Four Nations, Four Lessons

The New York Times
October 22, 2011

AS the economy languishes, politicians and pundits are debating what to do next. When we look around the world, it’s hard to find positive role models. But as we search for answers, it is useful to keep in mind those fates that we would like to avoid.

The recent economic histories of four nations are noteworthy: France, Greece, Japan and Zimbabwe. Each illustrates a kind of policy mistake that could, if we are not careful, presage the future of the United States economy. Think of them as the four horsemen of the economic apocalypse.

Let’s start with Zimbabwe. If there were an award for the world’s worst economic policy, it might well have won it several times over the past decade. In particular, in 2008 and 2009, it experienced truly spectacular hyperinflation. Prices rose so fast that the central bank eventually printed 100 trillion-dollar notes for people to carry. The nation has since abandoned using its own currency, but you can still buy one of those notes as a novelty item for about $5 (American, that is).

Some may find it hard to imagine that the United States would ever go down this route. But reckless money creation is apparently a concern of Gov. Rick Perry of Texas, who is seeking the Republican nomination for president. He suggested in August that it would be “almost treasonous” if Ben S. Bernanke, chairman of the Federal Reserve, were to print too much money before the election. Mr. Perry is not alone in his concerns. Many on the right fear that the Fed’s recent policies aimed at fighting high unemployment will mainly serve to ignite excessive inflation.

Mr. Bernanke, however, is less worried about the United States turning into Zimbabwe than he is about it turning into Japan.

Those old enough to remember the 1980s will recall that Japan used to be an up-and-coming economic superpower. Many people then worried (too much, in my view) that Japan’s rapid growth was a threat to prosperity in the United States, in much the same way that many people worry today (too much, in my view) about rapid growth in China.

The concerns about Japanese hegemony came to a quick end after bubbles in the real estate and stock markets burst in the early 1990s. Since then, Japan has struggled to regain its footing. Critics of the Bank of Japan say it has been too focused on quelling phantom inflationary threats and insufficiently concerned about restoring robust economic growth.

One of those critics was Mr. Bernanke, before he became Fed chairman. Watching Japanese timidity and failures has surely made him more willing to experiment with unconventional forms of monetary policy in the aftermath of our own financial crisis.

The economists in the Obama administration are also well aware of the Japanese experience. That is one reason they are pushing for more stimulus spending to prop up the aggregate demand for goods and services.

Yet this fiscal policy comes with its own risks. The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead. In the long run, we have to pay our debts — or face dire consequences.

To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence.

Bond markets are now giving the United States the benefit of the doubt, partly because other nations look even riskier, and partly in the belief that we will, in time, get our fiscal house in order. The big political question is how.

The nation faces a fundamental decision about priorities. To maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare. Alternatively, we can preserve the current social safety net and raise taxes substantially to pay for it. Or we may choose a combination of spending cuts and tax increases. This brings us to the last of our cautionary tales: France.

Here are two facts about the French economy. First, gross domestic product per capita in France is 29 percent less than it is in the United States, in large part because the French work many fewer hours over their lifetimes than Americans do. Second, the French are taxed more than Americans. In 2009, taxes were 24 percent of G.D.P. in the United States but 42 percent in France.

Economists debate whether higher taxation in France and other European nations is the cause of the reduced work effort and incomes there. Perhaps it is something else entirely — a certain joie de vivre that escapes the nose-to-the-grindstone American culture.

We may soon be running a natural experiment to find out. If American policy makers don’t rein in entitlement spending over the next several decades, they will have little choice but to raise taxes close to European levels. We can then see whether the next generation of Americans spends less time at work earning a living and more time sipping espresso in outdoor cafes.

N. Gregory Mankiw is a professor of economics at Harvard. He is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.

  1. #1 by yhsiew on Sunday, 23 October 2011 - 7:41 pm

    Very soon it will be 5 nations, 5 lessons if Najib does not rein in unbridled spending practices.

