Don't Imitate Japan

The Washington Post's op-ed free-market economist, Robert Samuelson, has a concise and very interesting analysis today of the Japanese case of a 'lost economy'.  Bottom line is, the course we're on threatens to parallel what has happened to Japan.

Japan's lackluster performance has two main causes. One is the "dual economy": a highly efficient export sector (the Toyotas and Toshibas) offset by a less dynamic domestic sector. Until the 1980s, Japan depended on export-led growth that created jobs and investment. An undervalued yen helped. "You had 20 percent of the economy carrying the other 80 percent," says Richard Katz, editor of the Oriental Economist newsletter and the author of several books on the dual economy.

But the yen's appreciation in the mid-1980s - making Japan's exports more expensive - doomed this economic strategy. Ever since, Japan has searched in vain for a substitute. Cheap credit (which fueled the original "bubbles") and many "reforms" haven't sufficed. Japan's domestic sector remains arthritic, often protected by cartels or government regulations. Japan has one of the lowest rates of business creation among major industrial countries. One survey ranked Japan 44th in the world in the ease of starting a new firm, reports economist Randall Jones of the Organization for Economic Cooperation and Development. (The United States was fourth.) Indeed, Japan's best recent years of economic growth (2003-07) occurred when a weaker yen revived exports....

Economic success ultimately depends on private firms. The American economy is more resilient and flexible than Japan's. But that's a low standard. Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan's.

This advice is similar to that given by George Schultz to Fareed Zakaria on GPS yesterday.