As we come to the end of another election campaign, we continue to hear (and read) partisans of various political sides argue about the state of the economy, whether President Obama has mishandled it or been victimized by it, and what should be done going forward. The problem with much of what is out there passing for argumentation is often merely someone’s politics masquerading as economic discussion. The problem isn’t as much what is being said as much as it is that the same people are making the same case for the same policies year after year and decade after decade. These people, and I include certain Nobel Prize winning economists writing for certain well-known publications in this, are writing about economics as if they are advocating for a religion.

What I mean by “advocating for a religion” is that no matter what the economic circumstance, the prescription is the same. The Republicans always argue for tax cuts and less business regulation as the method for spurring economic growth and Democrats always argue for more government spending. While this may work for a religion with a God who never changes, it doesn’t work so well for economic policy. An economy is more like a human body. As such, policies that are appropriate at one point in time may not be appropriate at another point in time. In fact, the other guy’s policies are virtually guaranteed to be the appropriate policies at some point in time. Those who simply argue for “their” side’s policies and against the other guy’s policies again and again and again are really no better than a doctor listens to a patient and prescribes the same medicine (say, chemotherapy) no matter whether the patient is describing cancer, a heart attack, a stroke, or a broken leg. Sometimes the medicine is appropriate, and sometimes it is not.

Where economic ideology ultimately has brought us to in society is that economic policy debates have taken on characteristics more reminiscent of religious arguments than a relatively dispassionate debate that should characterize such as dry a subject as economic policy. When you have certain political pundits characterizing those who oppose their economic point of view as “mean”, you know that they are saying that opposing their economic viewpoint is not merely mistaken (diagnosing a heart attack instead of a stroke) but morally wrong. Having this view of economic policy is not conducive to rational discussion, and in fact inhibits the process of finding the appropriate policy as some large group is going to be morally opposed to what ultimately will be the correct policy mix at a given point in time. As long as we look at economic policy ideologically instead of ‘medically’, we will continue to have more dissention in society than is necessary.

Last month, the UK relatively narrowly avoided being broken up when Scotland voted 55% to 45% not to secede. Although 55% to 45% might not seem like a “narrow” win in the context of a U.S. presidential vote (and it isn’t), but when 45% of a large area of your country say they don’t want to be a part of you any more, that is not something that can be dismissed. What tipped the scales in favor of not seceding was the fear that an independent Scotland would be economically worse off. While the Scottish National Party argued that Scottish control of the North Sea oil would allow Scotland to be independent and maintain its standard of living, enough of the Scottish voters chose to stick with the “devil” they knew rather than chance independence.

Had the Scots decided to go it alone, they would have had the freedom not only devise their own economic policy but their monetary policy as well. However, England had already said that they would not allow Scotland to use the pound in the event of independence, meaning that Scotland would have had to go through the trouble of launching its own currency with a value relative to international currencies that simply couldn’t be estimated in advance. A change over from one currency to another meant that it was impossible to see when voting for/against independence how competitive Scottish goods would eventually be on international markets. This uncertainty would have been a temporary cost of economic freedom.

Another cost would have been the fact that Scotland, as a new country, would likely have found itself outside of the E.U. While the E.U. would likely welcome Scottish membership, that process of making Scotland a member of the E.U. would take time (years). In the meantime, Scottish goods would be at a disadvantage when being sold in the E.U., meaning that there would likely have been less demand for Scottish goods at any given point in time, with the concurrent drag on Scottish employment. In addition, the fact that an independent Scotland would have been outside of the E.U. initially meant that it was possible that manufactures would have tried and relocate to England (or other E.U. countries), which would not help the Scottish employment picture.

Finally, while one major selling point of independence was to get control over the bulk of the oil resources in the North Sea, revenues from this source are projected to shrink. Although the SNP was arguing that Scotland would be able to use the North Sea Oil revenues to fund a social state preferred by most Scots, it appears that this would not have been a solution long term. Scotland would have had to find a way to grow its economy (and increase its tax base), live with higher taxes and a lower overall standard of living, or see a reduced social state.

Overall, an independent Scotland would have had the freedom to do many things as a sovereign state. However, simply having the freedom to make choices is no guarantee that they would make the right ones. If they made the right choices, unencumbered from London, Scotland could have found itself with a growing economy and a higher standard of living. However, there was also a lot that could go wrong if Scotland went out on its own, leaving it worse off economically. This uncertainty and danger would have been a cost that a free and independent Scotland would have had to live with for some time.

