A Long View--part 1

After World War Two, a large proportion of the factories in the developed world had been bombed out--except in the United States. The US's industrial capacity was a key reason it had won the war. Its ability to produce tanks, planes and ships was unmatched. When the war ended with Europe, Russia and Japan mainly in rubble, demand for peacetime production was high, and US industry obliged. Times were good for factories and their workers. Wages rose, and unions were strong.

Demand for military production continued as well, since the Soviet Union was a major threat to Europe. And we were providing funds to rebuild Europe.

Over the next couple of decades, Europe revived, and Japan re-emerged as an industrial power.

Wages in Japan started out low, giving them an advantage over factories in the US. The US began to experience the rising tide of imports from Asia. The impact seemed to be particularly severe in the auto industry. The US ended up making a series of deals with Japan in which Japan agreed to limit its exports of autos to the US. This seemed to help, but on the other hand, Japanese car makers sent over more expensive cars rather than the hordes of cheap ones. Thus they did not lose much money on the deal.

Meanwhile Japanese wages and general standard of living rose until it reached the range of that of the US and Europe. Japan became part of the developed world. It lost its low-wage, low-cost advantage over the US and Europe. Yet its manufacturers were still almost legendarily efficient, profitable and high-quality. They continued to be a formidable competitor.

In the 1980s the Japanese overextended themselves, running up huge debts to invest in US assets. Some of the assets they bought at their high water mark seemed to be symbolic of a Japanese economic victory over the US.

The government-directed industrial policy of Japan also reached a point where they were done catching up, and if they were going to really overtake the US, they would have to lead the world in new directions in technology and innovation. Artificial intelligence seemed to be a new frontier with huge potential. They embarked on a course to advance heavily in that area.

But the debts they ran up in over-expanding into the US, plus the unexpected difficulty encountered in developing artificial intelligence, led to Japan's "lost decade." Growth ground to a halt, and unemployment rose. The government began a long period of deficit spending to try to stimulate the economy. Yet structural problems in various areas of their economy, particularly their finance industry, have kept japan from recovering from their slump. The lost decade has stretched out into another decade.

Japan is still one of the largest economies in the world, but it does not at this time appear to be a threat to overtake the US.

Part 2 will consider China.