Friday, May 21, 2010

Are We Japan or Greece?

While I believe the correct response is likely neither, I did enjoy Krugman's column today that takes up the subject. He's still afraid that we're stuck in a deflationary trap and that policymakers are doing too little to address it. I concur with him that the evidence seems to be pointing more strongly towards a Japan like situation than a Greece like situation but I think while there are some macroeconomic similarities in the financial and monetary systems we don't have the structural issues on the same scale that Japan did in our business sector. I'm not sure what effects this difference will have but I do expect the problems to be less severe than Japan.

I'll admit that I'm drawing a bit heavily from Katz's "Japan, the System That Soured". Very good book about the structural deficits in Japan's non-export sectors and the trade offs inherent in industrial policy. Since we haven't been pursuing an industrial policy I don't see the issues being quite the same. Though I do think there are enough parallels that comparing our long run recovery to Europe's will be helpful since there are some similarities in the amount of social responsibilities given to corporations both here and Japan that are fulfilled by the state in Europe. For a very brief read of Katz's standpoint, the summary of this Foreign Affairs article gives a very brief overview. The full article is available only to subscribers but I found the summary outlined things well enough.

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