The Lessons of Japan’s Economy – NYT

Doing the hard parts of governing don’t seem to be en vogue. Japan needs to address these reforms as much as parts of Europe and the US:

Given Japan’s past failure to take on sacred cows, it’s unlikely that the country will ever again rank as an economic juggernaut. But a robust third arrow could at least put it back in the game and provide an important lesson for other developed countries.


13 thoughts on “The Lessons of Japan’s Economy – NYT”

  1. Steven Rattner has weird ideas about what constitutes “doing the hard parts of governing”.

    His priorities include encouraging companies to be quicker to fire people (i.e., removing any sense of responsibility company leaders feel towards their employees) and transferring farmland from old Japanese farmers to massive corporations (i.e. Soviet-style land reform, but in the other direction).

    I do not understand why this type of thing would be good for Japanese society.

    1. Allowing companies more flexibility in hiring and firing does not inherently lead to corporate neglect for employees. You’re assuming that employers do not have to compete for good employees, or that corporations do not know how to give incentives to their employees. The reality is that the more difficult it is for corporations to fire, the less they will hire. No corporation wants to be caught unable to let go of non-essential personnel during a downturn, nor do they want to hire someone they’re not absolutely certain will be able to perform the duties they need to perform. Strict employee protection laws are politically popular, but create endemic unemployment problems as seen within some EU member states. It’s simply too expensive to hire in the EU, so companies invest elsewhere.

      Additionally, the agricultural industry in Japan is a perfect example of how government policies can create enormous inefficiencies; rice is subject to an 800% import tariff, while domestic producers are permitted to deliberately reduce the efficiency of their plantations to underproduce, thus driving up the domestic price ( ). It is estimated that since 1961, the amount of rice paddy hectares in use for production has dropped by 2.5 million hectares, despite public works projects aimed at increasing the amount of land available for rice production. All of this results in exceptionally expensive rice, a staple in the Japanese diet (as in food, not the legislative body). This kind of protectionism is found in other parts of the Japanese agriculture as well (like apples), which profits only farmers while making the Japanese economy less competitive.

      The Japanese choice to use labor instead of capital is an understandable one; given their relatively labor abundant economy, it makes sense to use labor instead of capital. However, forcing corporations to increase wages above what those laborers earn through their own productivity will only make the Japanese even more uncompetitive in the long run. If an economy specializes in labor intensive industries, and then the government legislates away cheaper labor’s comparative advantage, everybody loses, because increased wages will eventually be offset by falling investment and declining amounts of capital. Without capital, productivity will fall, and the Japanese way of life will begin to slip away as declining birth rates drain the economy through health care costs. That is why reform is so badly needed; government policy has created massive amounts of inefficiency that protects domestic industries, but causes less jobs to be created and more debt to be incurred in the next generation.

      1. It’s probably worth discussing whether or not easy hiring and easy firing is more “efficient” in some economic sense. It’s certainly going to be more convenient for companies from time to time.

        But I would argue that easy hiring and easy firing do make the relationship between employee and employer more uncertain, characterized more by a mutual search for advantage than any long-term commitment, and I’m not certain why (or if) you disagree.

        And I’m certainly no expert on Japanese rice production. but you seem to be arguing that, while current Japanese policy is good for farmers and good for laborers, because that policy is obnoxious to the people in charge of allocating capital, it will “make the Japanese economy less competitive” and ultimately be bad for all of the Japanese.

        To me, this raises some big questions: Who are these people in charge of allocating capital? What stops them from worrying more about the well-being of the Japanese people and less about what’s competitive? Why can’t Japan just ignore them and find it’s own way of funding big projects?

        1. It’s hard to ignore your constituents and Japanese farmers form a powerful political lobby ( As Taylor noted, they benefit greatly from the high import tariffs. Unfortunately, these types of ridiculous tariffs are exactly the type of policies that decrease efficiency and are against the efforts of free trade talks. So, as you mentioned, this creates a problem, because the policies that are in place only serve to benefit certain group while undermining the rest of Japan’s economy and even the world’s.

          You asked “What stops them from worrying more about the well-being of the Japanese people and less about what’s competitive?” Competition is what is good for the well-being of the Japanese people. They are caring too much about the short-term well-being of a certain group of Japanese people. However, as a whole and in the long-run, competition is ultimately what is best for everyone. Without competition, there is no incentive to innovate and grow.

