Japan’s Recent Past = America’s Future?

Years ago, the Antiplanner met some students from the Maxwell School of Public Administration. I asked them what they learned at the school.

“We learned about the Golden Triangle,” they said. That sounded suspiciously like the Iron Triangle, a concept used by public-choice economists to describe the natural alliance between elected officials, bureaucrats, and special interest groups: the elected officials fund bureaucracies, who pass money and resources to the special interest groups, who donate money to the elected officials’ political campaigns.

According to the students, the Golden Triangle “is bureaucrats, elected officials, and special interest groups — with bureaucrats at the apex of the triangle, running things.” Does the Maxwell School think this is a good thing? “It’s an ideal to be achieved, but we haven’t gotten there yet,” they said.

One place that has reached this “ideal” is Japan, at least according to Alex Kerr, author of Dogs and Demons: Tales from the Dark Side of Japan. Though not a recent book (copyright 2001), Dogs and Demons provides an uncomfortable look at our possible future.

Back in the Rising Sun era, when Japan was considered a serious economic rival to the U.S., many American writers had nothing but praise for the Japanese bureaucracy. “Their objective is to achieve the greatest happiness of the greatest number of people,” said one writer (quoted by Kerr on p. 140). Another wrote that Japan’s top bureaucrats are “brilliant, creative, tenacious, public spirited” and “living proof that top officials can be ‘rightly oriented in their own minds and hearts.'”

Kerr paints a very different picture. Japan’s children attend strict and harsh schools where all independence and creativity is literally beaten out of them. An elite few go on to Tokyo University, which by American standards is a backwards place with negligible research programs, but which graduates most of the people who go on to staff the nation’s top bureaucracies.

The bureaucracies have more power than those in any other country. Although Japan has serious problems, the bureaucrat’s answer to just about any question is to build a monument. “In field after field, the bureaucracy dreams up lavish monuments rather than attend to long-term underlying problems” (p. 146). These monuments include dams, stadiums, concert halls, museums, roads, and, yes, high-speed rail.

“Railroad building is an example of a policy that grew far beyond its original aims and become one of officialdom’s unstoppable tanks,” says Kerr. “A high priority in the postwar years, railways took on a life of their own as the ultimate pork barrel beloved of politicians, with the result that gigantic new lines continue to expand across the nation regardless of economic need or environmental impact” (p. 150).

What most bothers Kerr (who lives in Japan) is that all this construction has devastated Japan’s environment. Although various land-use policies confine most people to cities, you can hardly go anywhere in the countryside where your views are not obstructed by some giant concrete monument of some sort or another.

But an even more serious problem is the economic effects. Japan is famous as a nation of savers, and most people save their money in Postal Service savings accounts. The bureaucracy finances its endless construction programs by borrowing from these accounts, which it can do off budget and virtually unregulated by the elected parliament (Diet). Contracts are supposed to be bid out, but the bureaucrats rig the process to limit the number of bidders. This makes a few contractors rich.

At an appropriate time in their careers, bureaucrats “descend from heaven” by retiring from the public sector and taking a job with banks, construction companies, or other companies dependent on the bureaucracies’ largess. In a few years, the former bureaucrats can earn $2 million or more in their new positions. As a result, the Golden Triangle becomes a Golden Line, with elected officials almost completely cut out of the process.

Meanwhile, the nation and all its various bureaucracies are deeply in debt. So are many companies, which have billions of dollars of unfunded pension liabilities. As noted here before, the Japanese National Railways racked up a debt of well over $200 billion before being privatized in 1987, with the government taking over the debt.

The Japanese system seemed to work in the 1960s through the 1980s. But it was all based on a big bubble, both in land and stock prices (which depended on one another). As soon as the land price bubble burst, the stock price bubble followed. Deflation was slow, and today — some two decades later — Japan is still suffering the consequences.

There are many differences between Japan and the U.S., but there are also some parallels. Just as Japan borrowed from postal savings accounts to finance ridiculous construction projects, Congress borrowed from the social security “trust fund” to finance its pork barrel programs.

Just as the bursting of Japan’s inflated property bubble led to its 1990 financial crisis, the bursting of U.S. housing bubbles in 2006 led to our 2008 financial crisis. Just as Japan tried to spend its way out its bubble collapse, so the Obama administration is trying to spend its way out of the current credit crisis. Just as most Japanese programs benefit a wealthy elite while everyone else lives with the bureaucracy’s policy of “poor people, strong state,” so many of Obama’s programs benefit bankers and other elites at the expense of ordinary taxpayers.

The most important lesson from Japan, however, is that we must not trust that bureaucrats and planners always — or ever — have our best interests at heart. American bureaucrats may not all “descend from heaven” (though when you look at the revolving door between Goldman Sachs and the U.S. Treasury, you have to wonder), but they still face incentives that rarely promote policies that are truly in the public interest.

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21 thoughts on “Japan’s Recent Past = America’s Future?

  1. the highwayman

    http://search.japantimes.co.jp/cgi-bin/fd20090405pb.html

    Sunday, April 5, 2009

    Dead ends, about turns abound in the politics of roads

    By PHILIP BRASOR

    About a year ago, the government was all in a lather about extending the gasoline tax. Local governments and the ruling coalition, not to mention interested bureaucracies, wanted to continue the tax because they said the revenues were necessary to build more roads. Opposition parties were against the extension, saying they wanted to reduce gasoline prices, which were the highest they’d ever been.

    The opposition camp mainly wanted to force a deadlock on the budget so as to precipitate a snap election. The ruling Liberal Democratic Party thus had to find ways of justifying the tax in the face of consumer opposition, and the government tied itself into knots doing so. One of these knots was environmental in nature. Then Prime Minister Yasuo Fukuda said that the gasoline tax was also a kind of green tax; if it were removed, gas prices would fall and traffic would increase along with carbon-dioxide emissions. When it was pointed out that such a justification didn’t make sense since the tax went to building more roads — which, in theory, encourages more driving — the LDP said that more roads means less traffic congestion and thus less wasted fuel.

    This logic may sound self-serving, but it’s practically Einsteinian compared to the reasoning behind the road-toll reductions that went into effect last weekend. The toll cuts, based on an idea that you can travel almost anywhere in Japan on a national expressway and not pay more than Â¥1,000, were originally proposed to alleviate some of the pain inflicted by high gas prices, but those prices eventually dropped as a result of the global economic meltdown. Still, once a notion is lodged in the government’s collective consciousness, it’s difficult to remove, so somehow the purpose of the toll reductions has been changed to that of economic stimulus, the idea being that if tolls are cut, more people will drive long distances and spend money in places they wouldn’t visit otherwise.

    Disregarding the not insignificant environmental question, there’s nothing wrong with this plan per se, but the way it’s been implemented so far indicates once again that the government never comes up with a policy that doesn’t benefit itself first.

    The main opposition Democratic Party of Japan has said that if the DPJ becomes the ruling party it will make all toll roads free. The LDP’s response to this pledge was to ask, “How will highway maintenance be funded?” That’s a good question, and one the LDP no longer finds any use for. Even though the new plan doesn’t eliminate tolls completely, the government has had to allocate Â¥500 billion to pay for it, which means all taxpayers are subsidizing the weekend leisure activities of car owners.

    One reason the government can’t completely eliminate tolls is the Electronic Toll Collection system. As the DPJ has pointed out, if all roads were free you wouldn’t need ETC at all, but there are people whose livelihoods depend on ETC, and most of them work for highway-related bureaucratic entities, which have basically cobbled together a toll-cut scheme that ensures their continued existence. What’s more, since drivers can’t take advantage of the reduced tolls without ETC, more of them will have the devices installed in their cars, thus reinforcing these bureaucracies’ positions. That’s why the government agreed to subsidize purchases of ETC devices before the toll-cut system went into effect.

