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Economist In Japan Eyes Effects Of U.S. Debt Debate

STEVE INSKEEP, host:

World markets have also declined in the midst of the argument over the debt ceiling, including markets in Japan, where we're going next.

We reached Richard Koo in Tokyo. He's chief economist with the Nomura Research Institute.

How are investors where you are, feeling about the resolution to the debt crisis in the United States?

Mr. RICHARD KOO (Chief economist, Nomura Research Institute): It was a good news that default was averted, but it was a very limited news because our experience with this type of recession suggests that this is no time to cut budget deficits. And this deal that president had with the Congress is that they are going to cut the budget deficit in order to avert default. But if the government tries to cut budget deficit now when the private sector is still very weak, the whole U.S. economy could head toward what may be called double-dip, and I think that's what people are worried about now.

INSKEEP: Well, that's interesting. So we're hearing two different criticisms of this deficit deal. One, that it did not go far enough to reduce future U.S. debts, because some experts are saying the U.S. has unsustainable debts in the future. And then this argument that youre making, that actually it cuts too much too quickly.

Mr. KOO: I would agree with the other camp if the private sector is healthy. But U.S. private sector, just like the Japanese private sector the last 20 years, is not in good health. And you can see that by the fact that U.S. had zero interest rates for more than two and a half years. And where is the unemployment rate? 9.2 percent and the economy is still going nowhere. And if the economy is not responding to this extreme monetary ease, you know the private sector is sick.

INSKEEP: A couple of years ago, in the earlier phases of what weve call the Great Recession, we called you up and asked for a comparison with Japan's Lost Decade, which as you point out...

Mr. KOO: Yes.

INSKEEP: ...some people could describe as a lost 20 years at this point. Are comparisons valid as weve gone forward a couple more years?

Mr. KOO: In this type of recession, if the government does not come into borrow and spend these savings that are generated by the private sector, the economy will remain weak and could go weaker still. And luckily, when the crisis hit, President Obama put in the $787 billion package - fiscal stimulus package - and that kept the economy from losing its bottom, and that was great. But that package has already expired. That was for three-year package, and the weakness we are seeing now, I think, comes from the fact that the package is no longer in place.

INSKEEP: I understand what youre arguing, that the U.S. government needs to continue borrowing and spending to keep the economy moving for a while longer while the private sector recovers. But isn't there a risk of actually a downgrade of U.S. credit if they dont get the fiscal numbers to add up a little better?

Mr. KOO: Well, the problem is, most of the rating agencies do not understand this type of recession, where private sector is minimizing debt instead of maximizing profits. All of their models are based on the assumption that private sector is maximizing profits, and if that world is the world we are in now, of course, downgrades are justified. But when we are in this type of recession and there's no name for this type of recession in the economic literatures - I call it balancing recession - where people all worried about their balance sheets and trying to repay their finances, government has to be borrowing and spending the extra savings to keep the GDP from collapsing. So in this type of recession, government borrowing and spending is actually good, not bad.

INSKEEP: Richard Koo is chief economist with Nomura Research Institute, and an advisory board member of the Institute for New Economic Thinking. He gives us one perspective on the aftermath of the debt deal in the U.S.

Thanks for joining us from Tokyo.

Mr. KOO: Oh, quite welcome. Transcript provided by NPR, Copyright NPR.