CAMBRIDGE, Mass. — As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style "lost decade." Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy. These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity.

There is no doubt that Japan's massive 1992 financial crisis was a hammer blow, from which it has yet to recover, and the parallels with the U.S. and Europe today are worrisome. Both seem set for a long period of slow credit growth, owing both to necessary stricter financial regulation and to the fact that their economies remain significantly over-leveraged. There are no simple shortcuts in the healing process.

Yet, in assessing the Japanese experience and its relevance today, it is important to recognize that Japan's fall to earth was due not only to its financial crisis. Japan also suffered a number of severe productivity shocks, which had much to do with its longer-term problems. Even if Japan had never experienced a real-estate and stock-market bubble, the meteoric rise of its giant neighbor China would have been a huge challenge.