The unwinding of excessive corporate indebtedness in Japan and a "kereitsu" culture of companies buying one another's equity shares put extraordinary pressures on business spending. In the US, an excess of household indebtedness could put equally serious and lasting restrictions on consumer spending.
Like their counterparts in Japan in the 1990s, US authorities may be deluding themselves into believing they can forestall the end game of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption.
Yet that is precisely what got the US into this mess in the first place – pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt.
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.
That will not be easy to achieve. Such a shift in the mix of the economy will require export-friendly measures like a weaker dollar and increased consumption by the rest of the world, which would strengthen demand for American-made goods.
Fiscal initiatives should be directed at laying the groundwork for future growth, especially by upgrading the nation's antiquated highways, bridges and ports.
That is not to say Washington should not help the innocent victims of the bubble's aftermath – especially lower and middle income families. But the emphasis should be on providing income support for those who have been blindsided by this credit crisis rather than on rekindling excess spending by overextended consumers.
By focusing on exports and on infrastructure spending, we might be able to limit the recession. Such an approach might also set the stage for a more balanced and sustainable economic upturn in the next cycle. A stimulus package aimed at exports and infrastructure investment would be an important step in that direction.