Economic freedom is not free.

Recent news this week that German exports crumbled and that the continent looks like it may be on the verge of a “triple-dip” recession has added to the fears that have caused the stock markets to decline over the last 3 weeks. However, Europe faces some real long term challenges that are going to provide significant headwinds to economic growth over the next 5 to 10 years. These challenges relate to the viability of the Eurozone (and E.U. as a whole) as a viable economic bloc.

The first thing to bear in mind when discussing the European economy in the context of the E.U. or the Eurozone is that we are talking about something that can’t possibly work in the long-term, if what is meant by “work” is a large, integrated, dynamic economy along the lines of the United States. The United States became the “United States” as a culture and economy expanded across a continent that was essentially empty. The European project, on the other hand, has attempted to fuse 28 countries with existing economies, political structures, histories, and cultures into a single whole by force of law. The Greeks didn’t stop being Greeks and the Germans are not going to stop being Germans simply because they are told that they are now in a single economic entity.

The second thing to bear in mind is that the Eurozone has essentially created a single monetary policy for multiple economies that are not integrated. The Germans may want a tighter monetary policy and the Italians may want a looser one. They can’t both get what they want (and may in fact need). The European Central Bank (ECB) essentially needs to balance competing needs/wants which means that it will not be able to produce a monetary policy suitable for all countries that use the Euro. Add to this the fact that the economic structures of many countries are so different from each other and it is likely the ECB will produce a monetary policy that is positively harmful to some countries. When one considers the different cultures and different political realities faced within each country, it is no wonder that many hard-right (and a few hard-left) anti-EU political parties have risen over the last 10 years; parties that would have been nothing but small inconsequential splinter parties 10 or 15 years ago.

The third thing to bear in mind is that the Eurozone has many economies that are over-leveraged and in massive need of economic reform. However, went not facing a flaming Greek-style crisis, the impetus for economic reform seems to be lacking. Many of the economies have been largely stagnant for many years, and entrenched interests (such as those in Italy) are making economic reform all but impossible except by force in the wake of Greek-style meltdowns. The fact that the countries don’t seem to be able to embrace much needed reforms makes it only a matter of time before we have another Greek-style meltdown with all of economic problems that will come with it.

Simply put, the internal contradictions within the E.U. (different economies, different cultures, etc.) mean that there will always be devolutionary tendencies and resentments. Trying to force integration means that there will continue to be an unnecessary source of tension and instability as countries are put through wrenching changes to their economic structures without the benefit of controlling their own monetary policy that would allow them to choose the appropriate monetary policy for themselves at any given point in time. This will result in less legitimacy for the E.U. and Euro both in countries being forced to adopt policies that they don’t want, and in countries being forced to bail out certain other countries. As long as countries are locked into a system that forces inappropriate monetary policies on them, they will be susceptible to melt-down style crisis. As long as this continues to be the case, the E.U. will continue to be economically unstable with the reduction in investment (and lower economic growth) that will result.

With great fanfare, the Labor Department released the last jobs report before the election: 248,000 new jobs in September (with some upward revisions in previous months), and an unemployment rate that has dropped below the magical 6.0% barrier to 5.9%. Under normal conditions, this would be a cause for celebration. New jobs and lower unemployment are signs of an improving economy. However, buried in the report is the fact that 315,000 people dropped out of the labor force at the same time, which is what caused the decline in the unemployment rate.

During the post-war period, the unemployment rate was broadly correlated with the health of the economy. As the economy improved, hiring picked up, and the unemployment rate declined. Or conversely, the economy worsened, people were laid off, and the unemployment rate increased. The government has never counted people who were not looking for a job as part of the labor force, and this hasn’t been a problem. In the post-war period, we had an expansion of the labor force as women started entering it in large numbers. However, we haven’t had an issue with people of working age quitting the workforce because they couldn’t find a job. Until now.

