The "Japanization" of America may be here, as the U.S. begins a long period of weak growth
The U.S. may face a prolonged period of stagnation. That's the warning from a Reuters op-ed written earlier this week by PIMCO CEO and co-CIO Mohamed El-Erian. He worries that the U.S. could be on a worse path than Japan was when it began its "lost decade." But he ends with a note of optimism, saying that policymakers have the power to avoid Japan's fate. Both their willingness and ability to do so should worry us, however.
Why We Face a Lost Decade
What has gone so wrong that the U.S. could be in for a decade or more of sluggish growth and relatively high unemployment? The problem all began with too much borrowing -- on all levels. Consumers, states, and the federal government borrowed too much money. The problem for homeowners is particularly acute, since many now have assets worth less than what they owe due to the housing bubble. Rapidly growing student loan debt makes matters worse.
What you end up with is a troubling cycle. Unemployment is high, so consumer sentiment is low. And as a result, Americans aren't spending enough money to cause firms to hire more aggressively -- so unemployment stays high. And the debt burden Americans are under cuts spending by even more. Many are trying to whittle away at their mortgages, credit card balances, home equity loans, and student loans. Others are trying to rebuild their nest eggs. Weak sentiment combined with deleveraging is a recipe for very slow spending growth.
Housing having been the source of the bubble makes economic growth even harder. It often helps lead a nation out of recession, but this time around it is contributing zero growth.
This begins to point to one of the nation's structural problems. For more than a decade, the U.S. developed a thriving and robust housing market as the center piece of its economy. But it was built on the sand. The tide came in and washed it away. Now it has millions of unemployed Americans who supported that industry in jobs like construction or financial services. The trillions of investment dollars that flowed into real estate industry over this period could have gone to technology or other sectors to provide sustainable growth. Instead, that money was squandered.
Manufacturing is another major source of job losses. Those jobs also aren't coming back. The U.S. can add some new jobs in this sector, but most of those lost are simply more economically viable elsewhere. Most of those now-unemployed workers need to find a new field, which likely requires training. And that takes time and money.
Of course, it doesn't help that the global economy is a disaster. The European Union continues to struggle to agree on an exit from their sovereign debt troubles. Any solution that would ensure stability will also necessarily constrain growth in the region, because some austerity must result.
Why It Could Turn Out Worse Here
As bad as this sounds, the U.S.'s lost decade could actually be worse than Japan's, according to El-Erian. He notes that Japan had a few advantages over the U.S. during the period.
First, he says that the U.S. does not have the same level of "social cohesion" as Japan. In particular, the nation provided a broader, more effective safety net that can benefit a nation in a time of weak growth and high unemployment. Although the U.S. does have some measures meant to help those struggling, their impact is limited. For example, in the U.S. jobless benefits remain capped at 99 weeks. If unemployment is prolonged for several years, those payments will quickly run out for many Americans.
Second, he notes that Japan had a net creditor status. The U.S., however, is a net borrower. As a result, capital inflows helped Japan to recover more quickly. The U.S. doesn't have the same luxury.
Why It Might Turn Out Better
As bad as all this sounds, the U.S. might also have some advantages over Japan. Back in May, I spoke to S&P about why Japan was downgraded in 2001, while the U.S. hadn't been downgraded despite its similar level of debt-to-GDP. The rating agency provided several reasons why it considered the U.S. to have better prospects now, than Japan had then.
- The U.S. has better fiscal indicators, both on the stocks and on the flows.
- U.S. prices are more stable, while Japan flirts with deflation.
- The dollar remains the key international currency, while the yen is a distant third.
- U.S. growth prospects are better.
- Japan has particularly troubling demographics, as its population is aging and skews towards the elderly.
The first two points do appear to give the U.S. a slight edge. But the U.S. may not get much benefit from the others.