An American lost decade? Is America economically headed for a 1990s-style Japanese "lost decade" of stagnant growth?

• Position: A SYMPOSIUM OF VIEWS - Column

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No, but I worry about something different.

SAMUEL BRITTAN

Columnist, Financial Times

I take the question to mean "Is the United States likely to endure a decade of stagnation?" My answer is no. Present problems are due to failure of the banking and monetary mechanism. In other words, insufficient pieces of paper are being created or used to purchase potential output. This problem is not beyond the wit of man to solve, whether by injecting more Federally created dollars, "rescuing" the banks, or supplementing or replacing them with government credit institutions. Fed Chairman Ben Bernanke and presidential counselor Larry Summers are well aware of this. They might make technical or political mistakes, but hardly ones lasting a whole decade. It is sad that "hard money" Republican Bourbons dispute the obvious, but the caravan marches on, leaving them behind.

What could spoil this reassuring prospect? The conventional answer is "international imbalances." The U.S. external deficit and Chinese surplus are probably already being eroded, even though the statistics which would confirm this inevitably lag. This is a most undesirable type of rebalancing due to recession. With recovery the original imbalances could reappear. If the Chinese continue to accumulate paper dollar assets, we have an equilibrium of sorts. If they dump the dollar, this will amount to a currency realignment which will stimulate U.S. exports and discourage U.S. imports in line with what I think you Americans call "Economics 101."

What worries me is something different--that bottlenecks will reappear and that oil and perhaps other commodity prices will start to escalate long before anything like full employment is regained. This was starting to happen in 2008 and accounted for the delay of central banks in relaxing their monetary policies. The policy dilemma will look like the familiar one of inflationary constraints on growth. In fact, it will be the more fundamental problem of physical limits to growth. But it is difficult to feel much sympathy for the United States here so long as a realistic petroleum tax remains politically impossible.

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America will face more than one "lost decade."

TADASHI NAKAMAE

President, Nakamae International Economic Research

The United States is in for more than just one "lost decade." Like Japan, which is well into its second lost decade, the United States is dealing with the detritus of its ruptured bubble economy in the wrong way.

In order to define Japan's lost decade, a sketch of the bubble economy that preceded it might be in order. In 1989, the grounds of the Imperial Palace in Tokyo were more expensive than the whole of California. Japanese companies, financial and non-financial, it was said, were about to conquer the world. Both reports built the illusion that the Japanese economy was invincible, making it harder, when the bubble burst, for the old guard to change their ways, their policies, and business practices.

Bubbles are created when economies are weak. Otherwise the monetary easing that caused the Japanese and American economic bubbles would have caused wage and price inflation. Rather, because the underlying economy was weak, they created asset price inflation. This led to a wealth effect, leading people to borrow and spend beyond their means, creating unsustainable demand.

When these bubbles burst, demand dropped to sustainable levels, creating a large gap between supply and demand. How policymakers deal with this excess supply will determine whether an economy will "lose" a couple of decades, or pull out of its decline fairly swiftly.

Policymakers should cut excess supply capacity, including labor. This is not a popular solution, especially for politicians who have constituents to answer to. Nonetheless, the more politically palatable alternative, to raise demand through monetary easing or fiscal spending, is not a sustainable long-term solution. Trying to raise demand to bubble-era levels is futile. People were spending based on an illusion of wealth: how do you recreate something that never existed in the first place?

So the problem is what to do with the ensuing unemployment when excess supply is cut. The best way would be to create and train people for jobs in potential growth industries. This is where Japan and the United States part ways. In Japan, this means downsizing export-oriented manufacturing industries and expanding domestic areas such as medicare, nursing, education, and agriculture, which are all short on labor.

The United States, by contrast, saw its financial services industry bloat during the past decade. This needs to be downsized. Its other service industries are also mature. Thus it might be time to reconsider its goods-producing industries. Most of these, however, are multinationals, which will probably continue to increase their production abroad, not at home. Looking for non-American manufacturers to produce in the United States (like Toyota) will take time. Convincing policymakers that the likes of GM and Chrysler have had their day and it would be more economically beneficial to spend money enticing foreign manufacturers to the United States rather than bailing out exhausted companies will take even more time.