Today, the unemployment rate is less of an accurate measure of the health of the American economy, The decline unemployment rate over the last five years has been driven in large part by people leaving the workforce. This is not to imply that there has been no real job growth. There most certainly has been. However, this recovery hasn’t been robust, and people have become discouraged looking for work. In addition, many people have had to take part-time work and are struggling, and many who have full time work don’t feel secure. It is quite a testament to the weakness of the recovery that roughly half of America still thinks that we are in a recession. It is not necessarily that, as some have implied, that the unemployment statistic is being fraudulently manipulated to make the economy seem better than it is. It is simply that the unemployment statistic as it has always been calculated simply doesn’t reflect the reality that is a large fraction of the American populace any more. After all, we could get to full employment (that economists have defined to be around 4%-5% unemployment) simply by convincing enough people to stop looking for work.

Under normal conditions (i.e. conditions that existed up through 2007-2008), an unemployment rate of 5.9% would imply that there was a robust recovery under way. However, this is clearly not the case. Those who are predicting that this rate, broadly speaking, is good for the President simply don’t understand the new reality through which this rate should be interpreted. The American population doesn’t trust the Republicans more on the economy because they have touted a plausible economic vision. They haven’t. But after 6 years of Obama, it is clear that he has no real idea how to get the economy working for most Americans again. Until the unemployment rate starts dropping while the labor force is expanding at the same time, people won’t feel that economy is on the mend and won’t give the party in power (whichever one it is) the credit.

As the 2014 election draws closer and as we look forward to 2016, the Democrats are facing an uphill climb. While the punditry concedes this for the 2014 election, many of them treat this as a function of Obama’s low approval numbers and the fact that the election is largely being fought in red states; on territory normally unfriendly for Democrats. However, many pundits view 2016 as a likely, if not guaranteed, Democrat win. This is especially considered to be true if Hillary runs.

However, this conclusion I think ignores some fundamental weaknesses with the Democrats. While people rightly point to the Republican brand problem and conclude that the Democrats will win in 2016, this is not the same thing as saying that the Democrats are strong. The Democrats have some real weaknesses that can and will eventually weigh them down.

The first problem is that (in many ways like the Republicans), they don’t really seem to have real answers to the problems facing the country. While certain individuals such as Paul Ryan has put forward serious plans to deal with the fiscal situation facing the country, the Democrats don’t really offer a serious alternative (unless President Obama’s comment that Ryan’s plan was a “meanwhich” can be considered a serious alternative). While Republicans over the last decade or so can rightly be criticized that their economic programs have consisted of tax cuts and not much else, the Democrats answer to everything has been more government spending. Bringing the American fiscal house in order will require reform and the real reduction of spending at some level. The Democrats proposals for more government spending run counter to this reality.

The second problem is that the Democrats have in many ways evolved into a political party that represents government and those that collect their paychecks directly (government workers, welfare recipients, etc) or indirectly (my privately held employer exists to fill government contracts) from government, and not one that really concerns itself economic growth. This focus on generating more regulations and micromanaging the economy wouldn’t be a problem if the result was more growth and more jobs, but it doesn’t. For an existing economy with no government (think Somalia), putting in some government with stable rules, the power to impartially enforce contracts, and the funding of infrastructure can lead to increased economic growth. However, the United States is far past that point, and the continually increasing of regulations and the power to micro-manage the private sector is inhibiting entrepreneurialism and “animal spirits” that create a dynamic and growing economy. The result is lower job growth and a lower standard of living more broadly. The fact that roughly half of the country still thinks that the country is in a recession (it has been officially over for 5 years) means that the economy is not generating enough jobs to create a broad sense that living standards are rising, regardless of what the employment rate says.

The 3^rd problem that is likely to have a negative long term effect on Democrats is that the experience that Americans have with government is becoming increasingly divorced from the experience that they have in other aspects of their lives. While the customer service experience with government has always generally been worse than the one experienced in the private sector, this experience gap is becoming increasingly wide. In many ways, the auto industry in America in the 1960’s and 1970’s was similar to American government at the same time: bloated, inefficient, poor quality product, and a poor customer service experience. However, today things are much improved in the auto sector with higher quality products and a broadly better customer service experience. On the other hand, the DMV experience of the 1970’s is still similar to the DMV experience today. Simply put, you cannot have a world in which the citizen has the power to view any movie they want, any time they want (for a cheap price), a choice of almost any food you want, a choice of dozens of high quality cars, the ability to handle all your financial transactions from your couch, and at the same time have a Soviet-style experience when it comes to government services.  It simply isn’t politically sustainable.