          1. It sounds like you are saying that we live in a world where if you or I or anyone else wants to make people around us happier, the only thing we can do is to focus all our efforts on ourselves (and how much money we have) – to encourage competition, foster innovation, and increase efficiency.

            In short, it sounds like you are saying that trying to be morally responsible is wrong; being selfish and/or greedy is the only thing that will ultimately be “best for everyone”.

            I believe that life in a world like that would be an ugly hell. If it is even a half-accurate description of reality, I will devote my life towards fighting to change it.

            I believe in a world where, when we come across friends or strangers laden with troubles, if we put forth the emotional energy to think about things carefully and try hard to do the right thing, we will be able to do something to help. Perhaps we will make some mistakes, and we will never be able to right all wrongs, but we can touch the lives of others in positive ways.

            So, in our particular example of Japanese agriculture, it may not be easy to see the best way to grow enough rice to feed people who are hungry while treating the old Japanese farmers on their little plots of land with dignity and justice. But I refuse to accept that the only thing to be done is to throw up our hands, remove any government restrictions on the actions of powerful companies, and turn our backs on it all.

        2. I’m going to reply to your comment below here, since I can’t seem to reply to your comment below.

          If any of what you said is actually what my comment sounded like to you, then maybe you should take a good hard look at what ever horribly preconceived notions you have on reality. You say that you believe in a world where we do the right thing. Great! I don’t think anyone would believe in a world where we do the wrong thing. So, please tell me what you think the right thing is. Is it “treating the old Japanese farmers on their little plots of land with dignity and justice”? Maybe, during the industrialization, we should have “done the right thing” and kept the factories from opening, thus treating the old artisans with dignity and justice?

          But there’s this thing in economics called structural unemployment. It means that, when technology improves, people lose jobs. Is it unfortunate? Absolutely. Should we do something to help them during this transitional period? Definitely. Should we artificially sustain their jobs through tariffs and politics? Absolutely not. You want to live in a world where no one loses their jobs? Good luck. The real world isn’t like that. When you’re stuck between a rock and a hard place, you’d better hope the hard place isn’t as hard as the rock, and please don’t complain when it doesn’t feel like a pillow.

          1. We seem to be talking at cross-purposes. I am certainly doing my best to be conscious of my preconceived notions on reality, but we all approach our lives with preconceived ideas about what the “real world” is like, so there’s no way to be perfectly “objective” in this sort of discussion. You raised a lot of points in your post, and I’ll try to respond thoroughly, so this will be kind of long. I’ll break things up by number, just to make it easier on the eyes. I tried to put things roughly in order of importance (to me), but feel free to respond to whichever parts you have the time and/or energy to respond to.

            (1) On our worldviews: Above, I was criticizing international investors (i.e. “capital”) for being overly focused on their own bottom line and less focused on the good of the Japanese people. You replied that my criticism was irrelevant because “competition is what is good for the Japanese people”.

            To me, this sounds like you are saying that big investment firms do NOT have a moral obligation to be concerned with the consequences of their actions. Instead, they should foster “competition” through the pursuit of profit opportunities, because “in the long-run, competition is ultimately what is best for everyone”.

            I extended this vision of the ethical obligations of corporations to individual decisions, and got the bleak world I described above.

            Have I misunderstood your argument? Do you believe that corporations have serious moral responsibilities to consider the consequences of their actions on, e.g., old Japanese farmers, or merely to consider the interests of their shareholders? Or do you think my extending things from the corporation to the individual is unjustified?

            (2) On rocks, hard places, and pillows: I agree that sometimes we are faced with difficult decisions in life. But the way you’re using the metaphor seems strange to me. Generally, being “stuck between a rock and a hard place” means having two choices, both of which seem undesirable, where it’s not obvious how to do the right thing.

            You seem to be saying that there are two choices, both of which seem undesirable, but it IS obvious how to do the right thing.

            If you believe that reducing tariffs involves trade-offs, then there must be circumstances when tariffs are good and circumstances when tariffs are bad. If you believe that reducing tariffs is ALWAYS for the good of all, then you believe in a gentler (i.e. more pillow-like) world than I.

            (3) You wrote: “You want to live in a world where no one loses their jobs? Good luck. The real world isn’t like that.” I’m not sure what you mean by “the real world”. In medieval Europe, it was really rare for people to lose their jobs. It’s not like some noble would go to the cobbler and say, “Sorry! No one wants shoes anymore, close up your shop!”. At modern universities tenure makes it hard for professors to lose their jobs. In the Soviet Union, people lost their jobs sometimes, but unemployment was still kept extraordinarily low.

            Maybe by “the real world”, you just mean the modern Western system of power. But there are plenty of other possibilities out there, if we are willing to put in the effort to really imagine them. In the words of Tolkien: “A single dream is more powerful than a thousand realities”.

            (4) Yes, I believe that “treating the old Japanese farmers on their little plots of land with dignity and justice” is the right thing to do. I do not believe (and never argued) that the only option is to preserve the Japanese status quo. But I do believe that dignity and justice aren’t optional. I’m not entirely clear on your position – maybe you are agreeing with me when you say that we should “do something to help them during this transitional period” after their lands have been turned into massive corporate farms. Mr. Rattner neglected to mention this as a legislative priority in his original article. Do you believe that treating the old Japanese farmers with dignity and justice is important? Or do you believe that it is impossible to do so, because of other priorities that take precedence?

            (5) A great deal of injustice occurred during the industrial revolution, and I believe that was wrong. For example, the Enclosure Acts in England was part of a centuries-long process of eradicating communal property rights and replacing them with individual property rights, (which in general effectively acted as a transfer of wealth to the nobility and the upper classes). This pushed the peasants into the cities and into the factories, which helped ensure that factory owners would not have labor shortages.

            Does this mean we have to choose between a world with iPods and a world without millions of people forced into abject poverty? I hope not. But we won’t know until we try to dream of other worlds.

        3. (1) First off, most of what you are saying to me is a gross over-generalization of my statements. I am not saying that the business world does “NOT have a moral obligation to be concerned with the consequences of their actions.” In fact, I haven’t mentioned big, investment firms at all. But because you mentioned your criticisms of international investors, I’ll address them right now. Do you know why investors aren’t focused on the good of the Japanese people? Because they aren’t donating their money. Do you know why businesses aren’t primarily worried about there moral obligations? Because they aren’t charities. Now, I want to emphasize that I am not saying they have zero morality. I am saying that they don’t have “serious moral responsibilities.” It isn’t their primary concern.

          Summary of Point 1: Businesses and investors are not primarily interested in being moral, they are interested in making money.

          (2) “You seem to be saying that there are two choices, both of which seem undesirable, but it IS obvious how to do the right thing.”

          You’re right! I believe that removing tariffs is always, in the long-run, for the benefit of society as a whole. With that being said, am I saying that everyone’s life is improved? Not quite. People will lose jobs, as I’ve said before. Therefore, in that sense, you’re wrong. I don’t believe in a “more pillow-like” world than you, I just think making a few sacrifices as a society is worth the greater good.

          Summary of Point 2: There is not a single choice, decision, policy, or law that will make every single person happy. You can only do what does the best good overall.

          (3) I honestly can’t tell if you are seriously using those examples. Medieval Europe? The Soviet Union? Sam, if I told you that you should wash your hands after using the bathroom, I hope you wouldn’t argue that, because peasants got away with it in medieval Europe, you’ll be fine not washing. I’d love to spend my evening talking to you about systems that are literally centuries obsolete or failed miserably, but I think we both have better things to do.

          Though you did think of one good example: tenure. Just as a thought experiment, let’s bring tenure into the workplace. Let’s say that your boss told you that, after about ten years of working with him, you’ve permanently earned your place at your company. Are you honestly going to work as hard as you did when your job was at stake? I’m not saying you’d just show up in a Hawaiian shirt and surf YouTube at work. But, my point is that tenure isn’t necessarily a great idea.

          Summary of Point 3: It’s not that long, just read it.

          (4) Of course treating Japanese farmers with dignity and justice is important, but feeding them government money and artificially sustaining their jobs is not the way to do that. Eliminating (or at least reducing) those ridiculous tariffs and treating Japanese farmers respectfully are by no means mutually exclusive.

          (5) Just because great injustice occurred during the Industrial Revolution does not at all mean that it was, as a whole, a bad thing. Broaden your perspective a bit.

          We aren’t choosing a world with iPods. We are choosing a world where you wake up, not having farmed a day in your life, and you can buy a loaf of bread, a gallon of milk, and a pound of meat from the grocery store. We are choosing a world where companies are constantly pushing the boundaries of innovation. The magical part? They don’t really care if it benefits you. They innovate because they themselves benefit. Have you heard of Adam Smith? Of course you have. You are a smart man. Read over the summaries of my points, and then read this quote:

          “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

          1. (1) You still seem frustrated by my efforts to clarify my position. I am sorry if I am misrepresenting you, but I don’t see a huge gap between “not worried about moral obligations” and “not primarily worried about moral obligations”. Anyways, at this point perhaps we agree on the following:

            We live in a world where massive amounts of power are wielded by individuals and organizations [e.g. CEOs and huge corporations] whose first concern is selfish or profit-oriented. Their moral concerns are secondary, and they don’t feel bound by “serious moral responsibilities”.

            Is that right?

            If so, it seems our main disagreement is whether or not this world is a good one. I have already stated where I stand: I think a world like this would be an ugly hell, and if it is our world, I’m going to fight to change it.

            I believe that putting moral considerations second has a lot of negative consequences. If you feel that this is a fair description of our conversation thus far, I’m happy to defend that position further.

            (2) Your position is clearer now. I agree with your summary statement, but I think it is rarely obvious what policy will do the best good overall.

            It certainly seems plausible that protective tariffs in the 19th century helped the development of U.S. industries (and it can also be argued that a developed United States is better than an underdeveloped United States for the world as a whole today)

            (3) I am serious. I think it is worthwhile to imagine worlds different from our own. Specifically, since you pointed to something (long-term job security) as an impossibility in the “real world”, I think it has value to look at actual historical examples where that existed. I’m not advocating feudalism, the modern university, or Soviet-style “communism” as perfect systems. I’m saying we still might be able to learn from them.

            I’m utterly mystified by your reference to Medieval hygiene. How is Medieval hygiene related to Medieval attitudes towards employment? Are they a package deal?

            (4) Here we’re pretty close on the core principles, though I don’t see subsidies or tariffs as automatically evil. [see (2)]

            (5) I’m on record here saying I hope I can keep my iPod, so yes, I agree that not everything about the Industrial Revolution was bad.

            And I am aware that I have a great deal of material prosperity to be grateful for, but there are also huge numbers of people living today in abject poverty. Did you know that medieval English peasants were better off than many people in poor nations today (in terms of, e.g., the food they could eat)? And they had more leisure time than most Americans [Sources posted below].

            So there are many things about the modern world that I think are pretty cool, and other things that I think are pretty distressing. I think we should be able to address these problems without giving up all past or future technological progress.

            And I’m familiar with the Adam Smith quote, but I don’t find it particularly persuasive. Leaving aside all of the moral arguments (above), it’s just not that psychologically/sociologically realistic. The butcher, baker, and brewer are probably more motivated in their day-to-day life by their idea of the role that they fill in society than by their annual income; just as there are plenty of people today who could retire and live comfortably for the rest of their lives, but choose to keep working.

  2. What an interesting article. Once a leading world economy, whose admirable innovative technology was often at the centre of modern “gadgety” advances, Japan hasn’t really been in the spotlight for a while. Because Japanese news have been rather quiet these days, people may have taken for granted that the country may be experience a downturn, and that glamorous Japan’s economy might not be all that up to speed as it once was. It seems to me that the Japanese are in need of a solid revamping of the system, an implementation of new business standards, an adoption of modern social dynamics in the work place, a breaking away from the shackles of tradition. Call it what you will. Perhaps a crash course for managers on how to create a better working environment? Hum. Let’s start with turning up the heat a bit. Shivering less should increase productivity some. But anyway, this revamping should be established both in the government and in privately owned businesses. Perhaps Japan has just been doing the same thing for years and hasn’t looked into taking actual steps for implementing any of Prime Minister Abe’s ideas. Or of implementing any ideas, for that matter. Which causes stagnation. And a stagnant economy won’t survive very long.
    Perhaps what Japan needs is more fluidity–that natural fluidity of cycles of employee turnover, of supply and demand, of more money coming out of farming subsidies and flowing into other sectors of the economy, of the young stepping into the economy to replace the old, of the invisible hand driving free markets forward.

  3. Japan has always had a form of a managed economy, so I can see why the Japanese government is taking procedures to control their economy by controlling the agricultural market and other forms of government. I thought it was interesting that recently wages were raised so spending increased by consumers. Typically this form of economics is unsuccessful, as seen in Reaganomics, though those reforms were meant for upper classes. It is difficult to compare the U.S. economy to the Japanese economy though, because Japan has had a history of a much more directed economy. Thus, we cannot really say that Japanese economic reforms will be unsuccessful, because Japan has been successful in the past undertaking the reforms they have undertaken.

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