Is America the Next Zimbabwe?

Fifteen months into a fitful economic recovery, we Americans are starting to doubt ourselves. What if our stubbornly high unemployment isn't normal but rather a symptom of deep problems? What if our politicians are incapable of controlling their spending or even governing? What if we're in (gulp) a Permanent National Decline?

That anxieety has led to a boom in an intellectual parlor game you might call "America is the Next [fill in your scary scenario here]." Anyone can play. For example:

America is the next.... Zimbabwe
Who says it: People worried that inflation is the U.S. economy's greatest risk and are prone to hyperbole

:Credible? Gimme a break

That the U.S. should have much in common with this unlucky central African nation sounds absurd on the face of it. But the claim is repeated often among those fearing that excessive government spending and too much dollar creation will create hyperinflation. Mark Sanford, the governor of South Carolina, recently argued to CNN: "You're buying into the notion that if we just print some more money and send it to different states, we'll create jobs. If that's the case, why isn't Zimbabwe a rich place?"

Whether Sanford and other deficit hawks believe that the U.S. is literally on the road to Harare is unclear. What is clear is that invoking a failed, violent dictatorship with peak inflation of 80 billion percent gets people's attention.

Just for the record, inflation in the U.S. is currently running 1.2% per year. Gross domestic product person in Zimbabwe is US$100 per year; in the U.S. it is US$48,000. As economics writer Fabius Maximus puts it: "That intelligent and educated people make this argument-either in seriousness or agitprop-shows the sorry state of debate in this country."

On the other hand, it's not wholly unreasonable to worry that printing money recklessly will cause inflation. But that only happens if there is no slack in the economy. Japan, for example, has been pouring money into its economy since their lost years started in 1990 and its most recent annual inflation rate is a nearly invisible 0.2%. Indeed, the stubbornly high U.S. unemployment rate and the still minuscule rate of inflation suggest that for now, spending is exactly what the Federal Reserve should be doing.

America is the next Britain
Who says it: People generally anxious about American decline

Credible? Depends

For decades, we Americans have been comparing our economy to Britain's in ways that tend to be generally unkind to our former colonial masters, and flattering to ourselves. These days, the comparisons tend to be more worried than boastful. After all, we're the nation that supplanted the Brits on the world economic stage. In the wake of the crisis we're suddenly aware that the same could be in store for us.

There are an almost infinite number of explanations for what knocked Britain out of first place; what you may see as the cause tends to be whatever most worries you about the U.S. at the moment. Some blame a no-longer-competitive education system--an argument that resonates in the wake of American kids' poor showing on standardized math and science exams. No, say deficit hawks, what brought Britain down was excessive government spending. Those disgusted with Wall Street blame the siphoning of Britain's best young talents away from business into the high-paying but unproductive practice of finance. Barry Eichengreen, a University of California, Berkeley, professor sizes up all these arguments and blames Britain's decline on a politically disjointed, economically unsound reaction to the Great Depression.

[block quote starts here] The country failed to develop a coherent policy response to the financial crisis of the 1930's. Its political parties, rather than working together to address pressing economic problems, remained at each other's throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable. [end block quote]

The message to today's gridlocked U.S. Congress is too obvious to miss.

America is the next Japan
Who says it: People who worry that deflation is the U.S. economy's biggest risk

Credible? Unfortunately, yes

Japan's Lost Years began in 1990 with a crash in real estate and the stock market. So did our Great Recession. The Bank of Japan instantly slashed interest rates essentially to zero and the Ministry of Finance poured money into banks and non-financial corporations deemed too big to fail. So did our Federal Reserve and Treasury. Japanese politicians went on a deficit spending spree. So did the U.S. Congress. Japan's tactics didn't bring prosperity. Ours haven't either.

Before 2008, American economists had long smugly argued that a Japanese-style crisis would never happen here. Our banking system was too transparent, our politicians too responsive, our culture too willing to admit mistakes and move on. Now we're no longer so sure.

Most important, we haven't proven significantly more honest than the Japanese about owning up to our banks' problems. The toxic real estate loans that lay at the heart of the crisis are still on the banks' balance sheets. Banks are reluctant to sell them or price them realistically, for fear of exposing their weakness and cutting into profits-and regulators so far are willing to look the other way. "We're being very Japanese about the way we're dealing with toxic loans," economic historian Carmen Reinhart, told CBS MoneyWatch.

Richard Koo, Chief Economist of the Nomura Research Institute, and author of widely quoted studies on the Japans lost years, argues that there's only one cure for recessions like Japan's and America's: government spending. Fiscal policy makers need to step up when the private sector is too frightened to do so. "The problem is," he says, "in a democracy, it is extremely difficult to maintain fiscal stimulus in peacetime. The demand for fiscal consolidation overwhelms the policy debate once the initial fiscal stimulus manages to stabilize the economy." Deficit hawks start to worry that excessive deficit spending will trigger inflation and burden future generations, and they convince voters to withdraw the stimulus too soon. What happens then? Says Koo, "The economy collapses again."

So, what should you make of this?

There's an element of propaganda in all three of these analogies. After all, the point of saying that America is the next whatever is not to make an economic prediction but to shock policy makers into doing what you think they should. But maybe the exercise is good for us. America needs an economic leadership that acknowledges that it its premier economic status is not a birthright and must be earned continuously. The true source of wealth in a country is the ingenuity and work ethic of its people and the statesmanship and unselfishness of its leaders. All of these could use a little help in America right now.

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