A lost decade may be in the offing for the U.S., akin to what the Japanese economy endured during the 1990s, writes Nobel Prize winning economist Paul Krugman.
“Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more Japan,” Krugman wrote.
“For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much," he recently wrote in his column in the New York Times.
"Governments need to stop spending, we’re told. Greece is held up as a cautionary tale.”
Krugman notes that nearly every increase in the interest rate on U.S. government bonds is treated as an indicator that markets are turning on America.
What is more, there are nonstop warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” squeezing credit by selling off assets and raising interest rates.
“But the truth is that policy makers aren’t doing too much; they’re doing too little,” writes Krugman.
“Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.”
Krugman observes that on several occasions during the past year, investors have been told that the bond vigilantes had arrived, that America had better slash its deficit immediate. “Each time, rates soon slid back down,” writes Krugman.
Krugman said that he wishes he could say that falling interest rates reflect a surge of optimism about U.S. federal finances.
“What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt,” writes Krugman.
Others on the Left agree. Andrew Leonard writes in Salon.com that if the U.S. got over its “fear of government,” and spent more, it would avert a lost decade like Japan.
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