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Japan and the Dangers of Blue

Once considered a rising Asian giant, Japan today is a cautionary tale about the perils of stagnation and economic mismanagement. Among other problems, a once robust industrial sector is falling prey to foreign competition and automation, forcing many plants to lay off workers. Japanese analysts now worry that over-reliance on an industrial base may be strangling the country’s economic growth. The New York Times reports:

“It is time for Japan to find a new model for its economy,” said Masatomo Onishi, a professor of business at Kansai University. “We can follow the United States into a more postindustrial economy, or we can follow Germany into high-end manufacturing, but we shouldn’t be trying to compete with China in mass production.” . . .

It is a similarly bleak story for many of the small factories that were the loyal foot soldiers of Japan’s postwar export machine. According to METI, the number of manufacturing companies in Japan dropped by a third, to 540,000, in the 10 years up to 2006. The share of manufacturing in Japan’s overall economy has also shrunk to 18 percent in 2009 from about 35 percent in the 1970s, according to the Cabinet Office.

By comparison, while the United States is still the world’s largest manufacturing country, such industry accounts for just 9 percent of its overall economy.

Like America, Japan faces an interesting paradox: Manufacturing output is holding up, but industrial employment is dropping rapidly; automation is the main job killer, not outsourcing. Unlike America, Japan has an industrial sector still largely controlled by a very rigid (and blue) social structure: long-term employment with extensive benefits at major firms remains the norm.

Although America’s prospects for a smooth transition away from that blue model are much better than those of other developed nations, but Japan’s recent troubles are a good reminder of where we may be headed if we fail to adapt.

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  • Jacksonian Libertarian

    “but Japan’s recent troubles are a good reminder of where we may be headed if we fail to adapt.”

    This is totally true, Japan’s Government has been sucking their capital markets dry for over 20 years, such than they now owe 200% of GDP. American is now doing the same stupid thing with over $1 Trillion a year being sucked out of our capital markets, and a total debt of over 100% of GDP.

    “There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.” Jacksonian Libertarian

  • Corlyss

    “automation is the main job killer”

    An interesting factoid for the good Professor’s kit about the Blue Model:

    Since 1968 the IRS has been trying unsuccessfully to automate 1040 processing. The IRS employees between approximately 100,000 employees in the off season and approximately 140,000 during filing season Jan-Apr. About 50% of employees at all times are input clerks, busily keystroking data into IRS data bases. Why can’t they modernize? Because every commissioner appointed has to pass muster with the National Treasury Employees Union, once the most litigious union in the federal stable of rent-seekers, always on the cutting edge of federal employee-employer relations law. And the appointee has to swear fealty to the existing setup in order to get the votes of Democratic members of the Senate committees that must consent to the appointment. The nominee has to promise that “no IRS employee will lose his job as a consequence of automation.” How can a data collection organization possibly take advantage of modern advances in collection methods if it can’t realize the savings in personnel costs? Answer: it can’t. So for 30 years (at the point when I left IRS in 1998) the service had managed to reject every effort to introduce OCR forms because none of the offices could agree on the design of a form. Of course, that was just a pretext. The service would never agree to collection by OCR. The only hope of automation has been internet filings, where most of the work is performed by . . . . you guessed it, the filing taxpayer. Even there the taxpayer has to purchase a Service-approved 3rd party software package (i.e., spend money) or have his tax-preparer do so (i.e., spend money).

    This system is nuts. The Blue Model needs to be razed and salt sown over the remains.

  • Kenny

    Mr. Mead, yes there has been economic mismanagement in Japan, but that’s not the root of the country’s problem.

    Demographics is — i.e., Japan decades long falling birth rate.

    To wit, old people consume; they don’t produce.

  • Brett

    I’m skeptical that they’ll reform. Japan has the same “divided economy” that several of the other East Asian Export-Led Industrializers have, with a split between an open-to-trade export sector (built around manufacturing) and a highly inefficient services and agricultural sector that employs most of the country’s people (and which makes the US health and education sectors look like economically dynamic dynamos in terms of productivity).

