Friday, May 21, 2010

America Isn't Japan

Paul Krugman writes about how America has 10% unemployment, and tries to cajole his readers into the idea that the government to do something otherwise we might end up with a lost decade like the Japanese.

I've mentioned this time and again, but Japan has a corporatist economy, which is not dissimilar from European nations do. This creates what economists call labor rigidities that, when combined with sticky wages, exacerbate deflationary cycles.

Let me put it this way -- when your labor force and wages are governed by union contracts negotiated every several years and layoffs of largely prohibited by the contract or the law or cultural expectations, then it is very difficult to adapt to shocks. In the short-term, 10% unemployment is very painful and that pain falls largely upon a specific segment of the population, the unemployed, but this flexibility allows the US to adapt to changing economic circumstances faster.

And that is where the irony lies for me. The managed economy model of Europe and Japan provide more stability and predictability at the cost of growth. But when big shocks come, and growth is really what's needed, they are predictably slow to recover. The US accepts higher uncertainty for, over higher long-term growth, often lower long-term unemployment compared to many managed economy countries, and faster recovery. But when the economy sours, the US does experience a lot more pain more quickly than those managed countries.

So, getting back to the point, Krugman ought to know that we aren't as susceptible to the problems that plagued Japan because our economy isn't arranged in the same way. Now, if he wanted to make the case that the short-term pain felt by the 10% unemployed is way too high and consequently that the government ought to do something, anything, to get them back to work, then that is a reasonable argument. But I just don't see America becoming Japan.

I'd usually offer some caveat that Krugman knows more about economics than I do, which he certainly does, but he's also been extremely partisan and politically motivated in his columns over the last few years. So much so that I question his ethos. You know, in the Aristotelian rhetoric sense of the word.

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