- The Washington Times - Thursday, November 6, 2008


A government repeatedly lowers lending rates, develops a cozy relationship with banks, and tolerates the hiding of bad loans.

A real estate bubble collapses, and banks start to buckle.

Everyone panics and government bails out the banks, spends massively on public projects, and raises taxes to pay for the new spending.

The U.S. today? No, Japan in the 1990s.

Tokyo’s mishandling of the economic crisis led to long-term stagnation, from which Japan has yet to recover, and to the loss of its place as a global economic leader. This - or worse - could be America’s fate if we get our reaction to the current crisis wrong.

While there is a veritable cottage industry of economists debating the causes and meaning of Japan’s “lost decade,” one thing is clear: It lasted much longer than it should have.

From 1976 to 1991, Japan’s gross domestic product (GDP) increased at an average annual rate of 6.5 percent. But from 1992 to 2007, it averaged only 0.6 percent per year.

There are many differences between Japan’s and America’s economic crises, but there are also several applicable lessons that we can take from Tokyo’s experience.

• First, allow the market to clear. Bailouts, subsidies and other rescue packages may ameliorate the problem in the short term, but slow economic recovery in the long run.

That’s what happened in Japan. Politicians, fearing recession, propped up banks and shielded investors from the consequences of bad decisions. Asset prices stayed artificially high, depriving investors of new opportunities. New regulations and taxes to pay for the additional spending froze the low-performing economy.

• Second, don’t hide the problem. The collapse of commercial property values in Japan left firms with huge debt that they hid from shareholders; they were still paying it down a decade after the bubble burst.

As we work to solve our crisis, we need much more transparency not only from government in whatever interventions it undertakes, but also from banks and firms in their accounting.

This won’t require intrusive new regulations. Instead, firms and banks should follow existing disclosure requirements while government is fully transparent about how its expensive programs are serving the public.

• Third, don’t expect “stimulus packages” or massive spending to “grow” our way out of the crisis. Tokyo spent on a historical scale. At one point in the 1990s, its budget deficit approached 10 percent of GDP, the equivalent here to more than the trillion-dollar deficit we expect for this fiscal year.

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