The obvious parallel for the current situation of the US is that of Japan a decade ago. As Paul Krugman notes, the factors that once appeared to distinguish the US from Japan (better corporate governance, more scope for fiscal and monetary policy, the absence of a real estate bubble) have disappeared. The prospect of a decade-long period of slow growth now appears plausible.
But, as I’ve observed in the past, Japan’s performance over the 1990s isn’t quite as bad as it looks . The average growth rate has been about 1 per cent, against a sustainable rate of around 2.5 per cent. Over this decade, annual average working hours have fallen by about 200 per year, from 2100 to 1900. The increase in leisure is approximately equivalent to additional growth of 1 percentage point per year. This is why a decade of slow growth has produced only a modest increase in unemployment.
It is now the US, and not Japan that has the longest working hours in the developed world. There is every prospect that, over the next decade,working hours will fall back to more reasonable levels. This will be good for American workers, whose working hours are difficult to rationalise as sensible choices. But it will be bad for advocates of American hyperpower, just as Japan’s lost decade has been bad for advocates of a resurgent Imperial Japan. Neither group has reacted well. As I pointed out here, the bursting of the bubble is already releasing some noxious gases.