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Some are asking whether we might be facing the problems of Japan, which has suffered more than a decade of dismal economic performance, or Greece, where fiscal irresponsibility has gone wild. Of course, there are far more possibilities than just these two models. Rather, it may be more useful to suggest that Japan and Greece have far more in common than we do with them. The U.S. has its own economic issues and needs, but they are vastly different than those affecting Japan and Greece.

Japan went through its own real estate bubble and banking problem in the 1980s and has been unable to get a solid economic recovery underway ever since, so living standards have stagnated for about 15 years. Many of its problems were self-inflicted. Japanese government officials actively collaborated with banks to hide their loan losses, so the banks took a long time to rebuild capital and resume lending. I can still remember when I visited the Ministry of Finance in Tokyo and a senior official lied to me, knowing perfectly well that I knew he was lying, when he claimed that Japan’s banks had already addressed their real estate loan problems. It has taken the industry many years for retained cash flow, augmented by restrained layoffs following mergers, to replenish bank capital.

Government stimulus programs blew huge holes in the budget that is still running enormous deficits, but the spending programs were politically directed and not designed to promote growth. Japan built bridges to nowhere and they failed to stimulate spending elsewhere in the economy. If not for its exports, Japan would have suffered even worse.

Greece’s budget was also managed irresponsibly in the somewhat European fashion of employing a vast bureaucracy at high wages and generous benefits without the tax revenue to cover the cost. Greece did this in spades and it is facing a day of reckoning now, because, unlike Japan, it can no longer borrow the difference in the public markets. As the government reins in the deficit, Greece’s economy will weaken. But as Germany’s economy is stimulated by a cheaper euro, some benefits will spillover to Greece.

In the U.S., we forced our banks to recapitalize quickly, or closed them down if they couldn’t. Also, all macro policy is growth oriented, as a large fiscal deficit promotes spending, while very low interest rates enables business and households to refinance at much lower cost. Already, domestic companies are sitting on about $1 trillion in cash and profits are still rising. We must also rein in our budget, but the government can continue to finance the deficit cheaply while it waits for recovery. Only then would it be appropriate to rein in spending. Policymakers made serious mistakes here, but were not as woeful as Japan or Greece.

These distinctions are significant, but investors still worry that our economy might still suffer badly, partly due to our failings, but also the mistakes of others, hence the selloff in stock prices. Many people worry that we might also suffer from an extended period of economic weakness. That’s not overly likely, because unlike Japan or Greece, the U.S. economy is far more market oriented, and entrepreneurs can and do respond to market opportunities quickly. Neither Greece nor Japan, nor all of Europe for that matter, enjoys the flexibility or dynamism of our economy. So we complain that job growth is not yet sufficient to significantly reduce unemployment quite yet.

However, we enjoy slowly accelerating job growth, unlike Europe or Japan where any hiring is very difficult. And as our job growth picks up steam, so will the entire economy. As this becomes manifest, the stock market should resume its ascent.

Disclosure: No positions

Source: Are We Greece or Are We Japan?