Sunday, October 31, 2010

Will we learn the lesson from Japan?

In the United States, a robust recovery remains stubbornly elusive, and Mr. Bernanke is said to be ready to take new, unconventional steps to increase the money supply in order to maintain the uncertain growth of the past year. He is also said by close associates to favor further fiscal measures to stimulate the economy. But in the current political climate, with Republicans poised to make strong gains in the midterm elections while preaching fiscal austerity, the prospect of more federal stimulus spending seems remote, and it is unclear if monetary policy alone will be enough to restore healthy growth.

Partly as a result, some economists now predict that it could take years or even a decade for the American economy to regain the levels of employment and vigor achieved before the 2008 crisis. The growing political pressure for cuts in federal spending — along with plunging consumer confidence and companies that seem more intent on cutting costs and hoarding cash than investing in new growth — have led economists to talk of the United States’ entering a grim new era of austerity.

That is very close to what befell Japan two decades ago, when the seemingly invincible Asian economic juggernaut fell into a deep rut of chronically anemic demand and corrosive price declines, known as deflation, from which it has never fully recovered. The parallels are so striking, and unsettling, that economists are now taking a renewed look at Japan for insights on how the United States can avoid the deflation trap.

“There has been a political and intellectual arrogance in the United States that it won’t happen to us,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. “We shouldn’t be so smug. You can get there without being Japan."

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