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Second mistake. With all those loans, the Japanese government was simply too integrated into the market to have adequate incentives to create the right policies. Daniel Okimoto, former director of the Asia-Pacific Research Center, points out that the interests of Japan's economic bureaucracies, such as the Ministry of Finance, became interdependent with the banking industry.
Moreover, government officials suppressed data revealing the intense scope of the economic malaise, all while regulations were developed with government interests in mind. Transparency and public accountability were basically nonexistent.
America now finds itself in the same position. The Treasury has taken equity stakes in many major financial institutions and insurance companies, not to mention the pending partial nationalization of Detroit's Big Three. This has created a myriad of conflicting interests as well as vast potential for fraud.
Consider that while the bulk of what the Treasury, FDIC, and Federal Reserve have spent has been tracked, it's far from clear what the banks and other institutions have done with that money. Without this information, it's difficult to measure whether the $8.4 trillion has been effective. Fighting fraud is equally difficult.
Third mistake. The length of Japan's asset deflation, recession, and liquidity struggles has been blamed largely on the lack of foresighted policies and political leadership. Politicians bent on retaining their power took action that sought to solve the present day concerns, such as infrastructure projects, without regard to their long-term effects. As a result, economic growth was not sustained.
America suffers from a similar vision problem. Intent with avoiding any semblance of economic pain, federal officials have thrown moral hazard and laissez-faire principals to the wind. Creative destruction has been rejected, despite long historical proof that it is the best way for an economy to grow.
Fourth mistake. Japan tried to climb out of its economic mess by raising taxes and cutting interest rates. Okimoto cites a series of policy mistakes in a report on Japan's economic stagnation that includes a consumption tax hike, business taxes, and heavy-handed reliance on interest rate cuts that reduced investment incentives.
President-elect Obama has backed down temporarily on his oil industry windfall profits tax and his promise to end the Bush tax cuts. But he still plans on letting the Bush tax cuts expire in 2010 and has set an arbitrary cap of $80 per barrel as the most profit oil companies can make before a windfall tax.
Neither Obama nor Congress has seriously considered cutting business taxes, cutting capital gains taxes, or creating an investment tax holiday. Any of these would encourage capital investment and the growth of businesses, thereby spurring on an economic recovery. Meanwhile, the Fed continues to slash interest rates with the goal of encouraging lending today, thereby limiting investment rates of return over the long-term.
Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.
Japan's economic growth during the 80s was due in large part to consumption growth and heavy capital investment. However, during the 90s, that money dropped-off as savings increased due to uncertainty, leading to a sharp drop in demand that further hurt prospects for recovery. The same problems contributed to the flight of foreign capital from Japan as well.
To counteract the lack of private investment, the Japanese government turned to large-scale infrastructure programs. They built roads, bridges, and airports, all with the goal of creating jobs and saving the economy. But it didn't work. Public debt skyrocketed (it is now higher than GDP), unemployment doubled, and the economy remained stagnant.
While private sector investment isn't totally stalled in America today, there is great uncertainty about what the government will do next, whether taxes will increase, and what future rates of return will be considering the Fed's rate-slashing binge. Foreign investment dollars are slowing as well, partially due to the global economic dip, but also because of errant policy.
To make matters worse, Obama is planning a Japanese-styled infrastructure investment project, with the goal of restarting the economy and creating 2.5 million jobs. But the plans are unlikely to encourage long-term economic growth, the jobs are not sustainable, and the spending will increase national debt.
And while some of Japan's infrastructure projects have served society, that value must be compared to what the private sector could have created with economic policies in place that encouraged free market activity. In other words, what are the unseen losses?
Still there are reasons to be optimistic. Not only does America have the Japanese lesson to study, we are in a much better position to act than Japan ever was. Despite Wall Street's massive losses, for instance, there is over $100 billion in private capital available now for investing in infrastructure. With a little forward thinking, we can unleash the greatest new wave of investment this country has ever seen-one that originates from the private sector, not from government planners focused on propping up the living dead.
Anthony Randazzo is a research associate at the Reason Foundation.