In contrast to the United States, E

In contrast to the United States, European and Japanese central banks and governments did not
try to return to the high growth rates, with low unemployment and inflation, which characterized their
spectacular quarter century of postwar reconstruction and prosperity 1947–1972. They did not even
try to recover the real economic ground they lost in the 1970s and early 1980s. Instead they concentrated
on eliminating the slightest chance of any resurgence of inflation. European unemployment
has risen to 12 percent in 1997, compared to 4.7 percent in the United States. Inflation in Europe is
no lower than in America.
Japanese unemployment numbers are chronically low, because redundant workers are kept on
payrolls; but the increase in under-utilization of workers is comparable to Europe. Indeed Japan has
managed to have a full-blown depression for the past four years, with periods of negative growth and
negative inflation. As a result of lack of demand, not because of deliberate expansionary monetary
policy, short interest rates have fallen virtually to zero. Thus monetary policy has become impotent,
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even if the central bank should want to use it to rescue the economy. Thus has Keynes’s liquidity trap,
thought even by Keynes himself to be an anomalous and rare curiosity confined to severe depressions,
come to life once more. The Finance Ministry, unwilling to fill the breach in aggregate demand and
distressed by the fiscal cosmetics of a stagnant economy, acts perversely to raise taxes and cut
spending. Japanese savers move the funds no one wants to borrow at home into dollars, causing the
yen to depreciate (losing 40 percent of its dollar value since 1995), generating an ever larger trade
surplus, welcome within Japan as needed demand but unwelcome to the U.S. and other trading
partners. It would be hard to find a case of worse macro-economic policy. As terribly costly as it has
been to Japan itself, it has been much more disastrous to other economies of East Asia, as events in
late 1997 have shown.