No matter how much Japan spent on public works or subsidized the weakest links in finance and industry, its economy refused to grow. All that spending couldn’t make up for a paucity of investment opportunity and capital frozen by high taxes, new regulations and an extremely high aversion to risk bred by the lack of transparency
• Fourth, don’t raise taxes. Japan, after spending piles of money it didn’t have, tried to deal with the budget imbalance by raising consumption taxes, which triggered another downturn.
• Fifth, keep interest rates as low as you want, but recognize that this alone will never bring the economy back. For most of the 1990s, the Bank of Japan’s discount rate was below 1 percent; so was growth.
Federal Reserve Chairman Ben S. Bernanke, like Alan Greenspan before him, may think low interest rates will provide the liquidity to grow our way out of a recession, but this likely won’t happen if high taxes, runaway spending, and frozen asset markets convince investors that the future will be worse than the present.
• Lastly, avoid the political stagnation that prevented Japan from correcting its problems. A tyranny of consensus killed any attempt at leadership in Japan. Short-term political expediency ruled the day; and when government did act, the only thing politicians could agree on was to throw more money at the problem. It didn’t work.
Notwithstanding the differences between Japan’s economic crises and our own, we are in danger of repeating some of their mistakes. Republicans and Democrats - the White House and Congress - seem to be suffering from a tyranny of consensus of their own. They believe a recession is politically unacceptable. They may do anything, regardless of long-term consequences, to stop or at least relieve short-term pain.
This is precisely when the long-term fate of an economy is most in peril. Decisions are made or not made for short-term political and economic gain, and the future health of the economy is scarcely debated.
This mentality is what brought Japan’s once mighty economy down. It could be our fate, too, if we allow our politicians to abdicate their leadership responsibilities.
Kim Holmes is vice president for foreign policy at the Heritage Foundation (Heritage.org) and author of “Liberty’s Best Hope: American Leadership for the 21st Century” (2008).