I often get asked when the United States will suffer a Greek-style fiscal crisis.

My answer is always “I don’t know,” though I freely admit we are heading in that direction.

My lack of specificity isn’t merely because economists are lousy forecasters. I tell people it’s all about investor sentiment, and it’s hard to know when the people and institutions who buy government bonds will suddenly decide that they no longer trust Washington.

And the same is true for other nations.

For instance, I also get asked about Japan’s shaky finances, and those questions are very understandable when you look at this chart.

The chart comes from a column in the Washington Post by Dominic Pino. He starts by asking why Japan has not suffered a fiscal crisis.

Japan has an aging population, and the government has enormous transfer programs that benefit seniors, increasing strains on the government’s already bloated budget. Sounds familiar. Except, Japan is much further along in that demographic transition than the United States. …Because of that larger senior population, Japan has much higher public debt than the United States, as a share of the economy. The U.S. national debt is around 120 percent of gross domestic product. Japan’s is around 250 percent of GDP, higher than any other developed country. …And yet, Japan’s staggering debt load has not caused a major crisis.

So why hasn’t the you-know-what hit the fan in Japan?

Dominic points to some new scholarly research for the answer.

A new paper in the Journal of Economic Perspectives by Yili Chien, Wenxin Du and Hanno Lustig tries to figure out how Japan has managed its massive debt. They find that the Japanese public sector (broadly defined to include national and local governments, the central bank and pension funds) borrows at low interest rates domestically to invest in long positions in risky assets. It’s a jury-rigged sovereign wealth fund. Japan can afford to do this because the Bank of Japan keeps interest rates extremely low, for many years below zero. It can do so in part because there aren’t really price signals in the Japanese public debt market. The Bank of Japan holds over half of Japan’s government bonds. The majority of the remainder is held by Japanese commercial banks and corporations, which are required by law to hold government bonds. …The Japanese strategy is working, if all you mean by “working” is not having a major debt crisis.

But avoiding (or, more accurately, postponing) a debt crisis has been very costly for Japan.

The column explains that the country is now in a very risky position. Any major changes in interest rates of exchange rates could cause a crisis.

But since most people focus on the present, let’s look at some data about relative living standards.

Giving up decades of economic growth in exchange for enormous public-sector asset ownership to prop up an unsustainable entitlement system, as Japan has done, is not an example for America to follow. …Three decades of evidence backs that up. Japan’s real GDP is roughly the same today as it was in 1992. U.S. real GDP has increased by 130 percent in that time. And despite Japan’s declining population, real GDP per capita has risen very slowly compared with the U.S. The U.S. led Japan by about $8,000 in that metric in 1992. Today, the U.S. is roughly $30,000 ahead. …To avoid falling into Japan-style arrangements, the U.S. is going to need to reform its entitlement programs and continue to grow its economy. Japan isn’t a model for how to deal with a debt problem.

Dominic is right. America desperately needs entitlement reform.

Sadly, that won’t happen with Trump in the White house.

I’ll close with a couple of charts to underscore some of the analysis in the column. Here’s a look at per-capita GDP in the U.S. and Japan according to the Maddison database.

You can see rapid convergence for almost 30 years after World War II, followed by slow convergence for the next two decade. But starting about 25 years ago, there’s been a remarkable divergence.

In other words, Dominic is right about Japan falling behind. Indeed, it qualifies for my Anti-Convergence Club.

Last but not least, here’s another very depressing chart about Japan (which makes sense, considering another depressing chart I shared in 2017).

The IMF data show that the burden of government spending is getting worse over time.

And with the country’s grim demographics, we can expect the numbers to get even worse over the next couple of decades.

The bottom line is that Dominic’s headline is correct. Japan is not a role model for America.

Unless, of course, you want bad Keynesian policy, bad industrial policy, and other foolishness from government.

P.S. As is so often the case, the IMF wants to make a bad situation even worse.

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Image credit: victorpalmer | Pixabay License.