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Don't scorn Germany and Japan; learn from them

Posted: Monday, August 02, 2010

In the midst of the Great Recession, the United States is suffering through nearly 10 percent unemployment, rising inequality and poverty, 47 million people without health insurance, declining retirement prospects for the middle class and a general increase in economic insecurity. The global marketplace has become tumultuous, so when we find a bright spot, one would think it deserves a mention.

How then should we regard a country that has 5 percent unemployment, the lowest income inequality, health care for all its people and is one of the world's leading exporters? On top of that, this country scores high on life expectancy, low on infant mortality, is at the top in math and literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse, according to British researchers Richard Wilkinson and Kate Pickett in their seminal book, "The Spirit Level." It also has a low per-capita rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats the United States by a country mile.

Doesn't that sound like a country from which Americans might learn a thing or two about how to get out of the hole in which we're stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case as much as the Land of the Rising Sun.

Google "Japan and its economy" and you will get many hits about Japan's allegedly sclerotic economy, its zombie banks, its painfully slow economic growth. Recently, the Los Angeles Times had an article about Japan's incurable deflation spiral. This malaise has been called "Japan syndrome," sounding like a disease to warn U.S. policy-makers, as in "you don't want to end up like Japan."

No one has been more influential in defining this narrative than Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still today, Krugman has skewered Japan's economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, bluntly stating in one: "The state of Japan is a scandal, an outrage, a reproach ... operating far below its productive capacity, simply because its consumers and investors do not spend enough."

But let's look at some of the Japanese metrics during that time. Throughout the 1990s, the Japanese unemployment rate was about - ready for this? - 3 percent, or about half the U.S. unemployment rate at the time. During that allegedly "lost decade," Japan also had universal health care, low income inequality, the highest life expectancy, low infant mortality and low rates of crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritize? How do they decide what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their theories and models?

In the current debate over fiscal stimulus versus deficit reduction as the best course for economic recovery, various economists now are criticizing Germany. Krugman says Germans are not spending or consuming enough to stimulate their economy - the same criticism he has leveled at Japan.

Yet in the early 1990s, when the United States was plagued by large deficits and recession, the Clinton administration didn't employ Krugman-type fiscal stimulus. Instead, it cut the deficit. By the end of the decade, the U.S. budget showed a sizable surplus and the economy was booming. Reality seems to defy economic theory on a frequent basis.

Japan's economy has been and remains successful. So is Germany's. They have reached an economic steady state in which they don't need roaring growth rates to provide for their people. But for the economic Cassandras, apparently it doesn't matter if people's needs are being met; what matters is whether their theories and equations balance.

Unfortunately, there is a common-sense aspect to this that gets lost amid all the headlines. Two of the lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth are severe. U.S.-style trickle-down economics doesn't work anymore.

In other words, it's no longer strictly about economic growth; it's about sustainability and learning to do more with less. The world needs to figure out how economies can provide for their people without relying on destructive bubble-driven growth or overheating in a Venus-like atmosphere. This is not an easy challenge, yet it is the path that Japan, Germany and others have chosen. Americans would be wise to learn from them.

• Steven Hill is the author of the recently published "Europe's Promise: Why the European Way Is the Best Hope in an Insecure Age." He wrote this for the Los Angeles Times.



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