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Jewish World Review March 26, 2001 / 2 Nissan, 5761

George Will

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A second decade of
economic trouble? -- BECAUSE misery loves company, Schadenfreude is fun and nervous Americans need some economic perspective, consider the world's second largest economy, Japan's. America's stock markets -- which are not the same thing as America's economy -- have entered a second troubled year. Japan's economy has entered a second ghastly decade.

At the beginning of the 1990s, Lee Kuan Yew, Singapore's leader, visited Rep. Jim Leach, the Iowa Republican. At that time many American intellectuals were "declinists," convinced that America's trajectory had passed its apogee and that Japan's corporatism -- close collaboration between government and business -- was guaranteed ascendancy. However, Lee told Leach that the 1990s would belong to America, because of Japan's "graying" (by 2015 one-quarter of Japan's population will be 65 or older) and Japan's preference for social homogeneity, and its consequent aversion to immigration, which inhibits social vitality and creativity.

Tokyo's stock market was nearly at 40,000 in December 1989 when the bubble burst. In eight months it plummeted to 23,000. It has continued to sink, closing at 12,854 on Thursday. This has been rather worse than even Nasdaq's loss of 64 percent of its (disproportionately technology sector) value.

Declining portfolio values accounted in 2000 for the first decline in the net worth of U.S. households (from $42.3 trillion to $41.4 trillion) in 55 years. But in Japan, a stock market crisis immediately becomes a banking crisis, because banks own large amounts of stock in corporations that are their customers. And the crisis may soon worsen because, beginning April 1, banks must value their stock holdings at the current (depressed) value, rather than the price when purchased.

Japan's total wealth loss has been $15 trillion -- three years of Japan's GDP. Proportionate U.S. losses would total $30 trillion. Americans' losses in their stock market portfolios have been one-sixth of that -- $5 trillion.

Japan's stock bubble was accompanied by a property boom, during which it was somehow considered reassuring for Japanese to joke that the palace grounds in central Tokyo were worth more than California. Then came confirmation of the late Herbert Stein's law: If something can't go on, it won't. The property boom came to a screeching halt.

John Makin, who studies Japan's dysfunctional political economy for the American Enterprise Institute, notes that Japan's problems are severe and intractable because Japan has such a political economy. He says that having proved in the 1980s that it is possible to invest too much in the private sector, Japan in the 1990s wildly overspent on public sector "pump priming" with public works projects. There has been, Makin says, $1.1 trillion sunk in public works since 1993 -- bullet trains to nowhere, a tunnel being built under Tokyo Bay. In 1996 the public works "stimulus" was 4 percent to 5 percent of Japan's GDP. In the United States that would be between $400 billion and $500 billion. Yet Japan's economy remains unstimulated.

Indeed, deflation has prices falling 2.5 percent a year -- a powerful incentive for consumers to defer consumption. Compounding the problem with perverse policy, in 1997 the tax on consumption was raised from 3 percent to 5 percent. Today 10-year bonds are yielding 1.1 percent, and two-year notes just four-tenths of one percent. Households earn zero on savings accounts. Japan's central bank has achieved this nightmare: Bank interest rates are at zero, and they are not low enough to stimulate the economy.

Japan's government deficits have ranged been between 7 percent and 10 percent of GDP. America's 1980s deficits peaked -- and only briefly -- at 5.5 percent. Today, Japan's debt is 130 percent of its GDP, the highest of any G-7 nation. America's debt is 32 percent of its GDP, the lowest among the G-7.

When Japan is in protracted stagnation, Asia cannot grow, which exerts some drag on U.S. growth. Yet even though Japan is about 15 percent of global economic activity, America boomed during Japan's bad decade. The average price of American stocks is 21 times earnings, higher than the historical norm of 14 times, but well below the recent peak of 35. Productivity is rising and inflation is negligible, even with what was until recently considered more than full employment (4.2 percent unemployment).

Furthermore, analyst Irwin Stelzer notes that journalism produces perverse perceptions: Gloom-producing headlines proclaim a large corporation cutting 5,000 jobs, but no notice is taken when 25 of the smaller companies that drive America's economic vitality hire 200 people each. And Martin Wolfe of the Financial Times writes that there are forces for global growth that are far larger than Japan's drag on growth: For several decades the world's two most populous countries, China and India, with 2.25 billion people, almost 40 percent of the global total, have been growing faster than both the largest national economies and the world as a whole.

There is a moral obligation to be intelligent, so Americans are obliged not to be panicky.

Comment on JWR contributor George Will's column by clicking here.


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