Fifteen months into a fitful economic recovery, we Americans are beginning to doubt ourselves. What if our stubbornly high unemployment and stop-go economic rebound aren’t just the normal aftermath of a serious financial crisis? What if they are instead (gulp) symptoms of a permanent national decline? That worry has led to a boom in an intellectual parlour game you might call “America is the next (fill in your scary scenario here)”. Anyone with a public podium (or a blog) can play. For example:
America is the next Japan.
Who says it: People who worry that deflation is the US economy’s biggest risk.
Japan’s lost years began in 1990 with a crash in real estate and the stock market. So did the American Great Recession in 2008. The Bank of Japan instantly slashed interest rates essentially to zero and the ministry of finance poured money into banks and non-financial corporations deemed too big to fail. So did their American counterparts. Japanese politicians went on a deficit spending spree that brought Japan’s total debt to around 170% of the gross domestic product (GDP). So did the US Congress—although it hasn’t spent quite as much yet; the US debt is 60% of GDP (the comparable figure for India is 78%). Japan’s tactics didn’t work. And, well, neither have ours.
Before 2008, American economists had long smugly argued that a Japanese-style crisis would never happen here. Our banking system was too transparent, our politicians too responsive, our culture too willing to admit mistakes and move on. Now we’re no longer so sure.
Most important, we haven’t proven significantly more honest than the Japanese about owning up to our banks’ problems. The toxic real estate loans that lay at the heart of the crisis are still on the banks’ balance sheets. Banks are reluctant to sell them or price them realistically for fear of exposing their weakness and cutting into profits—and regulators so far are willing to look the other way. “We’re being very Japanese about the way we’re dealing with toxic loans,” economic historian Carmen Reinhart, author of a history of economic crises called This Time It’s Different, told me in an interview for CBS MoneyWatch.
Graphic: Shyamal Banerjee / Mint
Richard Koo, chief economist, Nomura Research Institute, and author of widely quoted studies on the Japan’s lost years, argues that an essential cure for recessions such as Japan’s and US’ is government spending. Fiscal policymakers need to step up and spend when the private sector is too frightened. “The problem is,” he says, “in a democracy, it is extremely difficult to maintain fiscal stimulus in peacetime. The demand for fiscal consolidation overwhelms the policy debate once the initial fiscal stimulus manages to stabilize the economy.” Deficit hawks start to worry that excessive deficit spending will trigger inflation and burden future generations, and they convince voters to withdraw the stimulus too soon. What happens then? Says Koo, “The economy collapses again.”
Which leads us directly into the next nightmare analogy.
America is the next Zimbabwe.
Who says it: People worried that inflation is the US economy’s greatest risk.
That the US should have much in common with this unlucky central African nation sounds absurd on the face of it. But the claim is repeated often among those fearing that excessive government spending and too much dollar creation will create hyperinflation. As Mark Sanford, the governor of South Carolina, recently argued to CNN: “You’re buying into the notion that if we just print some more money and send it to different states, we’ll create jobs. If that’s the case, why isn’t Zimbabwe a rich place?”
Whether Sanford and other deficit hawks believe that the US is literally on the road to Harare is unclear. What is clear is that invoking a failed, violent dictatorship with peak inflation of 80 billion per cent gets people’s attention.
Just for the record, inflation in the US is currently running 1.2% per year. GDP per person in Zimbabwe is $100 per year; in the US it is $48,000. At that rate, the US would have to experience the worst stretch of the Great Depression for 66 consecutive years before it approached the per capita economy of Zimbabwe. It’s not what you’d call a present danger.
On the other hand, it’s not wholly unreasonable to worry that printing money recklessly will cause inflation. But that only happens if there is no slack in the economy. Japan, for example, has been pouring money into its economy since their lost years started in 1990 and its most recent annual inflation rate is a nearly invisible 0.2%. Indeed, the stubbornly high US unemployment rate and the still minuscule rate of inflation suggest that for now, spending is exactly what the Federal Reserve should be doing. But as Richard Koo observed in Japan, that doesn’t mean that policymakers will stick with it.
America is the next Britain.
Who says it: People generally anxious about US decline.
Credible: It depends.
For decades, we Americans have been comparing our economy to Britain’s in ways that tend to be generally unkind to our former colonial masters, and flattering to ourselves. (This is a sport that Indians no doubt indulge in from time to time.) These days, the comparisons tend to be more worried than boastful. After all, we’re the nation that supplanted the Brits on the world economic stage. In the wake of the crisis we’re suddenly aware that the same could be in store for us.
There is an almost infinite number of explanations for what knocked Britain out of first place; what people see as the cause tends to be whatever most worries you about the US at the moment. Some blame a no-longer-competitive education system—an argument that resonates among American moviegoers thronging to see Waiting for Superman, a documentary about the crumbling US education system. No, say deficit hawks, what brought Britain down was excessive government spending. Those disgusted with Wall Street blame the siphoning of Britain’s best young talents away from business into the high-paying but unproductive practice of finance. Barry Eichengreen, professor at University of California, Berkeley, sizes up all these arguments and blames the Britain’s decline on a politically disjointed, economically unsound reaction to the Great Depression.
The country failed to develop a coherent policy response to the financial crisis of the 1930s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable.
The message to today’s gridlocked US Congress is too obvious to miss.
Conclusion: There’s an element of propaganda in all three of these analogies. After all, the point of saying that the US is the next whatever is not to make an economic prediction but to shock policymakers into doing what you think they should. Even so, the exercise is probably good for the US. But US needs an economic leadership that acknowledges that it its premier economic status is not a birthright and must be earned continuously. The true source of wealth in a country is the ingenuity and work ethic of its people and the statesmanship and unselfishness of its leaders. All of these could use a little help in the US right now. But the first step is to admit there’s a problem.
Eric Schurenberg is editor-in-chief, CBS Interactive Business Network, and former editor of Money.