Going forward, the Democrats are likely to find that their perceived strength is more the result of Republican weakness. The more people have to deal with government, the more ridiculous will seem the notion that government is a solution. Continuing to pile on regulations, opposing fracking and energy exploration (which would create good, middle class jobs) in areas that will are barely inhabited, and generally showing little concern with private sector job growth, is not likely to improve the perception that the Democrats lack solutions to the problems facing the U.S. Unless the Democrats start to concern themselves with broad economic growth, and not just growing government, the day will come when it is the Democrats, rather than Republicans, who have a brand problem.

With Labor Day in the rearview mirror and campaign season ramping up, media stories are full of the story line as to whether the GOP will recapture control of the Senate. Although currently most prognosticators are assigning roughly a 60% probability of this happening, what should be good news for the GOP is really an indication of weakness. The GOP needs to pick up 6 seats to flip control of the chamber to their side. The current administration is confused (we don’t have a strategy to deal with ISIS), scandal ridden (we didn’t use the IRS to persecute political opponents, but everybody’s hard drives with potentially incriminating evidence seem to be crashing), and economically sluggish (roughly half of the U.S. believes the we are still in a recession even though it has been over for 5 years). Add to this that the electoral map favors the GOP this cycle (the Democrats are defending many more seats), are more motivated to turn out to vote (parts of the Democrat coalition tend to skip midterm elections), and the GOP nominated respectable candidate across the board (no Todd Akin, Sharron Angle, or Christine O’Donnell in this bunch), and there are 7 Democrat seats in states that Mitt Romney won, and the chances of a GOP takeover the Senate should be closer to 90%. If the GOP can’t win under these conditions, it is not clear under what conditions they would be able to win.

So what is wrong? Why is the GOP lagging? Pundits talk about how the GOP brand has been damaged, and perhaps this is part of it. The other part of it is likely that the GOP is not offering a vision of where the country should head? In 1994, the Republicans had the Contract With America. Whatever else it may have been, it laid out exactly what the Republicans would do if they were given control of the House and Senate. So what is the Republican vision now? Have they offered an alternative vision? We know that they are “Not Obama”, and in an election under these conditions, that could be enough. Occasionally, certain individuals will talk in generalities about this or that. Or they will say what they are against. Or they will argue in generalities that we need to cut taxes and reduce regulations, but these are not a vision. If the GOP squeaks across the finish line with a 1 or 2 seat majority in the Senate, what do they intend to accomplish. Sure, Obama will likely veto anything that they pass over the next two years. But what do they intend to pass that will serve as an argument for why Americans should elect more Republicans to Senate and a Republican President in 2016? They don’t say.

If the Republicans want to be the majority party in America again, they can’t just say what they are against. Yes, the Republican electorate is angry and frustrated, and they have a right to be. They are put upon by the state (the IRS), they are mistreated and caricatured in popular culture (when was the last time a Republican was the good guy in a movie), and their money is taxed and given to people who vote against them, and when they do pass laws, they are often invalidated by courts (sometimes on dubious legal grounds). But being angry and being against things isn’t a governing philosophy. Simply “reducing the size and scope of government” is a meaningless platitude. It tells me nothing about where the Republicans want to take the country, except that they want less of whatever it is that we are doing now.

The Republicans need to lay out a vision of where they want to take the country, and have to put forth a credible plan for getting there. Rather than being “against illegal immigration”, they can be FOR an immigration system that brings in the high tech foreign workers we need, and keeps out low wage migrants that compete with American low wage workers. Rather than being “against high taxes”, they can be FOR a much simplified tax code that gives us the revenue we need without the exhausting forms and credits that require paid experts to comply with even the most basic tax situations. Rather than being “against excessive regulation”, they should put forth a plan that will give us a regulatory structure for the 21^st century, instead of simply building on the outdated regulatory infrastructure of the 20^th century. This can be done within the broad context of renewing and rebuilding America for the 21^st century, which is a positive agenda.

The problem for the GOP is that it isn’t articulating a coherent, positive vision. If they can articulate one with a single voice that is positive, plausible, and coherent, they will give people a reason to vote for them. And they will likely find that people will.

