Japan Reveals Regulatory Trap

by Chidem Kurdas

Once upon a time, people tried to explain the post-war “Japanese Miracle” of rapid growth. Then in the current century, the puzzle shifted to Japanese stagnation since 1990. The lesson from these two distinct phases of Japanese history is germane for current American policy.

Chalmers Johnson’s influential book, MITI and the Japanese Miracle (1982), examined how the powerful Ministry of International Trade and Industry had guided and regulated the economy.  MITI implemented industrial policy in what Mr. Johnson called a defining characteristic ofJapan, namely close collaboration between politicians, economic bureaucrats and big business.

MITI’s successor, the Ministry of Economy, Trade and Industry, promoted the use of nuclear power. The ongoing problems at Fukushima Daiichi nuclear plant threw new light on METI. The plant’s operator, Tokyo Electric Power Co., is a monopoly fostered by regulators. The government announced that the Nuclear and Industrial Safety Agency will now be separated from the Ministry, to give it greater independence

Industrial policy and the collaborative iron triangles are part of the explanation of Japan’s difficulties. As Cato Institute’s James Dorn recently wrote, the new industrial state led to crony capitalism.  Failing banks were propped up and heavily regulated industries became dominated by sluggish cartels while inefficient sectors like agriculture were protected and their old structure frozen in place. People focused their attention on getting regulatory protection and a share of the gigantic government pie.  

Now consider American policies, replete with heavy doses of intervention, government largesse and burgeoning public bureaucracies. Lobbying is the one area of employment that’s booming, thanks to the great expansion of government that creates endless opportunities.  Federal money bolstered not only big banks but automakers GM and Chrysler, their unions and mortgage financers Fannie Mae and Freddie Mac—the last two created by and long assumed to have the implicit backing of Uncle Sam, before they were officially taken over.

About a year ago, Paul Krugman warned that theUSwas in danger of  resemblingJapan, because of insufficient government spending.   Data “suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth,” he argued.

That the federal stimulus is weak has been a familiar theme with Mr. Krugman for years and appears to have become a monomania —I counted three recent columns in a row in which he castigates the Obama administration for not throwing more money at the economy, despite the steep growth in federal spending and debt.

But he may be on to something.  In certain ways the US  is coming to resemble Japan.  Even as calls mount for reforming the Japanese system and cutting down on regulation,  America  has moved in the other direction with an expanding economic role for government and increasing interconnectedness between industry and government. Last week’s bad economic news, indicating slow job creation, fits this picture.

Of course, Mr. Krugman’s nostrum of greater stimulus will not help unclog the US economy.  It will just dig a deeper hole for public finances, as it did it Japan.

4 thoughts on “Japan Reveals Regulatory Trap

  1. Invetsment guru Jim Rodgers supports Chidem’s assessment of Japan. The Japanese government bailed out zombie banks and ran up huge debts. They have stagnated for 15 years.

    Under the Bush/Obama policy, the US bailed out zombie banks and firms. The government has run up huge debts. Why should we expect a different outcome than in Japan?

    (Jim Rodgers was George Soros’ original partner. They are world’s apart politically.)

  2. That’s interesting, Jerry. Some years ago I listened to a lecture by Rodgers on China –at the time he was very bullish on China, in fact was moving there. His China predictions turned out to be right.

    His commodity market forecasts have largely been right, too..

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