OPINION:
In the 1980s, Japan appeared to have the world by the tail before collapsing into a lost decade and malaise. A similar fate seems unimaginable for the United States given the big wins in artificial intelligence thanks to OpenAI godfather Microsoft and Nvidia, Alphabet, Amazon and Meta exploiting the global commercial opportunities of the internet, and Apple and Elon Musk’s enterprises giving master classes in reinvention.
Yet poisoned politics that beget dysfunctional government policies could cast the U.S. economy into an abyss like the one that swallowed Japan.
In the 1960s through 1980s, Japan soared on the back of exports — in particular to the open U.S. market — through a combination of management with tireless dedication to high-quality, protected domestic markets — often privately conspired through keiretsu networks of interlocking ownership among banks, trading companies, retailers, manufacturers and their suppliers — government subsidies and state direction. It accomplished higher growth than the United States and Western Europe by seizing global leadership in one manufacturing industry after another.
Many Americans don’t remember or don’t know that the semiconductor industry was pioneered here and made a stopover in Japan before Taiwan and South Korea won the top spots in the global supply chain.
Japan is still No. 3 thanks to strong positions in memory, sensors and power chips, and the United States is a flagging No. 4. But the world can’t make enough of the most advanced chips without the foundries at the Taiwan Semiconductor Manufacturing Co. or Samsung.
Industrial policies and subsidies that drive exports often attract foreign defensive reactions. Japan was forced to accept voluntary export restraints with the United States in textiles, steel, color televisions, machine tools, automobiles and semiconductors, and Japanese automakers established production here.
Industrial policies encourage pantheon misuse of capital, inefficiency, and reliance on a narrower group of national champions to fuel innovation. Even through Japan’s malaise, Sony, Nintendo and Toyota remained world-beater companies.
China is at similar risk, as former President Donald Trump was less surgical, slapping tariffs on steel and a broad range of products while in office. President Biden has not rolled those back and has introduced industrial policies and subsidies in solar and wind generation, automobiles, batteries and semiconductors.
China is limiting Apple’s market access, and the European Union is fashioning new industrial policies and subsidies. But the real problem for the U.S. economy — as it was for Japan and is for China today — is that industrial policies inspire inefficient investment and easy macro policies to compensate.
The federal government deficit is ballooning, yet pressures mount for more business tax breaks and entitlement spending and the Federal Reserve to cut interest rates and return to the days of cheap capital.
Ten-year, inflation-adjusted Treasury yields averaged 0.2% between the global financial crisis of 2007-2009 and last year. They resulted in overinvestment in commercial real estate and universities, supported by yet another industrial policy, the federal student loan machine.
General Motors benefits from Mr. Biden’s auto and battery industrial policies but has made bad bets on self-driving vehicles and eschewed hybrid vehicles.
Those subsidies provide cover for excessive CEO compensation. For example, GM’s Mary Barra is paid far more than her counterparts at Toyota and Honda. The new United Auto Workers contract makes it more difficult for the Detroit Three to match Japanese and Korean imports on quality and price without protection.
It us reflected by automakers’ cheapening products in ways they hope drivers won’t notice.
Consumer Reports test-drove the new Dodge Hornet in the highly competitive small SUV segment and found a noisy interior filled with cheap plastic. The magazine gave it a terribly low rating against comparable Toyotas, Subarus and Hondas.
Mr. Biden’s union preferences and social justice promoting training and day care mandates only worsen the 44% cost disadvantages U.S. semiconductor manufacturers have with Asian foundries. Those will likely require tariff protection or arm-twisting other industries to sell the chips government-financed factories produce — an American version of the keiretsu.
We may have record job creation as the pandemic fades from the headlines, but workers are disgruntled. High-paying jobs are getting scarcer, and an increasing number of Americans are working multiple gigs.
Young American adultss are not having children, which recalls Japan’s and China’s baby droughts. This forces reliance on immigration that isn’t properly managed to attract those with the most needed skills.
Notwithstanding the exhortations of statists at the left-leaning Roosevelt Institute and New York Times as well as the Biden West Wing, America is still about free markets, and the capitalists among us like to point to the record stock prices.
But the Magnificent Seven — Nvidia, Microsoft, Alphabet (Google), Amazon, Apple, Meta and Tesla — drove two-thirds of 2023 gains in the S&P 500. The latter accounts for about 80% of U.S. publicly traded equities.
An economy that supports 335 million people leans on a very narrow reed by relying on just seven companies to drive prosperity.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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