Bold Colors Blog

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Posts Tagged ‘Reason Magazine’

What the U.S. can learn from Japan’s failed experiment with “zombie businesses”

Posted by Liberty on December 22, 2008

Return of the Living Dead

“After Japan’s asset bubble burst in the late 1980s, their economy took a sharp downturn, prompting government officials to try bailing out banks and investing in infrastructure, much like the activity and proposals floating around America today. The results were terrible.

With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker ‘zombie businesses.’ And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.”

Check out this article in Reason Magazine today that foreshadows the consequences that we’re likely to face in return for passing out government bailouts like Halloween treats.  Ding dong, here’s $700 billion.  Japan has dealt with a similar economic crisis and they made significant errors that prolonged the problem.  We’re headed down that same road and I predict that Japan’s errors will be our errors.

“First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.”

Check.

“Second mistake. With all those loans, the Japanese government was simply too integrated into the market to have adequate incentives to create the right policies. Daniel Okimoto, former director of the Asia-Pacific Research Center, points out that the interests of Japan’s economic bureaucracies, such as the Ministry of Finance, became interdependent with the banking industry.”

Check.

“Third mistake. The length of Japan’s asset deflation, recession, and liquidity struggles has been blamed largely on the lack of foresighted policies and political leadership. Politicians bent on retaining their power took action that sought to solve the present day concerns, such as infrastructure projects, without regard to their long-term effects. As a result, economic growth was not sustained.”

Check.

“Fourth mistake.Japan tried to climb out of its economic mess by raising taxes and cutting interest rates. Okimoto cites a series of policy mistakes in a report on Japan’s economic stagnation that includes a consumption tax hike, business taxes, and heavy-handed reliance on interest rate cuts that reduced investment incentives.”

Are you getting my drift here?

“Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.”

I encourage you to read the whole article–Anthony Randazzo has done his research.  Clearly our politicians have not.

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