Economists usually do it with models, so it's rare in economics to be able to conduct a laboratory experiment. Currently, though, we're watching two experiments in different corners of the world that support the idea that stimulus works to repair a troubled economy and austerity doesn't.
[IMAGE]Japan and the eurozone are, through their actions, demonstrating how economies can move in opposite directions with Japan's stimulus plan succeeding and the eurozone's austerity program failing.
To revive his nation's dormant economy, Japanese Prime Minister Shinzo Abe argued strongly during his election campaign last year for the Bank of Japan to expand the country's money supply and, once in office, increased government spending. The result for the first quarter was the Japanese economy grew at a 3.5 percent annualized rate, much faster than the 2.7 percent growth rate expected by analysts.
If that scenario sounds familiar, we have only to look at the actions of the Federal Reserve--both in lowering the target Fed Funds rate to near zero and then adopting two further ""quantitative easing"" programs. The Fed is now pumping $85 billion a month into the economy through its purchase of agency mortgage-backed securities and its reinvestment of maturing investments into Treasury securities.
While first-quarter GDP results here were positive (despite a cutback in government spending) longer-term trends show slower growth as government spending drops.
While the Fed's action did not produce the feared inflation doomsayers predicted, Abe understood that the combination of increased government spending in Japan and the expanded money supply could push up prices with the additional benefit of ending the years of deflation that paralyzed Japan's economy.
The first-quarter results in Japan, while encouraging, still have further to go. Wages in Japan are flat, and other economic indicators have yet to match overall growth, though markets have improved and corporate Japan is forecasting higher profits.
Abe's program is not done. The third leg of his economic stool--structural reforms--could be the most challenging, but over the long run perhaps the most important. Those reforms, among other things, would make Japan's labor market more flexible and encourage immigration.
[COLUMN_BREAK]Half a world away, the eurozone, after preaching and embracing austerity, reported output contracted 0.2 percent in the first quarter, showing the region remains in recession. The results were worse than expected, leaving GDP down 1.0 percent from a year ago. Output has been negative for six consecutive quarters--a recession by anyone's definition.
The only nation in the eurozone that showed positive results in the quarter was Germany, where GDP grew 0.1 percent for the quarter but was still down 0.3 percent year-over-year.
The outlook isn't bright either. The European Commission forecast annual GDP would drop 0.4 percent for the year and that growth in 2014 would be a meager 1.2 percent. Whether the contraction would cross the Atlantic remains to be seen.
While the Fed has brought interest rates down as far as possible in the United States, the European Central Bank (ECB) earlier in May brought its main policy rate to 0.5 percent from 0.75 percent. With the GDP results, the ECB is under increasing pressure to act again when it meets next month.
The lessons from across the Atlantic and Pacific seem clear... if Congress and the president read and heed them.
The two key housing numbers for the upcoming week will be reports Wednesday on existing-home sales for April and Thursday on new home sales for the same month. Existing-home sales are expected to show improvement, though forecasters are not as optimistic about new home sales. Of the two, the new home sales report is the more significant. (Because the existing-home sales report tracks closings, it really reflects the economy two months ago.)
Indeed, forecasts notwithstanding, existing-home sales could show a decline because the pending home sales index two months ago was essentially flat to the prior month. Home sales dipped 0.6 percent in March. Sales in recent months have tracked prices, falling as prices increased. The recent price trend, combined with flat incomes and even flatter rates, suggests analysts and forecasters could be surprised.
New home sales improved 1.5 percent in March, but the percentage change can be deceiving. By the numbers, sales rose just 6,000 to an annual rate of 417,000. Sales have increased in five of the last seven months, and the March increase was the weakest since last August. While homebuilders' optimism increased in the National Association of Home Builder's latest Housing Market Index, they may have overlooked the link between sales volume and prices, which has been demonstrating the same relationship as existing-home sales.
_Hear Mark Lieberman on P.O.T.U.S. (SiriusXM 124) on Friday at 6:20 a.m. Eastern._
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