Robert Samuelson had a good op-ed in the Washingtom Post on Japan, stimulus and deflation. A lot of people point to Japan as a modern example of deflation and the damage it can do to an economy.
Deflation doesn’t explain persisting economic stagnation. Japan’s consumer prices have declined in nine out of the past 20 years; the average annual decline was six-tenths of 1 percent. “People aren’t going to say, ‘I’ll wait until next year to buy a car, when the price will be a half a percent cheaper,'” says New York Univeristy economist Edward J. Lincoln, a Japan specialist. If the Japanese were delaying spending, the household saving rate would have risen; instead, it fell from 15.1 percent of disposable income in 1991 to 2.3 percent in 2008.
What can we learn from the Japanese experience?
Japan’s economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that’s been missing in Japan. This is a lesson we should heed.
Economic success ultimately depends on private firms. The American economy is more resilient and flexible than Japan’s. But that’s a low standard. Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan’s.