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Obama Ready to Short U.S. With Japan Inc. Talk

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
January 26, 2010
Bloomberg

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When President Barack Obama delivers his State of the Union address tomorrow, he'll do it in English. But what he says would sound just fine in Japanese.

That's because the policies the president will outline are closer to those of traditional Japan than those of traditional America. The promulgation of such policies may help the president's party in the short term, but isn't optimal for the country's long-term future. †††† Consider what the president is likely to do. The first thing is bow to a long list of established interest groups. The president is certain to devote time in the speech to flattering organized labor. Labor's political support is all the more critical after the president's health-care setback. You also can bet teachers will get a mention, along with the middle class.

The private sector will get a nod too. The president learned last week that bashing business leads to instant losses in the stock market. So he'll leave it to the Democratic lobbies to call out Goldman Sachs greed.

Instead he will praise an enlightened company or two, as well as its founder or chief executive. There will probably be one old-line outfit -- say General Electric and Jeff Immelt -- and a newer company, maybe Microsoft and Bill Gates, or Google and Sergey Brin.

Expect the president to elaborate on the importance of green keiretsu, though he probably won't use that Japanese word. He will talk about how companies can work together with each other and government to achieve greener economic growth.

National Harmony

All this is highly Japanese -- the idea that the country, and also the economy, is made up of groups, not individuals, and the idea that the nation as a whole benefits most from a harmony of such groups.

Next Obama will talk a little bit about infrastructure, such as the rumored high-speed rail funding for Florida. Word has it that Obama has a plan to create green construction- or technology-related jobs.

To the Japanese this will sound more than familiar. When their economy hit troubles in the early 1990s, they turned to infrastructure spending to stimulate growth. By the end hundreds of billions had been spent. The coast was lined with concrete and Japan had new airports and bridges to nowhere.

But the stock market wasn't back to its old levels, and unemployment more than doubled, from 2.1 percent in 1990 to 4.6 percent in 1999.

Finally there's financial reform. The president will talk about the need to halt risk-taking such as proprietary trading at commercial banks so that depositors won't be hostage to foolhardy derivatives bets. You will hear about safe, federally guaranteed deposits at banks or thrifts.

Missing Opportunities

This idea is the most Japanese of any he will present, in both a good and bad sense. The president is right: depositors should be able to count on most of their deposits being there. But to establish a system in which†insured deposits of citizens reside at banks or thrifts that can't participate in many of the opportunities of the global economy is to replicate the bad aspects of the Japanese postal bank system.

That sounds appealing given the ruction of the past two years. But over the course of history Japan's postal banks, as well as their analogues in Germany, have offered limited returns to their depositors. It will cut depositors out of some of the opportunity that lies ahead. The result of the sequestering of their cash has been a safe life, but a lower standard of living, for the Japanese.

Too Big

The real reason that the administration feels the need to push for such protections is also Japanese -- an unwillingness to do something more fundamental, end the too big to fail doctrine. If there were no too big to fail doctrine, and banks were allowed to fold, many banks would indeed evaporate. Others would reconfigure themselves, and some would thrive.†The market would clear.

As difficult as it is to imagine, a few big failures would lead to a healthier scenario, in which our financial institutions are small enough not to cause catastrophe when they swoon.

But Washington prefers to keep things murky. No one in the U.S., or anywhere else, is going to have any idea of what the U.S. financial sector is really worth. The industry's values will move up, and prices will move down, but in a less reliable fashion than they would if markets alone were determining them. That means, as in Japan, that over time people will be wary of investing in it.

This Japanification -- an America that is anxious but safe, or safe but anxious -- may appeal to the president's Democratic constituents. It will offer the promise, but only the promise, of a place like America in the 1950S.

Not Worth It

But Japanification isn't worth it, for it is more likely to yield an economy like Japan's in the 1990s, with an average growth rate of about 1.5 percent, than America's in the 1950s, when growth zipped along.†By postponing dealing with many of our economic problems we are ensuring stagnation.

Economist Martin Feldstein is predicting average annual growth of 1.9 percent for the U.S. in the coming decade. That's already below the 3 to 4 percent averages that Americans used to take as their birthright in the days of Bill Clinton or before. But what proposals like Obama's effectively are saying is: we'd love 1.9 percent, but we'd be fine with 1 percent, or 0.5 percent, as long as there were no global economic crises. And that resignation is the most Japanese of all.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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