Stock markets are slumping because the world's second-largest economy has admitted that it is near collapse and shows no sign of knowing what to do.
Your assets and mine have been dwindling for other reasons as well. High-tech tulip bulbs were fated to wither. The soaring U.S. economy had to land sometime, softly or otherwise: the vaunted "new economy" did not repeal the business cycle.
Yet what most concerns many institutional investors and other heavy hitters is the effect on world markets of the trauma of Japan. While our stock indexes dip toward 1998 levels, theirs has just gone through 1985.
Why? Because Japanese executives and the government they control never understood their need for competition. While the Sonys and Toyotas set world standards for innovation and marketing, the rest of Japan's companies _ producing 90 percent of that nation's goods _ refused to let outsiders compete.
Mom-and-pop stores were protected from domestic chains; those chains were protected from overseas competition; bankers, industrialists and politicians protected one another. The consequence: productivity plunged to less than two-thirds of that in the United States. False protection has been ruining Japan.
Liberal economists around the world confidently gave the Japanese the answer a decade ago: cut interest rates to stimulate the economy and have the government spend, spend, spend. Tokyo officials dutifully slashed rates to zero, subsidized failing companies to prevent unemployment and went on a Keynesian spending spree. That led to the current disaster. And the same gurus are advising another decade of similarly misguided medicine.
Small wonder that the Japanese resist gaiatsu, "outside pressure." When the lame-duck prime minister, Yoshiro Mori, arrives in Washington next week, he will become a conduit for a wholly different approach.
I deduce this from papers now being studied in the Bush White House and at Treasury, State and Defense. These include the National Defense University's November 2000 report by Richard Armitage and Paul Wolfowitz; the McKinsey Global Institute paper by Masahiko Aoki and Paul Romer on "Why the Japanese Economy is Not Growing," and the article by Michael Porter and Hirotaka Takeuchi in the May-June 1999 Foreign Affairs, "Fixing What Really Ails Japan."
The economic heart of these documents is in a line from McKinsey: "In a misguided effort to protect jobs and maintain stability, the government subsidizes the inefficient players and blocks the entry of competitors."
The Bush people will not be so crude as to say: "Look, Mr. Prime Minister, the way to avoid dragging the world down the drain is to close 20 of your weakest banks and make those remaining write off bad loans. Let hundreds of inefficient companies go bankrupt and save face by giving them long-term no-interest bonds. Join the deregulation revolution, stop depending only on exports for growth and open your markets to global competition. Then resign and be remembered in history as a hero."
That would be impolite and impolitic. Instead, we can hope that Treasury Secretary Paul O'Neill will fondly reminisce about how the U.S. taxpayers combined with private industry to spend $160-billion in 1980s dollars to bail out the crazily lending S&Ls, thereby returning our financial system to a firm footing. O'Neill can also expound on the wisdom of tax cutting, spending restraint and buying dollars with yen.
At the same time, Secretaries Colin Powell and Don Rumsfeldwill bolster Japanese morale with assurances that Japan, not China, will be the "bedrock" of our Asian strategic defense policy.
Bush's new take on Japan offers no quick fix for the stock market shakeout. But the current turmoil focuses minds on the need for talk with Japanese reformists about ways competition can help turn their economy around. The sinking sun can rise again; needed most is to know that the big, slow fix is under way.
The paradox: Japan got into trouble by protecting its businesses from overseas competition. America can get into trouble by failing to enable its medium-size businesses to compete with giants. We should both put our trust in antitrust.
William Safire is a New York Times columnist.
New York Times News Service