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Do we need a second fiscal stimulus? Lessons from Japan

Guest blog from Economics Editor Peter Coy

Two excerpts from an article I wrote for BusinessWeek that ran online on Jan. 7, 2009, called “What the U.S. Can Learn From Japan’s Lost Decade.”

Fiscal conservatives in the U.S. worry about huge deficits, but one lesson from Japan is that halfway recovery measures lead to years of subpar growth that make deficits even bigger. …

As big as it seems, Obama’s stimulus is likely to be just a down payment.

Sure enough, the first stimulus is looking insufficient. And sure enough, fiscal conservatives are complaining that the government has already done too much. Obama Administration adviser Laura Tyson is taking heat for an overnight speech in Singapore in which she went beyond other administration officials in saying that a second fiscal stimulus should at least be prepared as a contingency.

One lesson from Japan is the importance of intervening quickly and massively. If you let an economy sink too far, fiscal and monetary policy become less effective. Likewise, it’s easier to save a patient who has lost a pint of blood than one who has lost a gallon.

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