Crisis of Command
America’s Broken Civil-Military Relationship Imperils National Security
Faced with economic stagnation in the late 1970s and early 1980s, most of the world’s rich countries made a fateful choice. They lowered taxes; slashed government regulation in labor, financial, and other markets; opened their economies to global trade and finance; and privatized government functions. Economic historians will probably never fully agree on the magnitude of the consequences of neoliberalism, as it became known. But most concur that the reforms at least contributed to higher inequality, increased economic insecurity, and, at least temporarily, faster economic growth.
Data crunchers will surely spend the next several decades examining all these claims. Perhaps the best way to understand the effects is to look to a country that missed the neoliberalism boat: Japan. Buoyed by the last spurt of its postwar catchup growth, Japan managed to sail through the 1980s without having to face hard choices about the structure of its economy. As a result, its labor markets are still tightly regulated, with stringent protections for full-time employees, including strict regulations on firing employees. Its corporate taxes remain high, and many of its domestic markets are still shielded from imports behind a tall thicket of non-tariff trade barriers. Its financial system remains centered on large government-backed banks instead of on capital markets, and hostile takeovers are still prevented by the courts. There are no Gordon Gekkos in Japan.
Many features of the Japanese economy that are commonly attributed to culture are, in fact, the result of Japan trying to run a modern economy without neoliberal reform: powerful but inefficient corporations, little job mobility, low unemployment, a relatively equal income distribution, and a job market that is heavily rigged against women. Taiwan, which is probably the closest country to Japan in cultural terms, has much higher inequality, greater labor mobility, more gender equality, and a higher per capita GDP than Japan. Taiwan, of course, is a low-tax, low-regulation country that is heavily exposed to trade with China.
Japan’s economic woes are, by now, well known -- as are the efforts of its dynamic prime minister, Shinzo Abe, to put the country on sounder economic footing. Abenomics, as his plan is known, has a “three arrow” strategy, the most commonly discussed of which is the first arrow, a dramatic burst of unconventional monetary easing. Haruhiko Kuroda, the dynamic new Bank of Japan governor appointed by Abe, has vowed that the bank will continue to purchase a wide array of financial assets until the inflation rate rises to two percent. That effort, which many expect to succeed in boosting inflation, seems to have already lifted stock markets, consumption, hiring, and consumer confidence. But everywhere except the stock market, the growth has been modest. The first arrow was supposed to be followed by a second -- fiscal stimulus -- which was essentially sacrificed when Abe pivoted to a consumption tax hike in an attempt to reduce Japan’s substantial government debt. (It is not clear whether the tax hike was Abe’s choice or whether he was pressured into it, but this is a bit beside the point.)
That leaves only the third arrow: structural reform. Abe has promised substantial reforms. But there is widespread skepticism in the Western press about the prime minister’s willingness and ability to follow through. And there is good reason for the skepticism. In order to enact meaningful structural reform, Abe will have to reverse Japan’s most important economic policy decision of the last half century. He will have to embrace neoliberalism.
Japan’s long economic stagnation can be blamed on three things. The first, a collapse of demand caused by the bursting of asset bubbles around 1990 and exacerbated by policy mistakes thereafter, had mostly run its course by 2000. The second, an aging population, masks per-capita growth that has been stronger than the total GDP numbers reveal. The third culprit is the most troubling: low productivity. Economists Takeo Hoshi of Stanford University and Anil Kashyap of the University of Chicago have shown that Japan’s “total factor productivity” -- a common measure of the efficiency with which labor and capital are used in an economy -- has flatlined since the late 1980s, before the asset bubbles even burst. Meanwhile, the United States’ total factor productivity has grown; although the two countries were almost equal as of 1990, Japan is now only around 70 percent as efficient as its Western counterpart.
Why is Japan so inefficient? Hoshi and Kashyap hypothesize that the main culprit is so-called zombie companies, which are protected from bankruptcy by cozy relationships with big banks. A number of studies support this hypothesis, at least in part. But it is also likely true that strict regulation, which protects firms from domestic and foreign competition, is also to blame. An OECD study in 2008 found that regulation has reduced labor productivity, an alternate measure of productivity, in Japan’s service sector. Inefficiency is easy to find: endless unproductive meetings, byzantine organizational charts, refusal to adopt information technology, lifetime employment, and pure seniority-based pay. And of course there is Japan’s legendary gender inequality, which keeps women in low-status jobs, serving tea and being passed over for promotions and raises, their talents squandered.
Neoliberalism would make such inefficiencies hard to preserve. Freer trade would increase competition from low-cost imports, forcing companies to cut costs. Deregulation would boost competition, as it did in Japan’s broadband industry (which, after deregulation, went from a laughingstock to one of the world’s most efficient). Labor market reforms would allow companies to fire the least productive among the cosseted full-time workers. And financial reform, especially greater allowance of hostile takeovers, would force managers -- who now rule their domains like landed barons -- to scramble to boost productivity.
Two of Abe’s reform proposals, in particular, promise just this sort of bitter medicine. The Trans-Pacific Partnership, a fairly comprehensive regional free trade agreement that includes the United States, would introduce more foreign competition. Meanwhile, the Abe administration has been holding parallel talks with the United States about lowering Japan’s legendary non-tariff barriers, a dense thicket of regulations, import quotas, and preferential taxes that still isolates some of Japan’s domestic industries from global competition. Abe also wants to loosen legal restrictions on firing full-time workers.
Predictably, his proposals have met with stiff public resistance. This is natural. Neoliberalism represents an enormous, wrenching choice for Japan. Its public will face not only the economic costs of neoliberalism -- inequality, higher unemployment, job insecurity -- but also its social costs. The end of corporatism would amount to the wholesale destruction of Japan’s social model. Many Japanese men, who have long prided themselves on being economic providers, would feel degraded and demoralized. Suicide, already occurring at a very high rate and concentrated among unemployed middle-aged men, would at least temporarily spike. Japan’s image of itself as an equal, middle-class society (never quite true, but cherished nonetheless) would be shattered. That is a steep price to contemplate.
Then again, the corporatism has high costs as well. Slack productivity makes the entire country poorer, of course; Japan’s per capita income, which once rivaled the United States’, is now less than three-quarters as high, a difference of $13,000 per person per year. But the social costs may be even greater. The two-tier labor market, which has been Japan Inc.’s response to foreign competition, consigns half of new labor market entrants into low-status part-time or contract work, from which few can ever escape. And Japan’s gender inequality prevents many millions of Japanese women from feeling like respected and equal citizens (and is probably one factor behind Japan’s low fertility rate).
So the third arrow of Abenomics is not just about lifting Japan out of its long economic slump. It is about making a grave choice that will determine the fabric of Japanese society. The failure of the third arrow means continued corporatism, and the preservation of Japan’s social model even at the cost of a slow slide into economic backwardness. Abe’s trade and labor reforms offer a way out into a frightening and uncertain future -- but one that is potentially freer. In other words, Japan is being offered a second chance to take the road it chose not to take in the 1980s.