    Moving to a new model that isn’t so dependent on the export companies would require shaking up the “secure” sector, which could eliminate a ton of jobs in the short term and create social instability. Korea’s struggling with it right now, and I don’t expect the Japanese to do any better in liberalizing.

  • Luke Lea

    “automation is the main job killer, not outsourcing”

    True for the past but not for the future. It is impossible to have an informed opinion on this subject without mastering the essentials of Heckscher-Ohlin trade theory.

    The problem is the impact on the distribution of income in a highly developed country such as the United States when it does business with an underdeveloped country like China which is much bigger (3 times bigger) than we are.

    With China numbers swamp everything. The disequilibrium resulting will destroy the social fabric of this country unless we — and here I must jump to conclusions — subsidize market wages with the proceeds of a graduated expenditure tax.

    Never forget: free trade has the power to make everyone better off even in these circumstances, but only if you are willing to compensate the losers out of the gains of the winners.

    Otherwise this is class conflict pure and simple. Not only will it destroy the blue model, it has the power to take down our democracy and destroy all racial and ethnic comity in the process. Just as surely as the corn laws took down the English gentry and ushered in a period of political instability among whose children were the Soviet Union and Nazi Germany.

    Ignorance is playing with fire here. It is the sheer size of China which makes this a fatal issue.

    Here is the complete piece. Master it Mead:

  • Luke Lea

    Sorry. The end of the corn laws took down the English gentry.

  • Toni

    To add to Kenny’s comment:

    Japan has a fertility rate of 1.21 births per woman. Only Macau, Hong Kong, Singapore and Taiwan have lower fertility rates. A rate of 2.1 is required to maintain a population. (Ours is 2.06, but will likely rise with economic recovery.)

    “It is time for Japan to find a new model for its economy” — for whom? Unless the Japanese start making more babies, the shape of the economy won’t matter. There’ll be too few people for whatever economy exists.

    I don’t know at what point Japanese workers will be too few to support retirees, but Japan is a lot closer to that point than the U.S.

  • Daniel M. Ryan

    Yes, Japan is a cuationary tale – but it’s one of several. I was lucky enough to read the classic goldbug books, published in the late 1970s, in the ’80s. I found them compelling reads, but there always was this little point of skepticism in the back of my head because none of them saw Volcker’s inflation-fighting coming. Those that brought up the possibility dismissed it as politically impossible. And yet, he did it. With their main prediction, the goldbugs were wrong.

    Were I in charge of influencing young minds in the business programs, I’d plump for a course in “Business Critical Thinking,” whose texts would be:

    – A book on how to invest in growth stocks, from the mid- to late-1960s;
    – A similar book, on the Nifty Fifty growth stocks, from the early 1970s;
    – A goldbug book, c. 1980;
    – Ravi Batra’s “The Great Depression Of 1990”;
    – A collection of a few books detailing the Japanese MITI juggernaut, at least one of which presents it as a threat to American dominance, from the late 1980s;
    – “The Great Reckoning” by James Dale Davison and William Lord Rees-Mogg, which happens to be the most erudite of the declinist books from the early 1990s;
    – A then-bestselling book about how to invest in the Internet revolution, published around 1999;
    – A then-bestselling book about how to make a killing investing in real estate, published around 2005.

    Each book would be assigned at the end of a seminar, with instructions to the students to let themselves get sucked into its narrative. The next seminar would be devoted to discussing how to think one’s way out of the narrative. Special attention would be paid to the question: “How would you think your way out of it at the time it was published?”

    A course like this would properly begin with a dissection of Charles Mackay’s “Extraordinary Delusions And The Madness Of Crowds,” but I would also stick in the book “Futurehype: The Tyranny of Prophecy” by Ontario sociologist Max Dublin. Unusually among leftists, he dissects 1970s oil-price bubble thinking – in top executive ranks – as an example of groupthink. He didn’t fall prey to imagining a conspiracy, which makes his book a durn good one.

    The goal of such a course would be to help train the students to think their way out of the next bubble, whether optimistic (hype) or pessimistic (doomsaying.) Methinks this is needed…

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