Posted 2/16/2009

WILL OBAMA BECOME A SERIAL STIMULATOR?

Not if he learns the lessons of Japan's historic stimulus efforts of the 1990s.

If the U.S. does not learn from the Japanese experience, we are condemned to repeat it and suffer the same fate – long-term stagnation.

Serial stimulation is what the leaders of Japan did in the 1990s when their real estate and banking bubbles burst. When the Japanese economy hit the skids in 1989, the government pumped 13 stimulus packages into the economy.

But nothing much happened to the economy.

Nothing good and nothing bad.

The Japanese economy simply went blah, growing only an average of 1.5 percent during the following ten years, which are now known as "Japan's lost decade."

The stock market started a twenty-year bear run. Unemployment went from under 3% to over 5%. Nothing drastic. But nothing good. Certainly not anything to write home about.

Japan's economic growth came to a screeching halt after growing a remarkable 9% percent a year from 1956 to 1973, followed by a more modest 4% a year rate in the 1980s. Compared with those rates, 1.5% a year looked and felt like a depression.

The reason Japan's 13 stimulus packages failed was simple:

Its once robust export growth engine stopped hitting on all cylinders. The yen rose, making exports expensive. And the new Asian tigers (South Korea, Taiwan, Singapore and China) threw sand into Japan's once smooth-running export engine.

Yet none of Japan's 13 serial stimulations addressed the main problem, the failure of Japan's key growth engine – exports.

Today, Japan's exports are down 33% and the country is in a real depression, its tax revenues cannibalized by the monster debt created by the 13 stimulus packages.

The American experience has been similar. When our manufacturing sector dwindled, we maintained our high standard of living by building a huge growth engine of consumption. Fueled by cheap and plentiful capital, we overbuilt everything from houses to hotels to shopping centers to cars.

Now the American bubble has burst. About 11% of our houses are empty. Banks are failing at a record rate. Retail outlets are going under. Shopping centers are losing stores. And everyone from Donald Trump to General Motors seems headed for the bankruptcy courts.

Obama's stimulus packages may lessen the potential damage of the current depression. But what will we be left with?

One thing for sure, a monster debt. Even bigger than Japan's.

What will be the growth engine that restores our standard of living?

It can't be consumables because we are now turning into a nation of savers.

What happens when consumption drops from 70% of the American economy to 50%?

What is going to make up the lost 20%?

What is going to create the extra 3% or 4% that restores economic health and growth?

Finding and building a new growth engine is our overriding economic problem.

And no one is Washington is even talking about it.

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