Stagnation. It's an ugly word with even uglier connotations and, in recent months, it has found its way into more and more discussions about the future of the US economy (and, by association, the global economy.) With so much talk of the coming recession, the ongoing slowdown, the strangely euphemistic "negative growth" that the US might experience, it is inevitable that people would begin to compare the prospects for the US economy with Japan's experiences over the past decade or so.
Such comparisons are fair -- after enjoying a burst of frenzied economic growth that catapulted it into the number two spot among the world's biggest economies, Japan has been stuck in the mud for more than 10 years, unable to post anything more than nominal economic growth while watching its currency become the whipping boy for the world's foreign exchange dealers. With interest rates having sat near-as-dammit at 0% for years, Japan has been the place where people go to borrow the money that they need to invest pretty much anywhere else where interest rates are higher, while its own economy has seen very little foreign investment.
It really wouldn't take much for the US to find itself mired in the same scenario, if indeed that isn't already happening. But is "mired" really the right image? Is an economy of zero growth, with zero inflation, really such a bad thing?A quick glance at the numbers suggests it's not so bad after all. Japan's GDP per capita is almost $34,000, unemployment remains below 4%, inflation is practically nonexistent. And poverty? Also practically non-existent. In the US, which has been humming along in an economic boom for the past few years, 12% of the population lives below the poverty line (according to the CIA factbook).
At the heart of this paradox is the unremitting focus on economic growth -- the drive to achieve growth at practically any cost and to the exclusion of all other measures of prosperity. To illustrate the folly of this focus on GDP growth as the prime measure of economic success, take a look at one of the world's fastest growing economies: Mozambique. That sub-Saharan African nation of 21 million people is turning in a ripping 8% annual growth in GDP -- something policy-makers in Washington can only dream of. Yet 70% -- yup, that's seven in 10 -- of Mozambicans live on less than one dollar a day. Average GDP per head is just $900, which means that a very select few of those living above the poverty line must be doing very well indeed. That country's relentless and myopic focus on headline growth numbers may be helping it rack up some plump statistics, but it is clearly failing the vast majority of the population.
In the US, the prospect of negative GDP growth is being used to terrorize the population -- and, perhaps, to justify some pretty draconian cost-cutting among some of the country's businesses. But most of the values used in scary stories about impending recession, stagnation and market crashes are relative. When people talk about the dramatic collapse of property prices in Japan, which fell by 70% from their peak, they are comparing the prices to a level that those people also -- sometimes in the same breath -- describe as the result of an extreme and unsustainable speculative bubble. The same goes for GDP growth figures. We're looking at the possibility that GDP in the US might actually shrink this year, but that is compared to 2007. Even if the economy shrinks by 10% this year, real GDP will still be higher than it was in 2002, a year when most people in the States were pretty well off, by any measure.
Perhaps, then, the focus on Japan's experience is a healthy development. We can take heart from the fact that, despite its apparent economic malaise, Japan is not in such bad shape after all.
Finally, if your aim really is to scare people with all this talk of recession, don't call it "negative growth", call it "shrinkage". That's what it is, after all. And maybe it's not such a bad thing, because when you're talking GDP, it's not how big it is that counts, it's what you do with it.