Economist: U.S. Could Learn From Japan's Fiscal Gap

Economist Richard Koo, who's advised five Japanese prime ministers, says America could learn something from Japan when it comes to pulling out of a deep recession. He tells host Guy Raz that unless the U.S. government takes cues from Japan's mistakes after its economic crash in the 1990s, this country could face the same long financial plight.

GUY RAZ, host:

We're back with ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.

Almost two decades ago, Japan was hit by two potentially catastrophic events. The first was a crash in real estate values. The financial sector responded by hoarding cash and using it to pay down debts rather than spend it on new investments.

It took Richard Koo and other Japanese economists a few years to figure out that this combination was driving Japan's economy into the ground. And so, they advised the Japanese government to start spending money and ignore growing deficits. And Koo argues that it worked. He wrote a book about it and is now trying to convince economic policymakers in this country that we're in the exact same spot.

Mr. RICHARD KOO (Chief Economist, Nomura Research Institute): This disease is actually the same disease hit Japan 15 years earlier.

RAZ: The same exact disease?

Mr. KOO: Exactly the same disease.

RAZ: It's like nobody knew what it was.

Mr. KOO: Those of us in Japan were flabbergasted. The (unintelligible) raced down to zero, lots of quantitative (unintelligible), nothing helped.

RAZ: And you can recognize it instantly here in the U.S. now?

Mr. KOO: Yes, because the key feature of this disease is that people - meaning private sector is still leveraging or paying down debt under zero interest rate condition.

RAZ: Instead of spending money making investments.

Mr. KOO: Exactly.

RAZ: And you didn't know why.

Mr. KOO: Well, the reason actually, when you think about it, is quite simple. Those people bought assets with borrowed money during the bubble days. The asset price collapsed after the bubble, liabilities remain and people suddenly realized that their balance sheet's underwater. What do you do? You used the cash flow to pay down debt.

RAZ: Mm-hmm.

Mr. KOO: And that's the right thing to do for people in that circumstances.

But when everybody does it all at the same time, we enter what we call fallacy of composition in that what is right for the individual taken together is bad for the group.

RAZ: Many economists look to Japan's past two decades as a cautionary tale. But you actually see Japan as a success story, an example for the United States. How so?

Mr. KOO: Those people don't realize what happened to asset values. Commercial real estate in Japan - Tokyo, Osaka...

RAZ: Collapsed.

Mr. KOO: ...all cities - fell 87 percent.

RAZ: Eighty-seven percent, the value of a home in some cities fell 87 percent?

Mr. KOO: Eighty-seven percent. What kind of economy do you think you have left in the United States if Manhattan prices are down 87, Washington down 87, San Francisco down 87?

RAZ: There'd be nothing left.

Mr. KOO: There'd be nothing left. We managed to keep our GDP from falling below the peak of the bubble for the entire 20-year period. Our employment rate never went beyond 5.5 percent because government came in and borrow the money that people were all saving.

RAZ: Japan, at certain times, has (unintelligible) huge budget deficits, has a ballooning national debt, that's not a problem?

Mr. KOO: It's a problem, but it's the best of the possible choices in that government budget deficit increased by something like 460 trillion yen. That means about 92 percent of Japan's GDP.

RAZ: Wow.

Mr. KOO: But what's missing in the debate is that this 460 trillion yen deficit saved the GDP at least 2,000 trillion.

RAZ: Richard Koo, how long could the United States, though, run massive budget deficits?

Mr. KOO: In this type of recession, the amount of money the government has to borrow and spend is exactly equal to the excess saving in the private sector.

RAZ: So when the private sector is saving and not spending, the government has to come in and borrow the equivalent amount and spend it?

Mr. KOO: If you want to keep the GDP from collapsing, yes.

RAZ: That's Richard Koo. He's been an adviser to five Japanese prime ministers. He's the chief economist at the Nomura Research Institute and the author of "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession."

Richard Koo, thank you so much.

Mr. KOO: Thank you very much.

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