VideoThe news about the economy hasn't been good for some time, but in early February it got worse. The Labor Department reported that the United States had shed 598,000 jobs in January, the worst monthly loss in 35 years, for a total of 3.6 million jobs lost since the recession began in December 2007. The unemployment rate climbed to 7.6 percent, a level last reached 16 years ago. Meanwhile, the S&P 500 stock index remained 45 percent below its October 2007 peak, and millions of Americans dreaded checking their 401(k) balances. Housing prices, which lay at the root of the crisis, were down 25 percent from the 2006 peak of the S&P/Case-Shiller index and expected to fall further.
The economy, in short, is deteriorating at an alarming pace. In its annual budget and economic outlook, the Congressional Budget Office said the recession "will probably be the longest and the deepest since World War II," lasting "well into 2009." As of March the recession is 15 months old; by comparison, the longest postwar downturns, beginning in November 1973 and July 1981, lasted 16 months apiece.
On Capitol Hill, Democrats and Republicans wrangled over the provisions of an $800 billion stimulus bill, prompting an exasperated President Obama to scold Congress for the "inexcusable and irresponsible" delay. Treasury Secretary Timothy Geithner unveiled a new plan to bail out the nation's troubled banks, into which the government has so far poured hundreds of billions of dollars, with little visible effect — except that the banks are still in business.
To a growing number of observers, the current recession is beginning to look like something much worse than 1973 or 1981. It shares key hallmarks of the recent Great Stagnation in Japan — the "lost decade" of the 1990s, an economic slump and financial crisis that actually lasted longer than 10 years. The U.S. economy, many fear, may be on the verge of its own lost decade.
The basic outline of Japan's lost decade is familiar. Japan's "bubble economy" of the 1980s saw an astronomical run-up in the values of stocks and property. Famously, the land under the Imperial Palace in Tokyo was said to be worth more than the entire state of California. When the Bank of Japan raised the discount rate from 2.5 percent to 6 percent in 1990, first stocks and then real estate values plummeted. Suddenly saddled with bad loans they were loath to write off, banks curtailed lending to healthy companies, yet refused to pull the plug on insolvent "zombie" companies. Growth fell, and the Bank of Japan steadily lowered the discount rate to 0.5 percent in 1995, holding it there for the rest of the decade. Still, deflation set in.
The consensus is that quick, aggressive action by Japanese authorities would have abbreviated the crisis. Instead, they reacted first by denying that there was a problem, then by trying to bail out banks in a piecemeal fashion, and finally by starting a full-blown bank-recapitalization effort. By the end of the 1990s, many banks were thought to be insolvent.
Fiscal stimulus consisted largely of a massive public-works program, which spent hundreds of billions on buildings and infrastructure. But only when the global economy began to boom in 2003 did Japan's rev up again. By then the Nikkei 225 stock average was down more than 75 percent from its 1989 peak.
Japan's annual growth for the 1990s averaged a pitiful 1 percent, compared with 4 percent for the 1980s. From 1992 to 1998, the output gap (a measure of economic slack) was about 68 percent of gross domestic product, or ¥340 trillion. By some estimates, Japan has spent more than 20 percent of GDP to fix the financial system. (By comparison, the $700 billion Troubled Asset Relief Program [TARP] represents about 5 percent of U.S. GDP.) Today Japan's public debt is 180 percent of GDP, by far the highest ratio among industrialized nations.
It's not hard to see the parallels between Japan then and the United States now, in the wake of our own multi-trillion-dollar housing bubble. The current recession is not the old-fashioned kind that can be cured with cheap money. As in the case of Japan, the balance sheets of U.S. banks are clogged with questionable assets — namely, toxic mortgage-related securities. Banks are hoarding TARP capital instead of lending it (see "The Big Freeze"). Although the Federal Reserve has lowered the federal funds rate to near zero, credit is still frozen.
Meanwhile, amid a stunning drop in consumer spending, a federal bailout is moving forward fairly quickly. Despite criticism from the right that it's wasteful and from economists that it's not large enough, the roughly $800 billion program will include substantial spending on "shovel ready" infrastructure projects, just as Japan's did.
It Probably Won't Happen Here
Why will a banking bailout and a gigantic stimulus program work more powerfully here than in Japan? A number of reasons are offered in a 2008 working paper by James Wilcox, professor at the University of California at Berkeley's Haas School of Business and former chief economist at the Office of the Comptroller of the Currency. Although the paper was written long before last fall's deep freeze in the credit markets, Wilcox continues to stand behind most of his main arguments. They include:
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