Don’t Ask, Don’t Act

The military may be having an issue with its notorious”don’t ask, don’t tell” policy, but the economy is having an even bigger problem of its own. Policy makers and media don’t ask how big the problem is. Then, if they discover what’s going on by accident, they don’t act proportionately. Don’t ask, don’t act is not the basis for success in today’s crisis. It is the basis for a goodly dose of Japanese disease, which is something we should all want to avoid like the proverbial plague.

The New York Times, belatedly, has an article describing the ills that have befallen Japan in the decade or so since its economy went through a massive bubble, and then began what appears to be a long term swoon into mediocrity. Long gone are the heady days of “Japan Inc.”. Instead the subtle erosion of deflation has sapped all the vibrancy from the economy and made it entirely dependent on exports for growth. That strategy is now souring as the Chinese continue their assault on world trade. Before long the Japanese look destined for second class status and much diminished lifestyles. If they are not there now.

The story in the NYT is truly saddening. The people interviewed respond with a combination of resignation and confusion. They mourn the lost vitality and the yawning gap between the new prospect and the opportunity, now gone, in the old. A whole generation of Japanese people are growing up in diminished and straitened times.

So what’s new?

Nothing.

Nothing at all.

In fact the problem I have, and it is very disheartening, is that it has taken this long for the media to take Japanese style sclerosis as a serious enough threat to the US that they assign time and energy to reporting it. Up until now the typical American response has been one of arrogant “it can’t happen here” avoidance. Even the NYT falls into that trap by quoting, with obvious approval, several analysts who make the point that the US economy is somehow more flexible and energetic. This will, they suggest, ensure we do not fall into the same hole.

But we already have.

The issue is not the basic flexibility of the economy. Yes the US is structurally more adept that Japan. It is less tied to old fashioned ways. But that is looking more and more like the days of yore and less like the real US we now live in.

Why?

Politics and a deficient elite.

The problems Japan created for itself were sourced in its inability to meet a huge crisis with an equally huge response. Instead it meandered through years of half measures, politically compromised and watered down policies, and weak steps taken but then retracted. It was an epic example of lack of willpower combined with a bureaucratic complacency. The lack of willpower resided in the political leadership – what there was of it – and its unwillingness to describe the situation properly to the voters. The consequence was that the voters had less tolerance for the necessary scale of policy response. This then fed into the bureaucratic malaise which was typified by constant mistaken advice, fear of error, fear of mockery if mistaken, and fear of over reaction. There was always just sufficient evidence to support weaker measures. That evidence was pounced upon with glee by politicians and bureaucrats wanting to avoid strong policy stands. And even when strong policies were introduced, they were withdrawn at the very first sign, however tentative, of an improvement.

The result has been a dithering and deliberate slippage into perpetual deflation and contraction. The people of Japan have been betrayed by the weakness of their leaders.

That anyone can look at this and not see the obvious and exact parallel now being acted out here is beyond me. I see it very differently: we are already well down the same path, and yet we are in denial of the future we are choosing. We have decided to be mediocre.

Why?

Because fighting our way out is both risky and expensive.

It is risky because leaders actually have to bet their reputations, which is not something one does in a corrupt and weak political system like ours. And it is expensive because the banks did a number on us that we have not seen for seven decades. We seem not to grasp how toxic that combination can be.

And that is our central problem. Far too many commentators evaluate the US ability to avoid the Japanese trap through a rosy prism of self reference and self congratulation. They look at the US circa 1960 and think we are still operating with that level of bold decision and skill. We are not. The evidence is the past two years. We dithered in precisely the same way as the Japanese did. Our policies were riddled through with compromise that undermined their efficacy. The prescriptions were calibrated to be the least we could get away with, rather than strong enough for a certain cure. We have constantly misdiagnosed the depths of the problem, and then under prescribed against that misdiagnosis. And our political system is slow, unwieldy, and corrupt. It is time we took off those rose colored glasses and looked reality in the face.

We are no different. In fact we may be worse given our self absorption.

Even Bernanke, who made a reputation lashing into the Japanese government for its constant addiction to half measures, finds himself having to issue watered down statements and commit to weak policies because of the political atmosphere and the willful misinterpretation of our position.

And then there is the economic team. Ugh. Summers, Geithner and the others are petrified of doing anything that might upset the “system”, by which they mean the banks and the credit markets. It is the public’s interest that counts here, not the banks. The notion that we might be handing on to the next generation a much diminished economy, with weaker prospects and stagnant standards of living, should motivate our leaders to face down and eliminate the opposition of the banks. After all, the potential loss of wealth for society as a whole is vastly greater from stagnation than it is from any short term hissy fit the markets might throw.

Which is why I view the so-called financial reform as such a failure. It was a strategic error not to take on Wall Street and cripple its political influence. Not only would such action have been a popular vote winner, it would have been sound economic policy too: for financial instability remains the premier and most often quoted reason to support weak policy. “We mustn’t rock the financial boat”. That would not be on our minds if we had sunk that particular boat – or rather boarded and taken it over -when the time was opportune.

So, looking back over the last two years, I see a constant stream of decisions and policies that mimic the Japanese situation exactly. Of course the two countries are very different, but so far their reactions have been similar. That does not bode well for the US. More to the point: the fact that we have such recent experience as the Japanese malaise to see and educate us, and that we have ignored that possible education, speaks volumes about our own shortcomings. We have spent two years worrying about a surge in inflation that is nowhere to be seen. We have worried endlessly about budget gaps that need to be closed, but yet. We focus on structural problems that have no meaning without the crisis being dealt with first. We quiver at the sound of a bank CEO talking about the foreclosure problems that the banks themselves created. We dither over tax cuts even though we know the impact they will or will not have. We obsess over ratios that are meaningless in our current context. We underestimate the crisis. We overestimate the impact of our tepid response. We run away from the banking industry even though it was the root cause of our problems. We focus on endless political campaigning rather than government. We capitulate to the power of cash in our electioneering. In short: we have become unable to lead or be led.

And, given the malaise we are slipping into, that worries me a whole lot. Because the end of that road is a very poor legacy to hand into the future. Very poor indeed.