  2. #2 by limkamput on Sunday, 23 October 2011 - 11:48 pm

    Even now the Americans do not work that hard to enjoy the standard of living they are enjoying now. Think about it, the US is essentially creating US$ to demand goods and services worldwide to sustain their undeserved standard of living. If the US is any other country without the reserve currency status, it would have sunk a long time ago. A lesson to draw from here for Malaysia is that we do not have the reserve currency status and therefore our “abuse thresholds” are much lower than the US. In other words, don’t look to US as guide when abusing our economy. We could be Greece in no time.

  3. #3 by boh-liao on Monday, 24 October 2011 - 12:36 am

    In 1M’sia, can rakyat trust UmnoB/BN or PR?
    If no sure d answer, look at Kampung Buah Pala or Taman Buah Pala in Pg

  4. #4 by monsterball on Monday, 24 October 2011 - 2:04 am

    US greatest asset is their US $.
    In great demand…all the need is to keep printing.
    But they owe China and Japan…trillions.
    If these 2 countries demand payments…..US will go into a recession worst that the early 20s.
    Who knows…maids will come from US….to look for suckers like the China’s maids.
    The world is getting weird.

  5. #5 by Jeffrey on Monday, 24 October 2011 - 2:41 am

    Its seems paradoxical that by the very same No 1 reserve currency status US$ is viewed as safe bet by investors and creditors who being attracted are then at recipient end of being shoved the very financial risks that the US passes to them thereby creating in them a financial stake in having US’s reserve currency status maintained at its anchor position (the printing of US$ notwithstanding to bridge deficits) as these creditors with large holdings of US $ or US denominated assets or US Govt Debt would risk large losses should US$ depreciates against their currencies…Of course Bond markets still give US benefit of the doubt because its creditworthiness is a more function of perception/faith/confidence/”X factor” than reality based on its sole monopolistic Super Power status. It’s not just because other nations look even riskier or that US$ remains anchor currency in world trade including majority of world oil contracts being settled in USD. It is also the US continuing ability (military capability & technological prowess) to manipulate hegemony over various parts of world and therefore access to their resources – and its soft power of influence via media Hollywood television & English language domination etc, not to mention its lure of the brightest talents to its tertiary institutions leading right to its R&D laboratories.

  6. #6 by k1980 on Monday, 24 October 2011 - 7:41 am

    // Japanese hegemony came to a quick end after bubbles in the real estate and stock markets burst in the early 1990s. //

    From what I understand, the above came about because the Americans pressured the Japs to increase the exchange rate of the yen against the US dollar. Having achieved that, now they are pressuring the Chinese to increase the exchange rate of their renminbi. This is how the Americans get rid of their competitors.

  7. #7 by waterfrontcoolie on Monday, 24 October 2011 - 7:52 am

    It is funny that the author is an adviser to Romney who seems to think that China is the main cause of US’s problems! As far as our corrupted leaders and their cronies are concerned they will print more ringgit whose value will keep on dropping, it won’t bother them; after all their monies are kept in Swiss francs or aussie dollors by now. For that reason our Super-Ego loved to follow the footpath of Zimbabwe where we will join sooner than later! Though the sad thing is there are still a large number of Malasyians who still believe in the Super-Ego whose influence has also cowed the current PM. Those who still support him have failed to realize all his Cronies are practically PRs in other countries: like most African leaders, they only use slogans to mislead the blinded majority!

  8. #8 by dagen on Monday, 24 October 2011 - 9:42 am

    Spending your way to prosperity. Isnt that kenysian? Well, whatever. Yes about spending. That policy saved america once in the past. Maybe more than once. And it also made america great. And when the cold war ended, america by default became the lone superpower in the world both in economic and in military terms. That could be why american policy makers got hooked to that spending mentality. It is an addiction. (Just like umno’s addiction to the nep.) Spend your way to prosperity and spend you way out of trouble. Same formula. Works all the time, (then) hitherto that is. And really, I believe, there is no reason why it cant or wont work. Even today or tommorrow. What went wrong then? You see. Spending is not quite the same economic animal as over-spending. Really, did keynes advocate over-spending? Obvious answer, I think. And over-spending here does not mean spending beyond one’s means. One could be said to have over-spent when one spends beyond a certain x% of one’s earning. Dont ask me what the magic x figure is. I dont know. (Anyway that is not my purpose in writing this comment.)

