Turning Japanese: Hillary Fears for Our Economic Future

How Japan responded to its real estate and banking crisis could provide lessons for America.


"We might be drifting into a Japanese-like situation," Hillary Clinton told the Wall Street Journal earlier this week. "I don't think we can work our way out of the problems we're in, in the broad-based economy, with monetary policy alone. I think the Japanese tried that and tried that and tried that.... I don't think we'll have the strong growing economy we need until we have the strong energy policy, for example."

In the 1990s, miracle turned into malaise for Japan. A 2006 study from the Dallas Fed documents the nation's economic troubles. In 1991, the Japanese economy was 80 percent the size of America's. By 2004, it was 71 percent. From 1996 to 2002, per capita gross domestic product in Japan inched forward by just 0.2 percent. From February 1991 to January 2002, Japan suffered 66 months of recession vs. 16 for America. In the 1990s, the country's unemployment rose by nearly 3 percentage points, while the U.S. rate fell by more than 2 percentage points.

During its "lost decade," Japan suffered the worst period of economic growth of any industrialized nation since World War II, according to the Institute of International Economics.

Blame an interconnected bad banking system and deflating real estate bubble (sound familiar?) for the start of the downturn. But Japan's policy response didn't help matters. Clinton mentions that monetary policy didn't work. Neither did infrastructure spending packages, something Clinton did not note in the interview. One reason those efforts did not pay off, the IIE concludes, is that they were offset by higher taxes. Indeed, the Dallas Fed points to a number of problems with Japan's economy:

Taxes were onerous. Japan's top marginal income tax rate kicked in at a very low income level compared with other nations.... Japan maintained a large number of hidden barriers to imports.... Japan erected hurdles to starting new businesses and discouraged price competition.

Let's be clear: An economic downturn caused by a banking and real estate crisis in Japan was exacerbated by higher taxes, higher regulation, and protectionism. And keep in mind that Clinton has been calling for higher taxes, more regulation, and a timeout from trade. Something to ponder.