Meanwhile, bailouts will continue, while other desperate economic measures will probably be taken in the form of even lower interest rates. For Japan watchers this should sound all too familiar. America's debt-to-GDP is likely to top that of Japan. The Federal Reserve will probably have to apply Japan's unsuccessful experiment with quantitative easing. The United States gave Japan some jolly good advice about cutting losses and moving on in the 1990s. Now it needs to take its own advice.

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America's outcome will be either much better of far worse than Japan's

MARTIN WOLF

Chief Economics Commentator, Financial Times

"The United States should be so lucky," is my immediate response. The Japanese have pulled off a remarkable balancing act. The United States has already demonstrated its inability to follow suit.

In the years preceding the current crisis, I worried that the United States would experience a long period of weak growth in demand, similar to that of Japan in the 1990s, once its household sector cut back on borrowing and spending. But I also assumed that U.S. policymakers would manage this period of correction at least as well as the Japanese.

I was wrong. The United States has done far worse, suffering a severe contraction. Japan, in contrast, had no deep recession. Instead, it "merely" suffered a prolonged period of weak growth.

Many argue that this was Japan's big mistake: it did not allow swifter liquidation of the debt overhang and associated resource misallocation. If one believes that, one would argue that the United States has done "better" by doing worse and is, therefore, less likely to suffer a lost decade.

An alternative view is that Japanese monetary and fiscal policy was insufficiently proactive. Again, because the U.S. collapse has been bigger, its fiscal and monetary policy has been more aggressive, sooner. But the Japanese public has also shown itself willing to buy enormous quantities of Japanese bonds, at low rates of interest. That may well not hold for the United States.

In short, the United States will not experience a lost decade. The outcome will either be much better or substantially worse than Japan's. Either the United States will secure a strong private sector-led recovery or it will run out of fiscal and monetary room for manoeuver. Which will it be? We simply do not know.

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No, there are too many dissimilarities.

MILTON EZRATI

Senior Economist and Market Strategist, Lord, Abbett & Co., and author of Kawari: How Japan's Economic and Cultural Transformation Will Alter the Balance of Power Among Nations (Basic Books)

Though risks are evident, the probabilities say that the United States will avoid Japan's 1990s fate. The two countries and their situations have many more dissimilarities than similarities.

The biggest difference concerns questions of inflation and deflation. In the 1990s, Japan's ongoing deflation depressed spending growth, stymied deleveraging by effectively raising the real value of outstanding debts, and confused monetary policy so that it could not respond promptly to the situation. The yen's admittedly uneven rally from [yen] 159 to the dollar at the start of the decade to [yen] 102 by decade's end exacerbated the deflationary pressure and all the complications it brought.

The United States has none of this. Inflation remains moderate, but critically, positive, and commodity price movements suggest that it will stay positive, making the needed deleveraging go smoother and removing the impediment to retail sales growth that so bedeviled Japan. The Federal Reserve, facing a less difficult problem than the Bank of Japan did, seems to have learned from Japanese experience. It engaged in quantitative easing much more quickly than the Bank of Japan. Nor has the U.S. dollar behaved as the yen did, sparing the American economy the added problems that Japan faced in the 1990s.

Neither has the United States pretended, as Japan did, that the bad debts were still good. On the contrary, the American market and authorities insisted on write-downs, allowing the banks, with government assistance, to recapitalize themselves faster than the Japanese banks could and putting them on track to resume lending sooner. Further helping American markets recover faster than Japan's could are its much better developed commercial paper and corporate bond facilities.

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Perhaps, but the end result will depend on government policy.

IRWIN STELZER

Director of Economic Policy Studies, Hudson Institute

The clear answer is "perhaps." I say that because the question calls upon skills other than those possessed...