by Archie M. Richards, Jr., CFP^®
April 23, 2001

The Japanese and United States governments make similar mistakes in economic policies. (They set income tax rates too high, regulate too much, subsidize industries, protect companies from foreign competition, and pass out too much pork.) Japan has pursued these damaging policies far more earnestly, causing severe problems for that nation. But if the U.S. doesn't make a key change, it could travel the same downhill path.

One of America's strengths has been its willingness to put up with bankruptcy. Difficult though it may be for the individuals involved and threatening for their political representatives, bankruptcy cleans out debts and provides room for the more efficient to thrive.

Putting up with bankruptcy has been a Japanese weakness. The government has spent huge sums to ward it off, incurring public debt to keep private debt from defaulting. Overall, debt is very high, a burden for Japanese citizens.

Another Japanese problem not shared by America: Its corporations have extensive interlocking ownership. Banks, for example, own stock of their borrowers, and the borrowers own stock of their banks. Vendors own stock of their customers, and the customers own stock of their vendors. Companies have formed huge corporate groups; one of the largest is Mitsubishi.

Japanese companies prefer to buy from the members of their group, even if these members don't provide good values. The cross-ownership protects each group member from takeovers. It also supports the tradition of not laying off workers. When profits are low, as is often the case, executives count on other members of the group retaining the stock nevertheless. Despite the strength of some manufacturing companies (where government interference has been less), the Japanese economy is less efficient than that of the United States.

Japan's long recession has made the cross-ownership of shares too costly. Corporations have been selling their cross-holdings, reducing them from 52 percent of all Japanese shares ten years ago to only 38 percent today, a major change of corporate ownership. Foreign ownership has grown from 4 percent to 19 percent, forcing Japanese executives to kowtow to shareholders who prefer profits to job preservation. This enables laid-off employees to become employed by more efficient businesses. Even though the selling has pulled stock prices down during the past year, the sales of cross-holdings are healthy for Japan.

Yes, changes are afoot in that nation. It is more willing to face true competition and let failed companies fail. Don't let the country's current doldrums keep you from investing a chunk of your money in an index fund that tracks a broad spectrum of foreign stocks, including Japan.

Since 1955, members of the Liberal Democratic Party have held a majority in the Japanese legislature. The lack of turnover has made legislators too afraid of the bankruptcy of constituents, too afraid of risk. During the same forty-six years, the U.S. Congress have had several shifts in majority parties. Chalk up one for the Yanks, right?

No, forget the chalk. Over time, members of the U.S. Congress who have wanted to remain in office have become ever more difficult to defeat. The Cato Institute (www.cato.org) informs me that, after adjusting for deaths and voluntary retirements, the reelection rate of incumbents is 98.5 percent. The longer members remain in office, the more they favor government spending.

The U.S. Senate has approved changes in campaign finance laws that would make it even harder for incumbents to be defeated. If enacted and not reversed by the courts, such changes would do grievous harm to America's future. All restrictions on campaign financing should instead be removed, with the identity of donors published immediately on the Web. There should be a limit on the number of terms legislators can remain in office, just as is the case for presidents. A nation gains strength from being governed by citizen legislators, not career politicians.

The turnover of U.S. legislators must be quickened. If it isn't, America could suffer the problems that now beset Japan - problems that would hit U.S. wallets hard.

Do you like trees? If so, press for the removal of the federal estate tax. A study by Mississippi State University and the U.S. Forest Service estimates that, each year, the estates of deceased owners sell 1.4 million acres of forestland to raise cash for the tax. About one-quarter, 350,000 acres, is developed. Washington's gluttony, in other words, causes the destruction every year of wildlife habitat equal to half the size of Yosemite National Park. Way to preserve the environment, guys.