    The makeshift nature of the plan is exemplified by the fact that demand immediately outstripped supply. Until the toll-cut scheme was announced, a sizable portion of the nation’s cars didn’t use ETC because it seemed an unnecessary expense unless you drove on expressways often and needed an itemized accounting of your tolls for business reasons. But, of course, commercial vehicles don’t benefit from the toll-cut scheme because it is mainly in effect on weekends and larger vehicles don’t qualify.

    The media’s main focus so far has been on traffic congestion. Last weekend, every news program had helicopters hovering over the expressways, while back in the studios pundits wondered if the traffic jams were longer than usual. But the big question was whether or not this was a bad thing. There was plenty of anecdotal evidence showing that motorists weren’t getting the most out of the new system. One TBS cameraman rode along with a family who spent five hours in their car just trying to get from Tokyo to Chiba.

    But the government saw it as a good thing, saying that the long lines of cars meant that people were going places and stimulating local economies. That is debatable. The only economies that you can say for sure benefited last weekend were those of highway service areas, which happen to be run by a subsidiary of the Japan Highway Public Corporation; in other words, a bureaucratic entity. The Asahi Shimbun indicated it found little proof that the scheme would benefit local businesses. The mayor of a small town in Chiba expressed concern that town residents would use the highway discounts to go shopping in Tokyo and Yokohama.

    The real irony turns out to be that the congestion wasn’t as bad (or good) as the media first reported it to be. The Asahi later analyzed the data and found that the number of automobiles on the highways was only about 10 percent more than usual, which means congestion was “normal.” The real test will come during Golden Week at the end of April. If “normal” means sitting in a car for five hours in order to travel to the next prefecture, then what adjective will the media use to describe holiday gridlock? Back in 2000, ETC was introduced to lackluster sales with the publicized purpose of making traffic flow more smoothly. Now, there are waiting lists for ETC devices, and highway traffic will likely become less smooth as more people install them. That’s the logic of progress.

  2. msetty

    I would not be surprised if the Japanese highway bureaucracy–counting all levels of national, prefecture, and local governments–dwarfed the railway-related governmental bureaucracy decades ago. I am not counting the administration of the privatized railways, of course.

  3. Dan

    Just as the bursting of Japan’s inflated property bubble led to its 1990 financial crisis, the bursting of U.S. housing bubbles in 2006 led to our 2008 financial crisis.

    Saaaay…where is the call for Japan to build more homes?! Where is the call for Japan to loosen its restrictions and build more homes?! That’s right: like, say, Gullyvornia, Japan needs to build more homes in seismic zones, in floodplains, on valuable farmland, on steep slopes, in greenways…

    DS

  4. msetty

    As Randal knows, I’ll admit I’ve agreed with him on the potential multi-tens of billions of dollars in latent excesses of the California bureaucrats working on high speed rail. However, I’ve NEVER agreed that high speed rail in Japan has been mostly a waste. As my long-time associate Leroy W. Demery, Jr. has pointed out more than once, a number of rural rail lines were built in a pork barrel fashion where potential traffic density didn’t justify them, but most of the new high speed rail lines have been in places where they made sense.

    Here is the rest of the [lightly edited] comments that Demery kindly supplied me on this Antiplanner post (and will become a longer article at http://www.publictransit.us:

    All I see here is overwrought ramblings by one person, who doesn’t know the proverbial squat about transportation in Japan … based on overwrought ramblings by another – who can’t seem to resist demonstrating that he doesn’t know the proverbial squat, either. Kerr is as much a prisoner of his ideology as O’Toole.

    “Railroad building is an example of a policy that grew far beyond its original aims and become one of officialdom’s unstoppable tanks,” says Kerr. “A high priority in the postwar years, railways took on a life of their own as the ultimate pork barrel beloved of politicians, with the result that gigantic new lines continue to expand across the nation regardless of economic need or environmental impact” (p. 150).

    Huh??? Kerr literally does not know what he’s ranting about. He’s merely ranting. [As the American who arguably knows the most about Japanese railways over here, Mr. Demery has collected many facts and statistics over the years to demonstrate this.]

