Following Japan's footsteps

One of President Obama's economic advisers, Laura Tyson, seems to have a strange affinity for failed Japanese policies. In 1989 she co-authored The Politics of Productivity: The Real Story of Why Japan Works, a book which could be interpreted as a moderate endorsement of Japan's use of strategic trade policy. Japan's approach was essentially a form of dirigisme in which the government promoted the rise of certain economic sectors that it believed held the key to future prosperity.

Describing herself as a "cautious activist" on trade policy Tyson describes her approach in the book as the following:

Cautious activism has implications for domestic economic policy as well as for trade policy. A cautious activist supports general policy measures such as a more generous R&D tax credit and increases in public funding for civilian R&D and education -- initiatives that would promote all of the nation's high-technology producers without singling out any one of them for special favor. But a cautious activist is willing to go further, recognizing that measures to support particular technologies or industries are sometimes warranted.

To determine when such measures are required and what form they should take, the government needs an institutional capacity to monitor and respond to trends in global competition. Without such a capacity, America's policy has often been too little, too late, While we scramble to help our producers address crises that have been long in the making, both Japan and the European Community have forward-looking policies to nurture their high-technology industries. The American approach is no longer adequate, particularly at a time when cutbacks in defense R&D programs threaten to decimate public funding for science and technology unless new civilian programs are established to replace them.

Of course only a few years after this book was published Japan went into a decade-long period of economic torpor while the Europeans played second fiddle to a booming U.S. economy that was riding the wave of a booming technology sector. This should be kept in mind when politicians advocate policies to promote alternative/green energy technology, which the conventional wisdom holds is the next great source of American economic growth.

Also disconcerting is Tyson's recent talk of the need for a second stimulus package, citing the $787 billion version passed earlier this year as "a bit too small." Japan, of course, engaged in a series of 10 spending packages between 1992 to 2000 for which all they had to show was a mountain of debt -- currently at an astonishing 170 percent of GDP. This futility, however, has not stopped the Japanese from pushing yet another series of spending packages.

Let's hope that we don't proceed down a similar path.