind the Gap
By Paul Krugman
New York Times | Opinion
Friday, 16 August, 2002
How much has Japan's economy shrunk since its bubble burst? It's a trick question; Japan's economy
hasn't shrunk. It had only two down years over the past decade, and on average it grew 1 percent per year.
Yet Japan's is a genuinely depressed economy. Because growth has been so slow, an ever-increasing
gap has opened up between what the economy could produce and what it actually produces. This "output
gap" translates into rising unemployment and accelerating deflation. Slow growth can be almost as big a
problem as actual output decline.
Now the non-trick question: What would a similar analysis say about the United States?
The U.S. economy's "potential output" -- what it could produce at full employment -- has lately been
growing at about 3.5 percent per year, thanks to the productivity surge that began in the mid-1990's. But
according to the revised figures released a couple of weeks ago, actual growth has fallen short of potential
for seven of the last eight quarters.
The conventional view is that we had a brief, shallow recession last year, and that recovery has begun.
But the output gap tells a different story: Two years ago we went into an economic funk, and it's not over. In
a way the whole double-dip controversy is a red herring; the real question is when G.D.P. will start growing
fast enough to narrow the output gap. And so far there's no sign of that happening.
There's no mystery about the causes of our funk: the bubble years left us with too much capacity, too
much debt and a backlog of business scandal. We shouldn't have expected a quick and easy recovery, and
we're not getting one.
Some readers have already guessed where I'm going with this. The U.S. stock bubble in the second half
of the 1990's was just as big as Japan's bubble in the second half of the 1980's. Will our two-year funk turn
into a five-year or ten-year funk, the way Japan's did?
A loud chorus is already shouting "We're not Japan!" Half the time, depending on what I had for
breakfast (rice and pickles?), I'm part of that chorus. But let me share some disquieting thoughts.
Back when I first got professionally obsessed with Japan's problems, around four years ago, I made
myself a mental checklist of reasons that Japan's decade of stagnation could not happen to the United
States. It went like this:
1. The Fed has plenty of room to cut interest rates, which should be enough to deal with
any eventuality.
2. The U.S. long-term budget position is very strong, so there's plenty of room for fiscal
stimulus in the unlikely event interest rate cuts aren't enough.
3. We don't have to worry about an Asian-style loss of confidence in our business sector,
because we have excellent corporate governance.
4. We may have a stock bubble, but we don't have a real estate bubble.
I've now had to strike the first three items off my list, and I'm getting worried about the fourth.
More and more people are using the B-word about the housing market. A recent analysis by Dean
Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing
bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for
speculation rather than merely for shelter. And the explanations one hears for those high prices sound
more and more like the rationalizations one heard for Nasdaq 5,000.
If we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort.
A recent Federal Reserve analysis of Japan's experience declares that the key mistake Japan made in
the early 1990's was "not that policy makers did not predict the oncoming deflationary slump -- after all,
neither did most forecasters -- but that they did not take out sufficient insurance against downside risks
through a precautionary further loosening of monetary policy." That's Fedspeak for "if you think deflation is
even a possibility, throw money at the economy now and don't worry about overdoing it."
And yet the Fed chose not to cut rates on Tuesday. Why?
Last year some economists began privately referring to the Fed chairman as "Greenspan-san." The joke
faded out as optimism about recovery became conventional wisdom. But maybe it's not a bad nickname
after all.
CC |
