In the wake of what is happening to several economies in the world today, the question to ask is whether or not the Japanese experience known as the "Lost Decade" of the Nineteen Eighties and Nineteen Nineties was a similar phenomenon. There is no doubt that the tendency to deflate has been a common factor to the Japanese economy of then and to the economies of today, but do the similarities go beyond that?
It seems to me we are making a mistake painting everything with the same brush, and here is why. What hit the Japanese economy was a combination of the situation that exists in China today and the one that exists in the United States. Like the Chinese of today the Japanese had a high rate of savings, and like the Americans of today they had an asset bubble that affected real estate and the stock market. But neither the Chinese nor the Americans now suffer from the two phenomena at the same time.
The result for the Japanese people, the corporations and the government has been that they continued to enjoy a near full employment; and their income levels remained healthy enough to continue saving at a high rate. So then, where was the problem? To answer this question we need to identify who may have suffered from the apparent deflation. Well, it was the speculators who suffered the most but no Japanese or foreign tear was shed on their behalf and no heart ever bled for them.
In fact, the Japanese crash which undoubtedly happened by accident may well have been maintained afterwards by design. The deflation certainly came at the right time for the country because the world was developing in a manner that threatened to leave Japan far behind; thus the country’s need for a jolt to make it take a drastic turn and set itself on a new course.
What was happening were the emerging tigers of Asia. Some were fully revved up by then such as South Korea, Taiwan, Hong Kong and Singapore while others were beginning to rev up such as Malaysia and Thailand behind whom trailed the promising economies of India, Indonesia, Philippine and Vietnam.
All the while, Japan was becoming an ageing society which, by culture and by tradition, did not take in the immigrants that could have rejuvenated the population and invigorated the economy. Anyone could see therefore that within a generation or two, Japan was going to become not only the sick man of Asia but a walking geriatric corpse preparing itself for burial.
And so, before getting there, the Japanese decided to put the wealth they had accumulated into a kind of trust fund that will serve them as they go through the upcoming phase. They invested in the emerging economies that threatened their dominance and where the American competitors were investing already even though the latter did not expect a fate similar to the one looming over Japan.
For their plan to succeed, the Japanese needed a regime of easy credit that could be sustained for a decade or more because it takes this long to establish a foothold in a foreign country and longer to cement a lasting presence. To have easy credit for an extended period of time you must maintain a deflated economy and this is what the Japanese had during the time they needed to have it which raises the question as to whether the deflation was maintained by design.
To see that this is not just a rhetorical question but one that has standing, we must realize that the Japanese had an alternative to this course, that they tried it but that it failed. The alternative was for their country to become the hub of scientific and technological innovation not only in Asia but the whole world. Japan could then age graciously and still maintain a dominant economy.
However, it was recognized at the time that because of the nature of their culture, the Japanese were not driven to innovate as much as the Americans whose society was built on the shoulder of the risk takers that came to it from around the world. And so the Japanese lived and prospered for a long time by taking the American scientific breakthroughs and adapting them to make products they could sell to the American consumers and to the rest of the world.
Then came the big change, or so said some Japanese enthusiasts. They said the country succeeded in developing a generation of non-conformist youngsters who were thinking outside the traditional Japanese box and were now ready to take on their innovating counterparts in America. In fact, said the enthusiasts, the country was developing a Fifth Generation computer that will make the super computer of the time look like the abacus of antiquity.
But as predicted then by yours truly, despite the fact that American experts from academia were visiting the research centers in Japan and coming back with glowing reports, things did not work out for the Japanese. When all was said and done, they had not developed the generation of computers to dwarf everything before them nor did they develop the scientific base to leave everyone else light years behind. In fact, the accompanying claim they made which was that they were adapting the American breakthroughs and creating a new product every single day turned out to be short-lived if not a bogus claim altogether.
Unable to redesign and construct a Japan of tomorrow that will be distinguished by continued progress in science and technology, the Japanese adopted the principle of "if you can’t beat them join them" and so they did by investing in the emerging markets they once thought were a threat to their dominance. In retrospect, they were wise to choose this path rather than engage in a losing battle against their fate sustained only by idle fantasies.
If there is a lesson for America in all of this, it is that economic miracles can happen to an individual that wins a lottery, a prospector that hits a gusher, a speculator that makes one lucky trade or a small nation that discovers it is sitting on a natural resource very much in demand. But such miracles cannot happen to a large country with a population the size of the United States.
There was a time when science and technology in the hands of one country could make a difference. It was a time when you could use breakthroughs to secretly develop weapons that would subjugate underdeveloped societies sitting on vast reserves of natural resources. You would colonize these societies and plunder their wealth to build up your own society. But this era is now gone and has been since America’s back was broken in Vietnam, dragged there by the colonial French, and broken again in the Arab World, dragged there by the never quitting Jewish Establishment.
Consequently, those who are in charge of pulling America out of its current economic slump must recognize that in a large country, the service part of the economy exists only because it stands on the goods producing sectors of the economy. Take the latter away and the former dies a slow death; and you end up with an economy that looks like the Third World. This is beginning to happen to America because the country’s natural resources have almost been depleted and because manufacturing has been neglected for some time now.
Also, innovation is not going to create resources out of nothing nor will it manufacture in America the kind of products that no one can manufacture elsewhere. In fact, everything that is manufactured in one place can be outsourced to another place and will be if not looked after. Thus, America must now view itself as a somewhat underdeveloped manufacturing economy, different from the other underdeveloped economies only in the sense that it does not need outside help to redevelop.
What America needs now is the political will to embark on a massive program to rebuild its industrial base. To do this, you bear in mind two things. First, the best futurists who came armed with vast amounts of knowledge in math, science, technology, industry and economics were never able to accurately predict the future. Second, you build an industrial base from the bottom up and not the other way around.
Thus, the government bureaucrats in charge of industrializing America must stimulate the labor intensive, capital preserving low tech industries such as food processing, leather, furniture, building materials, home appliances, home entertainment and the like, all of which represent more than 90% of the products consumed in an economy. This will require prior negotiations with the trading partners so as to avoid a trade war, a subject discussed in previous articles.
In the meantime, the innovations and the high tech products will be taken care of by the private sector because when government supports the low tech industries, it creates the framework for new industries to come to the fore and be chosen or rejected on their merit by the marketplace. The product applications that will come out of this will then be developed and put to use without government input or oversight which is as it should be.
Unfortunately, there are factors sapping America’s political will, preventing her from doing what needs to be done. One factor comes in the form of clowns who command a few smart Aleck remarks but smack of illiteracy when it comes to math, science, technology, industry and economics. They write columns in prestigious newspapers and show up on television to spew superficial views about inventing America’s way into a new high tech industrial base that will thrust the nation forward at warp speed and place her ahead of everyone else. And the sad part is that these people are being aided in their fantasies by hosts that should earn a living doing anything but journalism.
Convinced that they are talking economics and not rubbish, these people describe situations in geopolitics that are as infantile as the twisted ideologies that spawned them. And they do nothing to help America manufacture a kitchen table or a scrap of the food that families work hard to put on it. In short, those idiots of the box have created a politico-journalistic Ponzi scheme that even the US Congress, which ultimately disposes of the economic ideas developed during the debates, consistently fails to recognize as the fraud that it is.
Therefore, the time has come to mothball these one-dimensional characters and to outsource them to the flatland of which they are fond; and where their effect on the civilized world will be reduced to a minimum. The day this happens will also be a happy day for America where progress will begin to be made in proportion to the destructive noise that is eliminated from the debates and the useful work that will be done as a result.