    O’Toole: “What most bothers Kerr (who lives in Japan) is that all this construction has devastated Japan?s environment. Although various land-use policies confine most people to cities, you can hardly go anywhere in the countryside where your views are not obstructed by some giant concrete monument of some sort or another.”

    … “Most people” in Japan are confined to “cities” by geography. A large share of the land area of Japan is mountainous and uninhabitable.

    O’Toole: “As noted here before, the Japanese National Railways racked up a debt of well over $200 billion before being privatized in 1987, with the government taking over the debt.”

    What libertarians and right-wingers over here can’t bring themselves to acknowledge is that this debt was accumulated, rather like a gigantic Ponzi scheme, by an avowedly conservative government.

    Moreover, some of the conditions leading to accumulation of this debt resulted directly from the acts of a certain right-wing politician, a de facto dictator who was even more arrogant than he was conservative (!). Seeking (… desperately …) to avoid political unrest of the sort experienced from the end of World War I (yes, World War I), the Japanese government put demobilized soldiers and men returning from Japan’s former external possessions to work in the “transportation sector.” The result was a high degree of overstaffing.

    There’s more … and it’s a lot worse. The typically loopy libertarian “thinker” will probably feign ignorance of the next few paragraphs, although all this is well documented, and in English.

    High inflation during the immediate postwar period stimulated the growth of an avowed leftist labor movement in Japan. The goal was to create American-style trade or craft unions. However, the U.S.-led Occupation … in fact, “The Supreme Commander” himself … was determined to snuff this out. He succeeded (with tacit support from Japan’s conservative business and political elite.)

    In 1948, MacArthur ordered that the government prohibit strikes by public employees, reject collective bargaining, and reorganize the railways and other “government monopolies” as “public corporations.” The new JNR took over from the old railway ministry in 1949. The railway union was divided into several factions of leftists and rightists. This conflict became institutionalized when leftist union leaders, fired for organizing (… you guessed it …) an “unlawful” strike, set up an “opposition” movement. But “The Supreme Commander” was determined to suppress the left.

    One of the early goals of the new JNR management was to rationalize staffing levels. Railway employees were unable to protest peacefully by striking. The result was a shocking wave of violence during summer 1949: thousands of acts of sabotage, several train wrecks and the “unsolved” death of the first JNR president. (“Unsolved” = obviously not accidental or suicide, but insufficient evidence for a murder conviction.)

    After “The Old Soldier” was gone, the JNR management avoided major conflict with labor. However, this period of relative peace lasted little more than a decade. JNR began posting deficits in 1964.  Its management adopted four consecutive plans for financial rehabilitation. However, unions opposed downsizing even through natural attrition, and the period from the late 1960s through the early ’80s saw a near-continuous series of disputes and several long strikes. Union protests outside the JNR HQ building near Tokyo Station were common during this period.

    The typically loopy libertarian “thinker” will probably feign ignorance of the next few paragraphs as well:

    Responsibility for massive JNR deficits and the astronomical JNR debt rests wholly with successive Liberal-Democratic Party governments. (In spite of its name in English, the LDP is avowedly conservative.)

    So-called “conservatives” [and “libertarians”] can’t stand the idea of “subsidies.” It is therefore no surprise that JNR deficits were financed by successive annual borrowing with interest charged as an “operating expense” against each year’s JNR budget. The bulk of the accumulated JNR debt – the figure that O’Toole loves to quote – therefore represents capitalized interest. This scheme began as the political “path of least resistance,” and soon became institutionalized.

    Annual budget details contain tantalizing evidence that the Finance Ministry realized the “day of reckoning” was inevitable. During the mid-1970s, the government began taking chunks of the JNR debt “off budget” by transfer to a separate account, to be paid off from tax revenues. But this “sub-scheme” could not be sustained owing to the impact of the 1974 and 1979 “oil shocks” on the national economy.

