The End of the Japanese Miracle… and the American One

Scott Alexander at Slate Star Codex has a very good post on cost disease. It definitely betrays a strong libertarian or conservative bias, but is nevertheless, worth reading.

The piece that resonates with me is posted below. It has some good insights, one or two that are questionable (for anyone not firmly ensconced on the right), but overall it methodically works its way to one hell of a punch-in-the-gut truth in last sentence.

Imagine if tomorrow, the price of water dectupled. Suddenly people have to choose between drinking and washing dishes. Activists argue that taking a shower is a basic human right, and grumpy talk show hosts point out that in their day, parents taught their children not to waste water. A coalition promotes laws ensuring government-subsidized free water for poor families; a Fox News investigative report shows that some people receiving water on the government dime are taking long luxurious showers. Everyone gets really angry and there’s lots of talk about basic compassion and personal responsibility and whatever but all of this is secondary to why does water costs ten times what it used to?

I think this is the basic intuition behind so many people, even those who genuinely want to help the poor, are afraid of “tax and spend” policies. In the context of cost disease, these look like industries constantly doubling, tripling, or dectupling their price, and the government saying “Okay, fine,” and increasing taxes however much it costs to pay for whatever they’re demanding now.

If we give everyone free college education, that solves a big social problem. It also locks in a price which is ten times too high for no reason. This isn’t fair to the government, which has to pay ten times more than it should. It’s not fair to the poor people, who have to face the stigma of accepting handouts for something they could easily have afforded themselves if it was at its proper price. And it’s not fair to future generations if colleges take this opportunity to increase the cost by twenty times, and then our children have to subsidize that.

I’m not sure how many people currently opposed to paying for free health care, or free college, or whatever, would be happy to pay for health care that cost less, that was less wasteful and more efficient, and whose price we expected to go down rather than up with every passing year. I expect it would be a lot.

And if it isn’t, who cares? The people who want to help the poor have enough political capital to spend eg $500 billion on Medicaid; if that were to go ten times further, then everyone could get the health care they need without any more political action needed. If some government program found a way to give poor people good health insurance for a few hundred dollars a year, college tuition for about a thousand, and housing for only two-thirds what it costs now, that would be the greatest anti-poverty advance in history. That program is called “having things be as efficient as they were a few decades ago”.

I should note that the spending examples cited in the above paragraphs have numerical support earlier in Alexander’s post. But the problem with the post is the lack of a satisfactory answer to the question it raises: what caused the massive declines in efficiency we saw in many vital parts of the US economy?

And here I am pleased to say I can help. I actually provided an answer to that question in a post I wrote six years ago explaining why Japan grew so rapidly after WW2 and what policy changes led to the end of its rapid rise.

I encourage you to read my post, but it comes down to this: the Japanese Miracle ended when its fabled bureaucracy became far less of a test- and performance-based meritocracy.  This was done with the noble cause of broadening inclusion, which of course, was severely lacking in the old system.  But the baby was thrown out with the bathwater.  The new system ended up just as unfair as the old one, but in very different ways.  Unfortunately, it also became a lot less efficient.  Test scores turned out to be positively correlated with performance.   Highly correlated.  It didn’t take long for the public to notice the change.  The deference once afforded to entities like MITI dwindled and died.  Soon the ministries could no longer command the respect they needed to actually run the economy, much less the competence to do it well.  But the now enfeebled bureaucracy could still influence events.  It went on to buy into Reaganomics (tax cuts, smaller government, and a trade policy that was less export oriented). Put another way: Japan Inc. started hiring suckers, and predictably the suckers got suckered.

The parallels with the US are obvious. That isn’t to say  all is doom and gloom for either Japan or the US. Both countries remain rich, prosperous, and innovative. But Japan no longer inspires the world as it once did. The Japanese Miracle ended decades ago. And I have a real fear that America’s best moment may also in the past. Policies that elevate mediocrity achieve just that.  And they are awfully hard to reverse.

Tags: Comments (31) | |