Can We Avoid Japan-type Woes? U.S. Hears Echo of Japan - NYTimes.com

Long article in this morning's New York Times comparing the U.S. and the 20 year economic woes of Japan.

Not a lot of new information, but the continuing malaise of the U.S. economy (and particularly high unemployment) will doubtlessly play a big role in Tuesday's elections.

Here's an excerpt:

However, some warn that the United States could still get it wrong, especially if the midterm elections produced a sharply divided political landscape.

“The danger is if the U.S. plunges into policy paralysis just like Japan in the 1990s,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Ideological divides and political divides can make bold policy action impossible.”

In fact, some economists warn that the United States may be deeper into Japan-style stagnation than is widely realized. Simon Johnson, a former chief economist at theInternational Monetary Fund, estimates that the total output of the American economy this year will be no higher by his estimate than it was in 2006.

“We’ve already lost half a decade,” said Mr. Johnson, now a professor at theMassachusetts Institute of Technology.

U.S. Hears Echo of Japan’s Woes - NYTimes.com

I had a long conversation yesterday afternoon about what the stock market might do if, for example, the Republicans are able to regain control of the Senate.

My two cents worth: I almost don't think it will matter. No matter who wins, the choices are incredibly difficult, and there are no easy answers. It is simple, for example, to campaign on a platform of cutting government spending, but 82% of the federal budget is already mandated by either law or contract (e.g. the interest on the federal debt).

Raising taxes on higher income folks wins applause in some corners but even this has risks, as the article notes:

In the annals of economic policy blunders, the one in which Hiroshi Kato played a hand in early 1997 ranks among the biggest in recent Japanese history.

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Issei Kato/Reuters

Bank of Japan’s headquarters. Japan is in an economic morass from which it has yet to emerge.

The Great Deflation

Studying Past Blunders

This is the second in a series of articles that will examine the effects on Japanese society of two decades of economic stagnation and declining prices.

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Mr. Kato led a government advisory committee that concluded that the economy, which was then finally starting to rebound from the collapse of its 1980s land and stock bubbles, was healthy enough to raise the national consumption tax to 5 percent from 3 percent.

Aimed at reducing deficits, the tax increase instead quickly snuffed out the fragile recovery, pushing Japan to the brink of a financial meltdown and thrusting the nation deeper into the economic morass from which it has yet to emerge even today.

“Our sins are large,” Mr. Kato, now president of Kaetsu University in Tokyo, said ruefully. “I hope the rest of the world can learn from this mistake.”ticle notes at the very beginning: