Lessons from Japan: Invest in the real economy, do it fast, and don’t deregulate

Can the U.S. learn lessons from Japan’s economic troubles of the last decade? Yes indeed. Not from a new Washington Post article, though.

The Council on Foreign Relations’ Amity Shlaes argues that Japanese investment in infrastructure offers a cautionary tale for Barack Obama. This is true, but not at all in the way Shlaes alleges. After studying Japan for eight years and living there for a time, I can say that the Post article presents a deeply distorted picture that needs debunking before it spreads.

First, understand this: Though there are common elements to their respective crises, comparing infrastructure policy between the two nations is like comparing burgers to sushi. It’s shortsighted and silly to compare a small, island nation with limited infrastructure capacity – a country whose public transportation system, 15 years ago, was ahead of where we are today – to the vast United States, where we’ve habitually underinvested in community needs.

America is unlikely to run out of areas, urban or rural, in desperate need of upgraded bridges, new bus and rail transit projects, or communities in need of jobs. That’s why Gavan McCormack, a well-respected progressive Japan scholar, is 100 percent correct to rail against Japan’s construction-industrial complex when he’s quoted in the Post article. Because of the construction industry’s huge lobbying influence in Japan, many unnecessary (and ecological harmful) projects were launched.

This is a spot-on criticism of Japan that applies not at all to the United States. I’m certain McCormack would be horrified to learn his work was being cited in the same breath as a Heritage Foundation study, and deployed to argue against public works projects on a different continent.

There are three major lessons we can learn from Japan’s response to their financial crisis:

What was Japan’s biggest mistake? Not acting fast enough. Though the economic problems were rooted in the 1980s bubble and the collapse started in the early 1990s, public sector funds weren’t used to rescue troubled firms until 1996. This allowed the crisis to deepen considerably, which made the road back much tougher.

Among mainstream Japanese economists, this is taken as a given. That’s why their government’s experts are calling America’s quicker response “encouraging.”

Is public investment necessary? Absolutely. Almost all experts agree that the problem wasn’t that Japan spent money on public works: it’s that they failed to do so fast enough and — due to political factors — they didn’t put the money in all the right places.

Is public investment sufficient? Absolutely not. Japan needed, as the U.S. needs, improved regulatory oversight to hold shady dealers accountable and guard against future troubles. Sound regulatory policy could have prevented both crises, and it’ll be necessary to stop future collapses.

Of course Japan made errors, and of course we should learn from those missteps. The keys to getting it right: act fast; invest in the real economy, putting people to work and meeting critical human needs; and resist the deregulatory impulse at every turn.