  5. ws

    ROT:What most bothers Kerr (who lives in Japan) is that all this construction has devastated Japan’s environment. Although various land-use policies confine most people to cities, you can hardly go anywhere in the countryside where your views are not obstructed by some giant concrete monument of some sort or another.

    ws: Japan is an island with treacherous mountainous regions that are not suitable for building (prone to landslides). Regarding Japan’s supposed “devastated environment”, imagine if the people (in Japan) were spread out in a single family house or low-profile multi-units?

    That’s environmental detestation if you ask me, not to mention the island would not be able to house all of its denizens at low densities (which is irrelevant anyways because of seismic and land slide prone slopes).

  6. the highwayman

    msetty said: So-called “conservatives” [and “libertarians”] can’t stand the idea of “subsidies.”

    THWM: Not exactly, that’s why the largest employer in the US is the military and for that matter that’s also why we have the National System of Interstate and Defense Highways.

  7. msetty

    THWM:
    Not exactly, that’s why the largest employer in the US is the military and for that matter that’s also why we have the National System of Interstate and Defense Highways.

    Well, not exactly. In libertarian- and conservative-speak, “defense” and highway spending is an “investment” but long-overdue investments in transit are “subsidies.”

  8. ws

    Well, to get technical, defense spending can be justified in the Constitution.

    Though, the degree to how much is spent on defense is always the debate. Reagan era 6% GDP (or something like that) spending is too much in my opinion. Star Wars = Excessive spending.

    Tax exempt airports, highways, and ports get massive “investments” (i.e. subsidies), but a few cents to Amtrak, like you say, is a subsidy.

  9. the highwayman

    prk166 said: In Libertarian speak, governments don’t make “investments”.

    THWM: Really now, then why did your crony Wendell Cox write this?

    “The Best Investment a Nation Ever Made: A Tribute to the Dwight D. Eisenhower System of Interstate and Defense Highways”

  10. the highwayman

    http://search.japantimes.co.jp/cgi-bin/nb20090409a1.html

    Thursday, April 9, 2009

    DPJ pushes ¥21 trillion two-year stimulus plan

    By KAZUAKI NAGATA

    The Democratic Party of Japan proposed an economic stimulus package Wednesday that would feature ¥21 trillion in spending over the next two years to help the nation weather its worst postwar recession.

    The main goal of the package would be to increase disposable income, DPJ President Ichiro Ozawa said at a meeting of the leading opposition party’s shadow Cabinet.

    “If the people become more affluent, the economy will recover,” Ozawa said.

    The DPJ plans to spend ¥14.1 trillion to do this by offering families a ¥26,000 monthly child-rearing allowance, abolishing enrollment fees for public high schools, which could save some families around ¥500,000 a year, creating more university scholarships, and eliminating expressway tolls.

    Masayuki Naoshima, head of the DPJ’s policy research committee, said the package is designed to increase disposable income at households making Â¥3 million to Â¥4 million a year by 20 percent.

    Other proposals include slashing taxes to 11 percent from 18 percent for small and midsize businesses, offering training to the jobless, and subsidizing household solar energy systems.

    The DPJ has been preoccupied with the political donations scandal triggered by the arrest of Ozawa’s chief secretary. Critics say the distraction has blunted the DPJ’s quest to wrest power from the ruling bloc in the Diet in the general election expected by fall.

    Last week, DPJ Secretary General Yukio Hatoyama dismissed such allegations but he also said he felt the need to compile the stimulus package before the government and ruling bloc unveil their latest stimulus plan Friday.

    Naoshima, however, admitted the government would have to issue more bonds.

  11. prk166

    THWM: Really now, then why did your crony Wendell Cox write this?

    I don’t know; ask him. My comment was to point out the false claims as to what constitute a libertarian and capitalism.

  12. the highwayman

    Sounds more like this is Extreme-Right speak for highly partisan propaganda dedicated to principles of government by and for the very wealthy, invasive curtailment of civil liberties, economic freedom for the most wealthy and powerful, and YOYO (you’re on your own) policies in the face of the economic devastation that these policies cause the rest of us.

    Along with socialist funding of streets and highways versus road-blocking railroads & mass transit to the greatest extent possible!

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