Fall is in the air, and with it the return of America’s youth to college campuses. Eager young minds will be returning to the classrooms in the hopes (and in the hopes of their parents who are shelling out tens of thousands of dollars) that they will be able to land a “mega-job” that will make them wealthy (or at least not make them poor). While studies have shown that college degreed people make more over their lives than those who only graduate from high school, there is no doubt that the cost of college has exploded over the last four decades, while the financial benefit to a college education has not kept pace. Evidence of this is that over the last 25 years, roughly 1/3 of college graduates have eventually ended up in jobs that don’t require a college degree (http://www.ny.frb.org/research/current_issues/ci20-1.pdf). Although college graduates have historically had lower unemployment rates than the rest of the population, even during downturns, junior isn’t taking on astronomical amounts of debt in order to ensure that he won’t spend a few months of his life collecting unemployment, he is doing it so that he can obtain a well-paying job. Given that some college degrees cost as much as a house in some parts of the country, telling kids that their degree (even one in the abstract theory of dead languages) will make them more marketable and that they should saddle themselves with the equivalent of a small house payment upon graduation, is borderline fraud.

But what has caused this bubble? Well, for one it is artificially increased demand that resulted from a conscious policy decision several decades ago that it would be a good thing if everyone should go to college. Consequently, low-cost student loans, grants, etc were instituted to make it possible for anyone who wanted to do so to afford college. At the time the policy was decided upon back in the 1960’s, roughly 10% of the U.S. population had a bachelor’s degree or more. Today, more than 30% do, which is a success if you think that everyone having a college degree is a good thing. However, this has had a couple of effects. First, more than tripling the share of the U.S. population that holds a bachelor’s degree, all things being equal, is going to depress wages for college degree type jobs. When my mom and dad graduated from college in the late 60’s, having a college degree of any sort virtually guaranteed you a middle class job (at a time when typically middle class households had only one breadwinner). Today, that is clearly not the case. Secondly, college degrees have been dumbed down as colleges have adapted their standards to enable them to capture more of the federal money as well as pursue various perceived social justice goals by working overtime to pass people onto a degree whose special God-given skills simply aren’t the same ones that are conducive to academic success. Evidence of this can be found in that more and more employers are finding that their newly minted college graduate can barely read, can’t write, and can’t properly use the English language.

The second reason for the bubble is that the “cost” of the college degree has increased, according to some estimates, by a factor of 12 over the last 30+ years. While general inflation and increased demand would account for some of the increase, the astronomical increase is largely due to legacy costs; that is college administrators are “empire building” by adding additional (extremely lavish) administrative positions that don’t directly impact teaching and learning (Coordinator of Diversity and Social Justice anyone?), building new shiny buildings to show that they are doing something, adding a new football field, etc. etc. All of these increase the prices that colleges must charge, and yet they have little to no impact on the quality of the education.

Bubbles, by their very nature, consist of assets that increase price far beyond their actual value. Bubbles can go on for a long time until investors come realize that the true value of the asset is far below the current market price for it. When this happens, bubbles pop and deflate. The college bubble has gone on as long as it has because the American public has largely bought into the notion that a college degree will get you a good job. However, employers long ago caught on that simply having a “sheep skin” from a college does not mean that they are getting an employee that is necessarily more qualified for a specific job. The American public is starting to realize that college, while still a good investment for many, is not a good investment for everyone. The improved earning potential from a degree is not always commensurate with large cost at some institutions. As this perception continues to take hold, the college bubble will pop.

One source of puzzlement today among the policy elite is why, despite unprecedented intervention in the economy /markets by the Fed, along with unprecedented amounts of government stimulus, this economic recovery is the worst that anyone can remember. It is so bad in fact that more than half of the country still thinks that we are still in a recession, even 5 years after the recession officially ended.

So what has happened? How could so many smart people be so wrong? How could policies and actions that created earlier recoveries and expansions fail to do the same here? Those on the left will likely claim that the problem is that the stimulus should have been bigger. Many of those same pundits and policymakers will also claim that without the policies that they advocate, the Great Recession could have been the Great Depression II and that we should be satisfied with sluggish growth because things could have been so much worse. On the other hand, those on the right will argue that the policies were all wrong and that with tax cuts and less regulation, the economy would be humming along the way that it used to do back in the good old days.

