Congress & White House Can't Learn From Japanese Crisis

This makes a lot of sense except for the last part where the author believes the fed must continue to support the economy as this will only extend the problem or make it worse. Borrowing and or monitizing the debt with printing more money will cause biggger problem in the future.

That this has worked to stablize the economy, in part, is true, but only when coupled with entitlement reform as well as tax reform which has not occurred.

There doesn't seem to be the 'will' to take the hard steps to fix the problem in congress or in the White House as there are so many good voters getting so much free stuff, and voting to keep the givers of free stuff in power, to actually do something to stop the red ink is ridiculous. That would be like 'bitig the hand that feeds you'. Hey more is better, right?

The Fiscal Crisis: Lessons from Japan
February 5, 2013
Source: John Makin, "Japan's Lessons for America's Budget Warriors," American Enterprise Institute, January 29, 2013.

Since Japan's housing bubble burst in 1990, the country has suffered two decades of rapidly increasing public debt, deflation and stagnant economic growth. The United States can help fix its own economy by learning from Japan's budget woes, says John Makin, a resident scholar at the American Enterprise Institute.

• Japan's property bubble was more than 50 percent larger than America's 2000-2007 bubble when it burst in 1990.
• Japan's debt-to-gross domestic product (GDP) ratio has risen from 15 percent in 1990 to 220 percent today, with about 145 percent of this rise occurring after 1997. Just as in America, Japan's debt has risen more sharply during the global financial crisis.
• Japanese debt has coincided with very low long-term interest rates and weak nominal growth rates, both of which America is currently experiencing.

Makin says that if Congress studies what led Japan to its stagnant economy, the United States can avoid policy blunders that will exacerbate its economic woes.

• To cut deficits and enhance economic growth, America should reform entitlement programs and lower tax rates while closing loopholes.
• Fiscal austerity will hurt growth and the debt-to-GDP ratio will rise as the interest gap expands.
• America should continue to aim for limited inflation through adept monetary policy that pushes up bond yields and encourages growth.

If America adopts policies that encourage growth, tax revenues will not fall as nominal GDP collapses, which is what Japan experienced. As tax revenues fell for Japan, their primary deficit as a share of GDP increased. Japan's central banking agency -- the Bank of Japan -- has been printing money and purchasing bonds since 2007 in an effort to turn deflation into inflation and drive down the value of the yen to make Japanese goods more competitive on the global market. The Bank of Japan's efforts have been successful.

Japan and Europe have followed the same trajectory of fiscal austerity following economic turbulence. To avoid the troubles experienced in those countries, the U.S. economy needs to reform its tax code and rein in entitlement spending. Coupling these two actions with a steady reduction in the deficit would reduce America's debt-to-GDP ratio and boost the United States' long-term economic prospects.

America needs to continue its monetary policy of allowing the central bank to support the economy and must begin to tackle its balance sheet.