    This is the american lesson for all of us. And of course umno is too busy to learn anything new. Umno is forever playing with its ketuanan and is perpetually engaged in public orgies. And not having anything new to show the people, umno decided to recycle its old idealogy over and over again, that of protecting malay rights. Screaming the same line for 50+ yrs, umno? Oh boy. Parents would know well the reaction of their children if the same message say “be home early” is being mentioned for the third time in the same day. And did I mention over-spending? Same logic goes for over-using. You see, umno. An overused ketuanan is going to be useless ketuanan! Jib seems to have erection trouble. He does not seem to know when to have it.

  9. #9 by Jeffrey on Monday, 24 October 2011 - 10:01 am

    Spending one’s way to prosperity is also closely related to borrowing to finance that spending. If you borrow a small loan and cannot pay the bank/creditor it will call default and make you bankrupt. But if you could borrow huge from many banks/creditors because of their misplaced faith in your credit worthiness – and your borrowing is so huge that if the banks and creditors call default on you, they will be in common predicament of not being able to recover anything and will suffer a devastating financial blow, then rest assured in such circumstances they will all have an interest in your carrying on your ways as usual than stop it abruptly, give you time, reschedule your debt long term and even extend a little loan here and there to bridge you over in hope that in long term you will survive and honour all your debt to them…

  10. #10 by limkamput on Monday, 24 October 2011 - 11:32 am

    This is what most economists in government think: Practising half-baked Keynesian economics by spending. If the governments keep injecting money by pushing up aggregate demand without the corresponding increase in goods and services, there is only consequence – its effect will manifest through increase in prices. Government spending must create capacity or enhance productivity in economy. Government spending is not blindly throwing money into the pockets of unproductive people and asking them to spend (sound familiar to you now). It is only through increased capacity and higher productivity that an economy could produce more goods and services. Put it simply, government spending building more roads and improve public transportation have very different impact when compared with spending on government servants by asking them to put up more bureaucracies. The former increases the capacity of the economy, the latter is a disservice to the economy. This is Economics 101, but today the world is governed by people who think they can have free lunches; thinking they can create something out of nothing.

  11. #11 by limkamput on Monday, 24 October 2011 - 11:34 am

    …,there is only ONE consequence – its….

  12. #12 by boh-liao on Monday, 24 October 2011 - 11:39 am

    Aisay, man, d 4 nations, 4 lessons NO WHERE near dis nation, 1M’sia: 1 nation 1 unik lesson

    Dis is d only nation in d world where msm, under d encouragement of d UmnoB/BN gomen, regularly give full publicity n lucid details abt sex, sodomy, boob grabbing, simultaneous mass orgies, n more sex 2 rakyat
    No wonder our rakyat, incl youngsters, hv gone AMOK/amour with SEX n INCEST
    1M’sia, truly 1 nation 1 unik lesson

  13. #13 by monsterball on Monday, 24 October 2011 - 11:50 am

    Four Nations ..with four different priorities…but with one common goal.

  14. #14 by monsterball on Monday, 24 October 2011 - 11:56 am

    Zimbabwe..and Greece
    Japan and France
    It’s like comparing apples to oranges.
    Stark contrast in every way.

  15. #15 by TheWrathOfGrapes on Tuesday, 25 October 2011 - 9:42 am

    k1980 :
    // Japanese hegemony came to a quick end after bubbles in the real estate and stock markets burst in the early 1990s. //
    From what I understand, the above came about because the Americans pressured the Japs to increase the exchange rate of the yen against the US dollar. Having achieved that, now they are pressuring the Chinese to increase the exchange rate of their renminbi. This is how the Americans get rid of their competitors.

    Yes, spot on. Through the Plaza Accord. And now they are trying to kill China through the same dastardly device.

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