An Economic Fate We Can Avoid

By Edwin J. Feulner (Archive) · Saturday, March 21, 2009

It's not always enjoyable to look in a mirror. But we can learn a lot when we do. Perhaps it's time for the United States to give it a try.

As the nation's economy struggles, with new reports of job losses, bank failures and shaky consumer confidence, our mirror should be Japan, a country that's also battling a fading economy.

In fact, President Barack Obama has already encouraged Americans to consider Japan's experience a warning. Speaking on Feb. 9 about the recession, he said, "We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough. As a consequence, they suffered what was called the lost decade, where essentially, for the entire '90s, they did not see any significant economic growth."

But as Asia expert Derek Scissors points out, Japan's struggles have been going on longer than that. Japan's been sinking for some 17 years. In current yen (the country's currency) Japan's economy appears to have been smaller in the fourth quarter of 2008 than it was in the fourth quarter of 1995. Further contraction is predicted this year.

Scissors notes that some of our biggest problems mirror Japan's. For decades, the government in Tokyo encouraged exports to boost economic growth. Meanwhile, in recent years the American economic boom has been fueled by inexpensive imports and even imported savings. Much of Washington's ballooning debt is financed by Treasury bills sold to foreign investors, led by China.

"If the U.S does not fundamentally change its tax, spending and regulatory policies," Scissors and co-author J.D. Foster warn in a recent paper, "this nation risks replaying Japan's two lost decades, with all that entails."

Unfortunately, we've already taken a step down the wrong path, by mistakenly copying Japan when we ought to be moving in the opposite direction.

The near-trillion dollar stimulus package Washington passed last month is comparable to the big infrastructure programs funded by Japan's government throughout the 1990s. Japan is now a country littered with "roads to nowhere," but all that concrete failed to drive an economic turnaround.

Unfortunately, American leaders such as House Speaker Nancy Pelosi are already hinting they may throw even more "stimulus" money around this year. There's a better approach.

The U.S. government unintentionally encourages imports because of its tax policies. Washington maintains the second-highest corporate tax rate among industrialized countries. That makes American companies less competitive and encourages them to move production and even headquarters overseas. That, of course, leads to lost jobs and lost revenues.

Further, the U.S. tax code discourages savings by applying high marginal tax rates on every dollar stashed away. That's a key reason Americans save less than people in other industrialized countries, and it explains why we need to import so much investment capital.

"Whether it's Japanese trade surpluses or American trade deficits, large, persistent international trade imbalances are truly unsustainable," Scissors and Foster conclude. That's the message our leaders need to hear, so they can change American federal policies and make our economy more competitive.

There was a time, not long ago, when books were written about how Japan would dominate the planet someday. Yet while the country remains wealthy, it can no longer aspire to global economic leadership.

That's a fate that the United States must avoid. We've been the engine driving the global economy for decades. For our own sake, and the rest of the world's sake, we must retain that role.

A good, long look in the mirror -- and taking the right steps now -- will allow us to do just that. 

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