Lessons From the Past

When it comes to competing for jobs, third-world countries like China and India seem to be unstoppable juggernauts. They are not, and a little historical perspective shows why.

In his 1987 book, "The Rise and Fall of the Great Powers," Paul Kennedy claims, throughout history, successful nations have recognized and accepted global waves of change and have managed to adapt and thrive. Nations that instead resisted by isolating themselves from global forces have failed miserably.

Individuals are faced with the same choices. Fight the inevitable and inevitably fail, or recognize change and use it to advantage.

Perhaps the most familiar example of failure by fighting is the economic performance of Japan from 1990 to 2002.

Back in 1990, most observers saw Japans Ministry of Industry and Trade (MITI) as a collection of infallible government mandarins expertly guiding their country to one success after another. The U.S. was portrayed as a declining nation at the mercy of malevolent global market forces.

Both Japan and the U.S. experienced substantial economic stress during the 90s and the first few years of the millennium. Japan chose to cope with these stresses by preserving the status quo and ignoring global forces.

MITI made preservation of jobs in aging and unproductive sectors such as steel, shipbuilding, farming, construction, and second-tier auto manufacturing (Subaru, Suzuki, Mitsubishi) a priority. They "encouraged" banks to lend money to such sectors, even though this lending was not for investment, but for covering operating losses and repaying prior loans.

MITI ensured that investment in Japan would remain locked in unproductive areas of the economy with no long-term futures. Promising new firms and technologies were starved for capital.

The U.S., whether through benign neglect or intelligent planning, chose to let unproductive firms fail. These firms were consolidated (Mobil), sold to foreign investors (Chrysler), or allowed to go bankrupt (too many to list). The trillions in capital freed by stopping existing and new investments in these firms were redirected to growth areas such as biotechnology, pharmaceuticals, and software.

So how did the MITIs mandarins fare against the "invisible hand" of U.S. markets? In 1990, the unemployment rate stood at 2.1% in Japan and 5.6% in the U.S. By 2002, the unemployment rate reached 5.4% in Japan and 5.8% in America. While the U.S. rate of unemployment remained relatively stable, Japans almost tripled.

In 1990, general government gross financial liabilities (national debt) as percents of nominal GDP were 68.3% in Japan and 66.6% in the U.S. In 2002, the national debts as percentages of GDP were 147.2% in Japan and 61.0% in the U.S.

The U.S. national debt relative to GDP declined by 5.6% while Japans more than doubled. Japans national debt now has junk-bond status and is rated one step below Botswana. Its by far the highest of any developed country, and is projected to increase to an astounding 164% of GDP by 2004.

At the end of 1990, Japans main stock market index, the Nikkei 225, stood at 23,849 compared to the U.S. Dow Jones Industrial Average of 2,634. At the end of 2002, the Nikkei had plunged to 8,579, while the Dow Jones stood at 8,342.

The U.S. stock market (and many of its investors portfolios) more than tripled, while Japans main stock market index dropped by almost two-thirds.

According to the World Bank, Japans average annual per-capita GDP growth rate from 1992-2002 was 1.1%. The recent trend is even worse, as Japans per capita GDP shrank by 0.6% in 2001 and by 0.7% in 2002. The U.S. average annual per-capita GDP growth rate from 1992-02 was 3.5%, and despite widespread recession, growth was 0.3% in 2001 and 2.3% in 2002.

Average annual per-capita growth is a good proxy for average annual raises, so the average Japanese worker saw his or her income increase by about 9% from 1992 to 2002. The average American worker enjoyed a rise in income of about 27% over the same time period.

If our economy had performed like Japans over the past 13 years or so, the U.S Dow Jones average at the end of 2002 would have stood at 948 instead of 8,342. Just think what this would have done to your investment portfolio!

Your annual salary would also be about 20% less than it is now, and you would be two and half times more likely to be out of work because our unemployment rate would be over 14%.

Finally, our national debt at the end of 2002 would have been $13,805 billion instead of $6,405 billion. At an interest rate of 5%, payments on the additional $7,400 billion in debt would add $370 billion per year to our national deficit, nearly doubling the project current national budget deficit of $401 billion in 2003 (Congressional Budget Office).

The 5% interest rate is higher than what the U.S. government now pays for borrowings, but interest rates rise as total debt increases, especially as debt approaches junk status.

If we had severely curtailed immigration per the Japanese model, we would have ignited the same demographic time bomb that is currently ticking in Japan. Largely because of draconian immigration policies, 27% of Japans population is projected to be 65 and over in the year 2020. Young immigrants to the U.S. will give us a much more manageable ratio of retirees: projections say 16% of the U.S. population will be 65 and over in 2020.