In this argument, we are looking at Keynesian policies that may/may not have worked (at least they did not produce the result that was predicted at the time that they were implemented) vs. Reaganesque supply-side measures such as tax cuts that were not tried. At the time that everything appeared to be melting down, the left (aka Democrats) felt that they were looking at the second coming of the Great Depression and so they took actions largely in line with what they felt Roosevelt would have done (or in the case of Fed Chairman Ben Bernanke, what the Fed of the 1930s should have done). In other words, the left instituted roughly the same policies that they always advocate for; policy prescriptions that have been largely institutionalized in the Democrat psyche because a great Democrat President implemented them and they worked. The right (aka Republicans) on the other hand, continues to argue and advocate for roughly the same policies that they always advocate for (tax cuts); policy prescriptions that have been largely institutionalized in the Republican psyche because a great Republican President implemented THEM and they worked.

The problem with advocating policies on this basis is that Roosevelt’s policies were largely the appropriate policies for the economy of the 1930’s and Reagan’s policies were largely the appropriate policies for the economy of the 1980’s. To use Reagan as an example, his tax cuts cut the top tax rate from over 70% down to under 30%. This is a massive cut of tax rates and would naturally have a large impact on the economic incentive structure, even leaving aside the differences in economic structure that exist between our time and his. Implementing a reduction in tax rates from 39% (Clinton era rates) to 34-35% is tinkering around the edges and likely won’t have much of a change on the underlying incentive structure in the economy. To use Roosevelt as another example, his stimulus measures were going into an economy that was largely industrialized, in contrast to our own economy which is largely service-based. In addition, Roosevelt wasn’t facing the large bureaucracy that was sucking up large amounts of stimulus money to fund itself nor was he facing as large a phalanx of special interests (government was much smaller then)  that invariably uses its political influence to bring money to itself and put it into economically unproductive activities. Consequently, his stimulus measures were likely more economically effective whereas Obama’s stimulus appears to have been little more that payoffs to various Democrat special interests.

In summary, the economic measures advocated today are likely to have limited impact because the economy (government and the private sector) is largely structured differently than they were when the policies being advocated seemed to function. We need a different policy paradigm than the ones that are being advocated today, even if some of the policies being advocated (i.e. massive reduction in government regulations) would have a place in that paradigm. Reagan’s tax cuts worked because they were large and they were the right policy at the right time. Yours won’t because they won’t be.

Winston Churchill is once reputed to have asserted that the Balkans region was an area that produced more history than it consumed. Since 1945, a chronically history-producing continent has seemingly taken a holiday from it. While there were some minor disruptions during Cold War years, the threat of mutually assured destruction from the nuclear arsenals of the U.S. and the Soviet Union created a sort of stalemate where major wars (aka ‘history’; nobody goes to watch movies or read stories about the intense negotiations regarding the wording of paragraph C of the 6^th article of the European Constitution, ‘yawn, zzzzzzzzzzzz’) were not possible. In the West, European institutions were formed to help lessen the rivalry that had led to wars in the past, and these institutions were expanded into Eastern Europe after the fall of communism. Sure, there was the little war in the Balkans in the early 1990’s, and the NATO air campaign against Serbia at the end of that decade. But apart from that, 3 generations of Europeans have grown up without a major war breaking out on their borders that had the potential to be disruptive to the current order. With the United States underwriting the security of Western Europe during the Cold War, and the lack of an established threat in the years following the Cold War, European nations have largely (with the exception of Britain and France) ignored the need for robust military expenditures.

However, with the recent actions of Russia in the Ukraine, history in Europe is beginning to stir from its slumber. While nobody expects a series of miscalculations that will lead to WWIII, it appears at the time of this writing that Russian military vehicles did cross into the Ukraine and several were destroyed, which essentially means that a large European power has again, in the space of a few months, invaded another European state. While Russia seems to be backing off this at the present time, its’ meddling in the Ukraine along with the invasion and annexation of the Crimea, means that Eastern Europe at least has become a more unstable (aka history-producing) place.

What this means for European economies in short run is negative in that the sanctions that they are placing on Russia (and Russia’s retaliatory sanctions) will hurt various sectors of the European economy. Over the long term, it likely means that European nations will need to spend more on defense and build real militaries that are capable of projecting force, instead of what many of them actually have (not to mention any names) which is sort of a perfunctory professional fighting force that may or may not be adequately equipped. These additional necessary expenditures to increase the size of and better equip the various militaries are likely to have a certain drag on the economy that will reduce by some unknowable fraction the potential for economic growth in Europe going forward.

