How ’bout a Little Optimism? The American Promise.

By John Lumbard.

  Investors are running scared right now, fearful that a slowdown in our economy means that we’re headed back into a double-dip recession.  Stop worrying and enjoy a double dip in the ocean (a balmy 66 degrees at the New Hampshire shore today) or two scoops of ice cream at Annabelle’s here in Hollis.  On writing those words I asked my wife if she’d like to walk over to Annabelle’s, and we wound up sharing a double dip (Cookies and Cream plus Kahlua Chocolate Chip), and talking with Chris Roukas.   Chris came here from the village of Metamorphosis, in northern Greece, and he honestly thinks his life is a never-ending miracle. 

  OK, that’s as far as that goes.  We don’t have any cheery metamorphosis analogies for you, and we already wrote about Greece.  This  post is about Japan, land of the endless flat horizon.  Her recent history is the benchmark by which our economy should be measured, and that’s been true for many years. 

  Japan’s twin bubbles—in real estate and in the stock market—burst in the late 1980s, and the nation responded with bank bailouts and Keynesian stimulus that went on and on.  Five years of that stimulus lifted GDP, but damaged the “real” economy by sucking up skilled workers, machinery, entrepreneurs, and investment capital.  The government built bridges to nowhere, paved smooth roads, bailed out banks, and mailed checks to voters . . . . . In 1997 the Diet (Japan’s parliament) tried to balance its budget, and found that the private sector was no longer large enough to feed and clothe and house all the new bureaucrats and welfare beneficiaries.   Frightened by a looming recession, they went back to running big deficits;  and the result was that the economy flat-lined until 2002.  Over the course of 13 years GDP grew a total of just 14%, and government accumulated the second-largest debt (as a % of GDP) in the world, after Zimbabwe.

  Japan was still in her “Lost Decade” when our own stock-market bubble burst in 2000 and 2001, and Washington went into a panic.  If the World Trade Center hadn’t collapsed in a ball of fire they might have been able to see the irony of trying to combat a feared Japanese-style endless recession with the very same strategies that Japan had tried.  They couldn’t, of course (there’s a reason why you never see the phrase, “Congress, in its wisdom”), and went on a spending binge (bridges to nowhere!) that was quickly matched by aggressive action at the Federal Reserve.   

  So here’s the Fed, printing huge quantities of money and driving interest rates down to 1% to ensure that we wouldn’t suffer Japan’s post-bubble fate;  and thus creating a gigantic bubble in our own real estate market.  Congress and the White House inflated the bubble further with a wide array of programs that extended home ownership to millions of people who could not afford to make mortgage payments . . . . The sorry truth is that we’ve been inexorably drawn to Japan’s example even as we’ve tried to run away from it. 

  It’s frankly difficult to understand why every pundit in America is worrying about a double-dip recession—an extremely rare event—when the obvious answer is that we’ll suffer slow growth for a very long time.  Like Japan we overinflated our economy, and need to go through a painful adjustment to get back to normal.  Like Japan we chose Keynesian stimulus, corrupted with the usual assortment of political favors, as our initial response.  Unlike Japan we don’t have frugal citizens with a gigantic pool of savings that can lend our government all the money it needs.  Is there any reason to hope that our outcome will be better? 

  Strange as it seems, Grasshopper, our meager savings might be a good thing.  We’re only two years into this great malaise, and already our nation feels an enormous sense of urgency about imposing fiscal discipline on Washington.  Austerity is the new virtue, and you’re about to be treated to some serious proposals for deficit reduction as well as a slew of initiatives meant to reassure businessmen that Washington isn’t trying to shoot them in the back.  If you’ll help us out a little bit here we might even be able to pass a balanced-budget amendment, a line-item veto, and a spending cap to ensure that we won’t have to go through this madness (call it angry-ness) again, 8 or 10 years from now.

  Our meager savings, oddly enough, also give our central bank more power to stimulate our economy.  In the United States low interest rates spread wealth by allowing us to refinance our mortgages at low rates;  while in Japan low interest rates rob savers by slashing the interest rates they receive on their bank accounts.  During their Lost Decade they responded by slashing their spending, and the result was weaker GDP growth. 

  We can also say that Japan’s bubbles were larger, and that they burst at the same time.  Japan thus had a larger adjustment to make, to return to a normal GDP;  and this process occurred at a time when South Korea and China were imitating Japan’s mighty export model and eating her lunch.  Korea and China have already hollowed out our manufacturing industries, and it’s not going to get any worse from here.  Really.

  As long as we’re looking for hopeful signs, let’s talk about energy.  Pundits and politicians always point to the energy sector as the source of a million new jobs, and we agree.  But wind and solar power will be a very small part of the story.  The Big News is natural gas, a relatively-clean and suddenly very-cheap fuel that (as a result of new technology) is now abundant enough to out-compete most other sources of energy.  Gas will take a big share of the nation’s electric power generation away from coal, and fortunes will be made by those who can figure out how to substitute natural gas for diesel fuel and heating oil.  

  There is also crude.  In the wake of great disaster in the Gulf of Mexico it’s hard to imagine a sharp expansion in deep-water oil production, but you will be shocked and thrilled to learn of the voracious appetite of the oil-eating micro-organisms that have long inhabited the Gulf.  BP’s Macondo well showed just how fast oil can come out of deep-water deposits, and when the infrastructure is in place (thanks to the labor provided by hundreds of thousands of “good-paying jobs”) we’re going to see oil imports slashed.  Cheaper energy will mean that Americans will have more income to spend, and they’ll spend some of it on products offered by the big blue-chip companies that turned in surprisingly-strong earnings reports in the first half of the year. 

  They’ll spend a good part of the rest on health, fitness, family, and friends.  A lot of people are finding that they’re better off without the frenzied consumerism of yesteryear.  You might not feel wealthy enough to re-do the kitchen in 2011, but you’re going to spend more time with the people who matter in your life.   So untie that hangman’s noose, step away from the window ledge, and go buy yourself a double-scoop ice cream cone.  Made right here in the U.S. of A.

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