Back in the 1980's, America's shrewd economic minds were very impressed with Japan. Typically, they seized on Japan as a model of what the U.S. should be like just when it became a model of what it should avoid. As usual, Robert Samuelson lays it out for us:
From 1956 to 1973, Japan had grown 9 percent a year; in the 1980s, it was still growing at 4 percent. Japan was widely expected to overtake the United States as the richest, most advanced economy. It didn't. Worse, its semi-stagnation defied the notion that modern economics enabled government to ensure adequate growth.
Papers were written, conferences organized, and the verdict rendered: The Japanese had botched it. After the "bubble economy" of the late 1980s burst, the Bank of Japan had eased credit too slowly. Burdened with bad loans, banks stopped lending; government didn't cleanse the banks quickly enough. Government stimulus packages were too little, too late. Naturally, the economy languished. All plausible -- and wrong.
In the 1980's Japan's get up and go got up and went. It never came back. What happened? It wasn't a failure of economic policy. It was a failure of being Japanese.
Japan has what Richard Katz, editor of the Oriental Economist, terms a "dual economy." On the one hand, export industries (autos, steel, electronics) are highly efficient. They face intense global competition. On the other, many domestic industries (food processing, construction, retailing) are inefficient and sheltered from local competition by regulations or custom.
This has suited most Japanese. Exports earned the foreign currency needed to buy food and fuel imports. Meanwhile, protected domestic industries provided the job security and social stability that most Japanese preferred to hyper-competition. While exports thrived, they -- and the supporting business investment -- were Japan's engine of economic growth.
The trouble is that this system broke down in the mid-1980s. The rising yen made Japanese exports costlier on world markets. New competitors -- South Korea, Taiwan -- emerged. Japan lost its engine of growth and hasn't found a new one. That's Japan's central economic problem.
The engine of Japanese growth finally petered out. What is the solution? The Japanese tried using Government spending as a tool to stimulate economic growth.
In the 1980s, the Bank of Japan sought to offset the effect of the higher yen with cheap credit. This backfired, resulting in the bubble economy. From 1985 to 1990, Tokyo land prices rose 134 percent; the stock market boomed. Since the bubble's collapse, there have been 13 stimulus plans, reckons economist Randall Jones of the Organization for Economic Cooperation and Development. Even now, the economy is trade dependent; in December, exports dropped 35 percent from a year earlier, pushing Japan into a deep recession.
Consider that carefully. Thirteen stimulus plans. The U.S. is already into its third, counting the auto industry bailout, the financial sector bailout, and the stimulus package as one each. But Treasury Secretary Geithner is already talking a two and a half trillion dollar second financial bailout. Oh, and GM is going to need a few hundred billion more real soon.
We know that this kind of thing doesn't work. The Japanese have an obvious option to restart economic growth: remove the restrictions on competition within the Japanese economy itself. But they can't use it because, well, they're Japanese. Can't let Wal Mart come in and threaten that Mom and Pop grocery store with its 45$ melons.
The U.S. has done much better than Japan because we did encourage rigorous competition in our domestic economy along with equally rigorous competition in our export industries. But every instinct of the Democratic majority in Congress will be to protect existing economic and social interests against competition, to make the domestic economy more like Japan. For the first time in my life, I am pessimistic about the future of our country and our world.
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