as the heavy overhang of government debt has made japanese policymakers more reluctant to use aggressive fiscal policies ( for evidence see, for example, posen, 1998 ). fortunately, the u. s. economy does not share these problems, at least not to anything like the same degree, suggesting that anti - deflationary monetary and fiscal policies would be more potent here than they have been in japan. second, and more important, i believe that, when all is said and done, the failure to end deflation in japan does not necessarily reflect any technical infeasibility of achieving that goal. rather, it is a byproduct of a longstanding political debate about how best to address japan ’ s overall economic problems. as the japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for japan ’ s long - run economic health. but in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. as a natural result, politicians, economists, businesspeople, and the general public in japan have sharply disagreed about competing proposals for reform. in the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. in short, japan ’ s deflation problem is real and serious ; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. thus, i do not view the japanese experience as evidence against the general conclusion that u. s. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the united states. conclusion sustained deflation can be highly destructive to a modern economy and should be strongly resisted. fortunately, for the foreseeable future, the chances of a serious deflation in the united states appear remote indeed, in large part because of our economy ’ s underlying strengths but also because of the determination of the federal reserve and other u. s. policymakers to act preemptively against deflationary pressures. moreover, as i have discussed today, a variety of policy responses are available should deflation appear to be taking hold. because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. for this reason, as i have emphasized, prevention of deflation

* in summary, because of increased access to real - time information and, more arguably, extensive deregulation and innovation in financial and product markets, economic imbalances are more likely to be readily contained. as a consequence, cyclical episodes overall should be less severe than they otherwise would be. if this is indeed the situation - - and it must be considered speculative until more evidence is gathered - the implied reduction in economic volatility, other things being equal, would lower risk and equity premiums. other things, however, may not be wholly equal. the very technologies that appear to be the main cause of our apparent increased flexibility and resilience may also be imparting different forms of vulnerability that could intensify or be intensified by a business cycle. from one perspective, the ever - increasing proportion of our gdp that represents conceptual, as distinct from physical, value added may actually have lessened cyclical volatility. in particular, the fact that concepts cannot be held as inventories means a greater share of gdp is not subject to a type of dynamic that amplifies cyclical swings. but an economy in which concepts form an important share of valuation has its own vulnerabilities. as the recent events surrounding enron have highlighted, a firm is inherently fragile if its value added emanates more from conceptual than from physical assets. a physical asset, whether an office building or an automotive assembly plant, has the capability of producing goods even if the reputation of its managers falls under a cloud. the rapidity of enron's decline is an effective illustration of the vulnerability of a firm whose market value rests largely on capitalized reputation. the physical assets of such a firm compose a small proportion of its asset base. trust and reputation can vanish overnight. a factory in such a context cannot. the implications of such a loss of confidence for the macroeconomy depend importantly on how freely the conceptual capital of the fading firm can be replaced by a competitor or a new entrant into the industry. even if entry is relatively free, macroeconomic risks can emerge if problems at one firm tend to make investors and counterparties uncertain about other firms that they see as potentially similarly situated. the difficulty of valuing firms that deal primarily with concepts and the growing size and importance of these firms may make our economy more susceptible to this type of contagion. another, more conventional determinant of stability will be the economy's degree of leverage - - the extent