Deja Vu All Over Again: What Are The Chances That The United States Follows Japan's Decade-Long Funk? - Statistical Data Included

International Economy, The, Jan, 2001

Little more than a decade ago, Japan, like the United States today, was on top of the world. Tokyo officials prided themselves on Japan's high productivity growth and booming financial markets, which led to a sense of cultural superiority. The world was scrambling to figure out how to adapt to the Japanese model. Meanwhile, Japan's political system was weak with little real division between parties, which were dominated financially by a vast array of special interests. In this highly leveraged economy, most felt the positive situation would last forever. Does the United States today risk being similarly overconfident?

PETER PETERSON Chairman, The Blackstone Group, L.P.

Those (problems) that worry me the most are the melancholy combination of our negative personal savings rate and gargantuan, unprecedented current account deficits.

Japan's vaunted savings rate did not translate efficiently into productivity enhancing investments. Why? For one thing, deregulation in Japan and reform of its extraordinary special interest political system moved at less than a snail's pace, leaving such vital sectors of the economy as food, transportation, distribution, retailing, energy, and, of course, banking at a significant competitive disadvantage. Meanwhile, at the same time that America's labor-mobile economy was undertaking major restructuring and downsizing in its Old Economy, lifetime employment was leaving much of the Japanese economy stuck in the past.

On these, and most systemic issues, I believe America has a relative edge.

Let's start with demography, a subject I have written about extensively. America's birth rate is at the highest levels of the industrial country world. Even with its relatively high rates of fertility and immigration, growth in the U.S. labor force is projected to come to a virtual standstill within a decade or two. Labor force growth, along with productivity growth, is, of course, a crucial factor in determining GDP growth. Japan, which did not experience a baby boom, projects a decline of 25 percent in the number of workers under the age of thirty by 2010. And most of Europe--with Italy leading the way--has birth rates far below the so-called replacement rate that keeps the population stationary.

Next, technology in general, and information technology in particular, are other areas where America also excels. The Federal Reserve Bank of New York has just completed an impressive study on the critical role of our vast investment in information technology (some $400 billion last year) in energizing the productivity boom in the United States. Also, no country matches the U.S. venture capital market, either in size or fluidity.

Finally, America stands alone at the top of developed nations in terms of deregulation, labor mobility, and openness of our markets to other world-class products that provide a decisive competitive stimulus.

We have good reasons to believe these systemic forces will continue to be decisive in this revolutionary, competitive world we are living in. Obviously, not all the systemic forces are in America's favor. Those that worry me the most are the melancholy combination of our negative personal savings rate and gargantuan, unprecedented current account deficits. Given the experience of the latter half of the 1980's, when projected account deficits were at much lower levels, we know what happened to the dollar, markets, and short and mid-term economic forecasts. Thus, in spite of the conventional odds that favor the soft landing, I think the odds of a hard landing are not insignificant.

So, put me down as feeling the odds are about 20 percent that the United States may also stumble in the next decade.

GARY HUFBAUER Senior Fellow, Institute for International Economics.

Japan was predestined to stumble. The United States is not predestined, but if it does stumble, it will have company elsewhere in the world.

Nothing would delight the doomsday crowd more than to see the United States imitate the pratfalls of Japan. Indeed, the celebration might have global overtones. Many countries share the French view that American "hyperpower" is too arrogant and too self-satisfied--in economic as well as military matters.

But there are important differences between Japan in the early 1990's, and the United States today. The differences add up to two propositions: Japan was predestined to stumble, and could stumble alone. The United States is not predestined, but if it does stumble, it will have company elsewhere in the world.

In the early 1990's, everything in Japan was overvalued, except the exchange rate. Real estate was priced to the moon. The grounds of the Imperial Palace alone were said to be worth more than all the real estate in California. The entire Japanese stock market was priced at more than seventy times earnings. The financial system ensured that bank credit was directed to crony firms, who made bad investments on a grand scale. Meanwhile, the Japanese authorities ran a persistent current account surplus in the vicinity of $80 billion, and an undervalued exchange rate in the vicinity of 140 yen to the dollar. With this combination, it's no surprise that the stock and real estate markets collapsed, that corporate waste reached magnificent levels, and that internal troubles were magnified by yen appreciation during most of the 1990's. The Japanese external sector could not and did not absorb much of the internal trauma.