Dr. Bernanke (Or How I Learned to Stop Worrying and Love the American Economy)

Back in mid 2010 while visiting a friend in New York I postulated that economic and job growth in the U.S. would remain anemic throughout 2011 and well into 2012. I estimated that it would take about two more years for the American economy to clean itself up, reallocate its resources (mainly labor) from real-estate construction to productive endeavors and get over the private debt hangover to drive consumer spending and boost the economy. With the recession officially over in 2009 and with encouraging economic figures, this ran counter the general view of most Americans who felt the worst of the crisis was behind them. Although nobody expected a miracle recovery,  the specter of a double-dip recession seemed to have been lifted.


Fast-forward to today. 


Downgraded growth forecasts, wild stock market swings, decreased consumer spending, an ever growing debt to GDP ratio and political gridlock:the perfect ingredients to concoct a new economic meltdown. The talk is no more about whether the U.S. will go into recession (or something that will feel like one), but whether it can avoid a lost decade (or two...). Economists have gone to great lengths to point out the similarities between the burst of the Japanese bubble, its subsequent economic malaise and the current state of the economy in the United States. Even those who hold the opposite view that it will avoid a 'lost decade' tend to overlook one important fact: the U.S. is nothing like Japan. 

1. For starters, the underlying economic and productive structure of the United States remains fairly healthy. American corporations have retained record profit margins and increased productivity (mainly by maintaining or increasing output while cutting their workforce). Companies have not been afraid to restructure when they have had to - just look at the automotive industry. On the other hand, Japan was plagued with zombie companies  kept alive through cheap loans, stagnant productivity, an inefficient domestic economy  and an unwillingness to restructure. In fact, it wasn't really until the mid 2000's that Japanese companies and the Japanese government  tepidly experimented with market and labor reforms. In comparison, the United States has moved at lightning speed.  
2. Americans in general, are not afraid of, and understand the need for change. One might disagree with the tactics employed and their objectives, but groups on the left and the right understand that something needs to change  (although they obviously  don't agree on what...). The Japanese establishment on the other hand likes to play ostrich and favors the status quo.
3. Certainly the political gridlock the world witnessed over the budget ceiling is scary stuff. Although the United States has very low levels of democratic participation, the actors that do take part in it matter.When they speak, people listen. Actions such as those of Howard Schultz, the Starbucks CEO or the involvement of Warren Buffet in the tax debate are sure to have an effect. This was -and still is- absent from Japanese politics (not to mention the deep ties between politicians in the Diet and corporate interests).
4. The Bank of Japan pioneered quantitative easing (QE) as a response to the crisis. The Japanese market and corporations became QE-dependent. This rather than in depth restructuring was thought to be the way out of the crisis. Two decades on, QE has not delivered the long term benefits it was expected to. Like any addiction, tolerance built over time but the addicts did not want to let go of it. The Fed resorted to QE as a short term palliative with a certain success, and Wall Street (and most analysts) were certainly expecting another round of easy money to boost the economy. Thus it came as no surprise that markets reacted badly when Mr. Bernanke announced last week that there would be no QE3. In my opinion, this should be seen as a positive development, and one that sets the American economy apart from the Japanese. In fact, by refusing to further stimulate the economy through monetary policy, the Fed is shifting the emphasis on deep structural and fiscal reforms to ensure solid long term growth rather than the mirage of monetary stimulus. It's the difference between giving an anesthetic to a patient on the operating table, and hooking him up on morphine.  
5. Unlike the Fed, the Bank of Japan was not independent until 1997, well into the lost decade and too late to help it fix the underlying malaise of the Japanese economy. The Fed however, is completely independent (at least, as independent as any political entity can be) and will not be subjected to the politicians' or private interests'diktat. Mr. Bernake's Jackson Hole speech, if anything, highlighted that fact. 
6. The Japanese government was (and still is) addicted to debt. Twenty years on it has not been able to effectively tackle the issue. The U.S. on the other hand is under enormous pressure domestically and externally to deal with it in a credible, sustainable way.
7. I don't think American pride will settle for a decade of sub-par growth. I know this may not seem a very academic argument but one should never disregard the competitive nature of the American people, never better expressed as when they are being challenged. Anemic growth in the European Union and Japan was only possible because the masses and the politicians lacked that fiercely competitive drive to do what must be done to become number one (or in this case, to remain so). My gut tells me John Q. Public won't be very excited by the prospect of living in a second-rate nation.

I do not believe the American economy will start flying anytime soon, but I do stick to my original forecast. Although many challenges remain, I am convinced the United States will pull through this crisis far better than people expect.