The Business Cycle and the Climate for Enterprise II: Japanese Growth in the Aftermath of Its Financial Crisis of the Early 1990s
I continue to worry about (and worry) the issue of what the experience of the past generation tells us about the relationship between short-run cyclical economic downturns and long-run enterprise, entrepreneurship, and growth...
From the end of World War II until the beginning of the 1990s, it looked as though the Japanese economy was "converging" to the American economy in living standards and productivity levels--that although Japan started the post-World War II period with a labor force inferior in education, with a lower level of installed technology, and with a capital stock deeply depleted by the fact that Curtis LeMay's bombers had made the rubble of Japan bounce, that eventually Japan's economy would "catch up" to that of the United States
Take the data from the Penn World Table 7.1. It looked as of 1990 as though, in an average year, Japan closed 1/14 of its economic gap vis-a-vis the United States. If you drew the line of best statistical fit on a graph of relative growth rates vs. relative GDP-per-capita levels out to the right, it suggested that Japanese and U.S. growth rates would be equal when Japanese GDP per capita would have risen to be 3% higher than that of the United States. That 3% was, statistically, so fuzzy as to be indistinguishable from zero.
Then at the start of the 1990s things changed.
Japanese growth slowed. In the post-1992 data Japan has no growth edge over the United States, and the line of best statistical fit suggests that Japanese and U.S. growth rates would be equal at a Japanese GDP per capita level more than a fifth lower than the United States. And, indeed, Japanese GDP per capita relative to the U.S. fell from 92% of the U.S. level at the start of the 1990s to roughly 75% of the U.S. level today.
What caused this end to Japanese convergence? It does look like it happened suddenly. And the collapse of Japan's real-estate bubble and the consequent financial crisis is the natural place to look.
Thus we appear to have two clear cases in the past generation--Japan at the start of the 1990s and the U.S. at the end of the 2000s--in which bad things happening to the business cycle in the form of a financial crisis appears to cast a long and dark shadow on long-run economic growth and the climate for entrepreneurship and enterprise...