Great Recessions-Lessons Learned from Japan

Economist Richard C. Koo thinks he has seen the future of the American economy, and it looks a lot like Japan’s “lost decade” of the 1990s.

That’s what he argues in a recent lecture, Great Recessions-Lessons Learned from Japan (website), at the Center for Strategic and International Studies, a Washington DC think tank.

Image

Ikebukuro, Tokyo, Japan. Image credit*

In 1990 Japan experienced the bursting of a real estate and stock market bubble, which left its banks critically wounded and essentially bankrupt. But unlike the US in 1929, Japan did not experience another Great Depression, with huge economic dislocation and massive unemployment. Instead, Japan endured almost 15 years of minimal to no GDP growth, with intermittent deflation. As bad as this was, Koo argues, it was in fact the healthiest outcome possible.

He believes that government intervention, in the form of massive deficit spending, allowed Japan to to minimize unemployment and maintain its economy without experiencing a large contraction. And this is the prescription that he offers to US policymakers. He predicts that with large doses of deficit spending, the US may be able to weather the next 5 to 10 years while private businesses pay down debt and repair their balance sheets.

It’s a sobering assessment, but a bit more upbeat than the prospect of a repeat of the 1930s.

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*Image credit: Wikimedia Commons. Creative CommonsAttribution ShareAlike 2.0 France
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