The U.S. has much more to lose: the loss of its long-standing global preeminence. Whatever the details, 17 years of net American economic stagnation would effectively end the post-Second World War era, with potentially frightening consequences around the globe. There is a heavy obligation to avoid such a development, perhaps equal in weight to the obligation to lift the American economy in the near term.

Avoiding American Lost Decades

In many respects, the U.S. economy has mirrored Japan’s. While Japan built its economy around an unsustainable export-based model, America has run large, unsustainable, and (until very recently) ever-growing trade deficits. Since the beginning of the decade, the U.S. has accumulated a trade deficit of more than $4.5 trillion.

 

 

An important difference between Japan and the U.S. is that the Japanese export-led model is explicitly a matter of government policy. Japan set out to construct such an economy decades ago and, as a matter of government policy, has been unable to move toward a more balanced model. In contrast, there is no American policy favoring large trade deficits. On the contrary, a more balanced trade position is preferred.

Although persistent and unsustainable American trade deficits are not the desired policy outcome, they do follow naturally as a consequence of a wide range of federal policies. In the area of tax policy, for example, the U.S. maintains the second highest corporate tax rate among industrialized countries, limiting the international competitiveness of American businesses.

In addition, the federal income tax often punishes many forms of saving by taxing the returns to saving at high marginal rates. Discouraging domestic saving means importing significant amounts of net saving from abroad, the flip side of importing significant amounts of net good and services from abroad.

 

 

Among the many other federal policies contributing to the trade deficit:

• The federal tax treatment of health insurance distorts the insurance market, encouraging excessive coverage and driving up health care costs.

• U.S. energy policy is replete with contradictions, the net effect of which is to diminish domestic energy production and increase energy imports.

• Federal spending is absorbing a large and increasing share of resources, some spent in an innovative fashion, some spent on the social safety net, but much spent foolishly and wastefully. An excellent example is how the federal government subsidizes the health insurance of high-income seniors through the unquestionably unsustainable Medicare program.

• A wide range of regulatory policies distorts the allocation of resources across a spectrum of activities. The federal government maintains thousands of regulations relating to worker safety, consumer protection, environmental protection, market competition, and more, some of which may have been justified at one point but today are antiquated, ineffective, overreaching, and burdensome on America’s companies.

Whether Japanese trade surpluses or American trade deficits, large, persistent international trade imbalances are truly unsustainable.

 

 

The U.S. at Risk

Japan’s lost decades stem partly from an inability to reconfigure their economy away from export reliance. The U.S. risks its own prolonged period of weakness if it fails to correct the policies that have contributed to excessive trade deficits and reliance on foreign saving. And in the case of American stagnation, the consequences would be far worse.

However, until now, the most powerful nation still stays strong!

 

Reference:

A major proponent of structural reform is Richard Katz, for example, in Japanese Phoenix, ME Sharpe, 2003.

Michael Pettis, “Asia Faces a Tough 2009 as Output Decreases,” Financial Times, December 14, 2008, at http://www.ft.com/cms/s/0/9f5cfb76-ca0b-11dd-93e5-000077b07658.html (February 22, 2009).

Ambassador Terry Miller and Anthony B. Kim, “High Corporate Taxes Undermine U.S. Global Competitiveness,” Heritage Foundation WebMemo No. 2065, September 15, 2008, athttp://www.heritage.org/Research/tradeandeconomicfreedom/wm2065.cfm.

Stuart M. Butler, “Making Savings the Default Option,” Heritage Foundation Commentary, September 4, 2008, at http://www.heritage.org/Press/Commentary/ed090408d.cfm.

Nina Owcharneko, “Health Care Tax Credits: Designing an Alternative to Employer-based Coverage,” Heritage Foundation Backgrounder No. 1895, November 8, 2005, at http://www.heritage.org/Research/HealthCare/bg1895.cfm.

Ben Lieberman, “No Energy in the House Energy Bill,” Heritage Foundation WebMemo No. 1542, July 9, 2007, at http://www.heritage.org/Research/EnergyandEnvironment/wm1542.cfm;

Jack Spencer, “Nuclear Power Needed to Minimize Lieberman-Warner’s Economic Impact,” Heritage Foundation WebMemo No. 1944, June 2, 2008, at http://www.heritage

.org/Research/EnergyandEnvironment/wm1944.cfm.

Brian M. Riedl, “Federal Spending by the Numbers: 2008,” Heritage Foundation WebMemo No. 1829, February 27, 2007, at http://www.heritage.org/Research/Taxes/wm1829.cfm.