The recent S&P downgrading of US treasuries has prompted a bout of soul-searching among economic commentators in the United States. Quite how the S&P retains any credibility after its AAA-rated subprime CDO fiasco is something of a mystery, but being booted from the AAA sovereign debt club has clearly been upsetting for the United States, if not for bond investors.
One of the memes that has emerged—in fact, it first made its appearance in the wake of the Lehman Brothers collapse—is that the United States is becoming the new Japan. Finance bloggers like to buttress the argument with charts showing the recent performance of US stocks and bonds, looking ominously like Japan’s in its post-bubble days. This time, opines a recent Wall Street Journal article, maybe the United States is Japan.
No, it’s not. Certainly, it’s tempting to draw the comparison. Two rich, post-industrial countries experience massive asset bubbles, followed by crashing prices, bank bailouts, debt retrenchment, burgeoning public debt, and ultimately downgrades.
But they are not the same, for the simple reason that in Japan the economic cycle is dead. The fundamental assumption that underpins the usual tools of economics no longer applies, and Japan’s only way out of a painful decline is structural reform that goes beyond its economy and into the heart of its social fabric. These reforms will be far more painful than anything required by the United States, which still has an economic cycle, meaning monetary and fiscal policy can still be effective, and which could achieve a recovery with a dose of sensible policy and patience.
This isn’t to be sanguine about America’s problems. S&P did get one thing right: US politicians certainly aren’t inspiring much confidence these days. For as long as the country remains in thrall to the arrant nonsense spouted by cartoonish fringe characters, there’s an ongoing risk of poor policy choices that will continue to damage the economy. The recent shift in favour of the policies of Herbert Hoover, circa 1931, puts a fragile recovery at grave risk. An inability to re-regulate its financial sector (the reintroduction of Glass-Steagall would be a good first step) will encourage new asset bubbles, wreaking more havoc. Even with an economic cycle, a country can defenestrate itself. Nor is it to suggest that the United States doesn’t have some deep-seated structural issues—income equality and the evaporation of well-paying, blue-collar jobs, eviscerating the middle class, will require sustained action. But the point is, whether or not it actually chooses to exercise them, the United States still has policy options that Japan now lacks.
Let me explain. In 2009, the United States had a population of 307 million, Japan had 127 million. In 2050, the US is projected to have a population of 393 million, according to the middle series estimate of the US Bureau of the Census. Japan, by contrast, will have just 95 million people, according to its Ministry of Health. So, over the next 40 years, if these projections hold, the US population will grow by about 30 percent, while Japan’s will shrink by 25 percent.