How history plays out is never certain, though. Putin could be forced to back down. The sanctions could result in economic decline in Russia that would cause Putin to be ousted. Or perhaps feeling cornered, he could lash out towards the West. Or perhaps he could recognize that he needs the West for energy exports more than they need him. Or he could increase Russia’s economic linkages with China to replace those with the West. There are many possibilities. That he has acted as he has means that Europeans will never fully trust him, and will likely attempt to develop other sources for the energy (and other products) that they have been getting from Russia.  The other result of the situation in the Ukraine is that history has been brought back onto Europe’s radar, which means a different geo-political and defense outlook for Europe going forward

Although certain mixed indications appear to show that the U.S. economy might be on the mend (while ironically the stock market has been declining over the last couple of weeks), commentators in some corners of the internet are starting the J-word (Japan). Although it may seem hard for anyone under the age of 30 to imagine, but there was a time in the 1980’s when many Americans thought that the U.S. was going to be displaced by Japan, much the way people look at China today. However, over the last 20 years, Japan has become Exhibit A for an economy suffering generational economic stagnation, and certain commentators are worried that the U.S. is looking at a generational period of economic stagnation.

In many ways, the story of Japan seems eerily similar to that of the U.S. In both cases, we see massively inflated property bubbles that burst (and in Japan’s case a massive stock market bubble too), followed by years of low interest rates, bad banks, and a sluggish economy. In Japan, as in the U.S., there is an aging population which also serves as a drag on economic growth.

However, there are many differences as well, which support those who doubt that the U.S. is in fact the next Japan. Firstly, the Japanese property bubble was much larger than the American one, in that valuations reached even more absurd heights than they did here. It was reported at the time that all of the real estate in Tokyo was worth more than the entire United States, and that the Imperial Palace grounds were worth more than the entire state of California. Say what you will about the American property bubble, but valuations never became this ridiculous.

Secondly, Japan also had a massive stock market bubble that dwarfed anything that the U.S. has seen. The Nikkei Index peaked at 38,957 on December 25, 1989, and is currently trading around 14,800, or a loss of 54%. This is unlike anything that the U.S. has ever seen. The worst comparable period would have to be the 1929 crash, in which it took another 24 years for the U.S. stock market to get back to the 1929 level. In the case of Japan, we are almost 25 years on and the Nikkei would have to increase by 163% to return to the 1989 level. It is possible that this may never happen.

Another factor buttressing the “U.S. is not Japan” thesis is population growth. One reason for Japan’s sluggish/stagnating economy is simply that the population has stagnated. Since 1990, Japan has grown by only roughly 4 million people (3%), whereas the U.S. has grown by 63 million (25%) over the same period. All things equal, a population that is growing (unless perhaps if that growth consists largely of retirees immigrating into the country) will result in an economy that is growing; and one that will certainly grow faster than a country with a stagnating population. In addition, the U.S., even with the some of the recent anti-immigrant rhetoric, is still one of the most welcoming countries on earth which can serve to increase the population, while Japan largely is not. Consequently, there is not likely to be a wave of immigrants into the country bringing skills and ‘human-capital’ that will serve to grow and youthenize (to make younger) the population, which would allow for less stagnation or more growth.

Finally, a growing population such as the U.S. will create a growing source of domestic demand, whereas a stagnating population will not. Consequently, a country like Japan is much more reliant on exports to grow its economy than one like the U.S. This, and the fact that so much trade (i.e. oil prices) are denominated in U.S. dollars, means that the Japanese economy is much susceptible to foreign exchange rate fluctuations to dictate the competitiveness of its exports. The U.S., on the other hand with its currency still operating as the world’s reserve currency, has more options at its disposal to enhance its foreign competitiveness.

Overall, although there seem to be many superficial similarities between the U.S. and Japan, their demographics, economies, and global economic positions are very different. While both the U.S. and Japan face some similar problems, the U.S. is still projected to have roughly 400 million people by 2050 (an increase of 60% over 1990), while Japan is projected to have 87 million by 2060 (a decrease of 30% since 1990). That, the fact that the U.S. can produce its own fossil fuel energy (Japan, currently largely cannot), the fact that the U.S. will have a younger population than Japan, as well as the U.S. position in the global economy makes it unlikely that the U.S. will be Japan anytime soon.