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Kristof gets Japan’s "lost decade" wrong; argues for a US lost decade by supporting the auto bailout

December 15th, 2008 No comments

New York Times columnist Nicholas Kristof argues on Sunday that an auto industry bailout is needed given the importance of the industry to the US economy, and bases his conclusion on how economic mismanagement by Japan resulted in the “lost decade” there; his blog summary is a good precis of his column:

My Sunday column argues for bailing out the auto companies. It’s not that I think the arguments against a bailout are wrong — in general, businesses should have to have the freedom to fail — but conditions are so precarious right now that we just can’t afford another huge blow to employment and consumer demand. It may well be cheaper for taxpayers to sustain General Motors than to pay for the clean-up and burial if it expires.

I should add that my view on this is deeply shaped by my years living in Japan during the “lost decade” there. Anyone who watched the torment of Japan, and the failure of government to address it sufficiently aggressively, believes that we should err on the side of action.

It seems to me that, from my vantage point (in Japan in the 80s and since 2000, and observation of the US S&L liquidations), Nick Kristof has got the lessons from the Japan “lost decade” all wrong.  I said as much on his blog, and copy below the comments I left him:

Anyone who watched the torment of Japan, and the failure of government to address it sufficiently aggressively, believes that we should err on the side of action.

Nick, I think you fail to understand Japan’s lost decade, which certainly involved the government acting to provide massive capital support to prop up banks, thereby allowing zombie companies to survive, while further wasting public funds on roads and bridges make-work projects.

The Japanese would have been much better off either with (1) aggressive bank takeovers, liquidations and asset workouts – a la the US method in dealing with failed S&Ls, or (2) with doing absolutely nothing, which would have resulted in bank failures and the death of zombie companies.

Why are these better than direct bank bailouts or industry bailouts?  Because they stop wasting public and private capital on failed businesses, put idle assets in the hands of people who can do something positive with them, and contribute to growing economies.

Public intervention in the form of bailouts is pernicious because it not only lets politicians pose as doing something, but further takes wealth from private hands (either in the form of taxes, or borrowed capital that raises borrowing costs for others) and instead of letting private markets determine what are the most profitable areas for investment.  At their core, bailouts are actually a tax on future recoveries.

Categories: autos, bailouts, Japan, Kristof Tags: