Dialogue With Economist Noah Smith, Part 1

Changes In the Last Three Decades; Culture in Economic Performance

Photo credit: Fumishige Ogata

Toyo Keizai invited me to engage in a dialogue at its offices with famed economist Noah Smith, since both of just had book published in Japan. Mine was the Japanese translation of my book, The Contest for Japan’s Economic Future: Entrepreneurs Vs. Corporate Giants, which discusses how nurturing a new generation of high-growth innovative companies can contribute to Japan’s revival. Noah Smith’s book, Weeb Economy: The Weebs Will Save Japan, shows how Japan can leverage its global cultural appeal to get more foreign direct investment in new “greenfield” companies that create jobs, innovation, and exports. Weebs are fans of Japanese culture.

Toyo Keizai journalist Misa Kurasawa moderated the discussion. This is Part I.

Kurasawa: How has Japan changed over the past 30 years?

Katz: The economic slowdown and stagnating living standards are the most obvious changes, but my book focuses on the positive changes in society and technology that give Japan its greatest opportunity for recovery since the lost decades began.

At the elite level of society, things look static. But beneath the surface, there’s a huge generational change, particularly among the 20-25% of the brightest. For this book, I was meeting younger people in their 20s and 30s who were starting companies. They are so ambitious and confident and want to fight conventional wisdom. At these new companies, you see so many women, and they're not serving tea. They can get promotions and help build a company from the ground up. In addition, e-commerce and technological change have created opportunities for new companies. So there's a mixture of positive and negative changes.

Smith: What I see is a lot of social change and gradual economic change, but not a lot of growth. The big problems are the stagnant economy and low growth, especially in wages.

But then, if you look at social change, I've seen enormous changes in just the 20 years that I've been coming here. Women are expected to work. The old idea is gone: the notion that men have careers and women just get a part-time job to make some extra money or maybe meet a future husband. That's an epochal, titanic change, even though it happened more quietly than in America.

I see the acceptance of gay people. When I moved to Japan, people said that's weird. Now, gay is normal.

The shift to online communication has been a significant change. And I can't tell you whether that's positive or negative overall. But, you know, everyone in Japan who’s 18 wants to be a social media influencer, just as in America.

When I lived in Japan in the mid-2000s, men worked incredibly hard. They ate bento at their open-plan offices and never went to the lunch cafe. Sometimes, I was the only man there. Now, you see them in the café. Prime-age men are working less. They're working themselves to death less. They spend more time with their children. That's really big.

The Japanese cities have continued to improve themselves and function better. I don't know about the small towns. But the big cities like Tokyo and Osaka functioned well when I lived there before. They're even better now. When I lived in Osaka in 2005, I lived in one of these so-called “rabbit hutches.” Now, houses are bigger. They're not America-sized houses, but they are Europe-sized. They are nice.

So, there are many lifestyle changes that are not reflected in the GDP statistics. Still, I think economic recovery is the most critical task.

Katz: A new buzzword in Japan is ikigai, meaning individual self-fulfillment. This becomes increasingly important in most societies as they modernize.

For example, as more women work, the divorce rate goes up, because now they have the economic ability to leave an intolerable situation. But, 30-40 years ago in Japan, the only socially justifiable reason for divorce was that your husband was cheating on you or beating you. Now, just the lack of intimacy—you don't talk to each other anymore—is socially acceptable.

Ikigai affects the economy as well. Bright people are more willing than a few decades ago to switch jobs, especially if there is a lot of demand for their skills. It might be for higher pay. But it can also be because they want their career to provide fulfillment. So, the statistics show a big increase in mid-career job changes, even among middle-aged people. I talked to one employer who said many men in their late 40s or early 50s will leave a big company to get on the ground floor of a new company. They say, “This is my last chance to do something interesting in my career.”

When Noah and I met for coffee earlier, we both felt that Japan's problems are easier to solve than America's. It would not take that much change to improve Japan's economic performance. For example, Japan has much more equality in educational attainment, but a lot of human capital is wasted. Japan’s problem is political stasis. So, we’re both optimistic about what Japan could achieve if it began to do some of the right things.

Smith: In the 1990s, many people said that Japan needed many cultural changes to return to growth. Most of those cultural changes have now happened. So, why has growth not returned? There's a theory of economic development called “O-ring theory.” And that refers to the space shuttle explosion in the 1980s in America, where one small piece, called the O-ring, failed and blew up the whole ship. Similarly, a few small missing pieces can really hold back economic growth.

So, in the 1990s, there were a lot of things wrong with Japan. Now there are only a few things. But those few things are still essential. My new book is about one of those things: Foreign Direct Investment (FDI) in new companies (not just the acquisition of existing companies).

Kurasawa: So, you don’t think there’s a cultural obstacle to recovery?

Smith: I don’t see Japan’s national culture as a problem. But I do see a problem of corporate culture, e.g., Panasonic vs Nintendo. Everyone accepts that American companies have different corporate cultures and that Microsoft and General Electric are totally different. However, people have underappreciated the cultural variety among Japanese companies. The corporate differences are more important than the similarities and differences between Japan’s national culture and that of other countries.

When I first came to Japan, I heard a general stereotype from both Americans and Japanese people that Japan is uncreative compared to the United States or the West. Completely wrong. I would say that Japan is a more creative country at an individual level than the United States is, and a less conformist country in many ways. Americans have now realized Japan's creativity level, both in the artistic and cultural space and in the product design space. And scientifically, too.

Katz: In some cases, these cultural myths are not simply wrong, but propaganda perpetuated by elites. Consider, for example, the idea that Japanese people love to work for one company all their lives began in the 1890s because people coming into the new factories would switch companies to get better wages. So, the companies made a pact not to hire workers who left another firm, and that suppressed worker bargaining power. As part of this effort, they created the myth of “company as family” as a supposedly centuries-old norm.

To block cuts in the consumption tax, the Ministry of Finance said people would just save the money because “Americans like to spend; Japanese like to save.” At that time, the savings rate was high, but as wages stagnated, people had to spend more of their income to maintain their living standards. As a result, today, Japan’s household savings rate is lower than America's. As conditions change, so does behavior.

Then, there is the idea of Japanese as inherently conformist and risk-averse. Studies by Japanese psychologists prove this is untrue. Japan could not have had the high-growth era without imaginative and original people fighting conventional wisdom. However, conditions have created some risk-aversion, e.g., a promotion system that punishes mistakes more than rewards success. The absence of a strong social safety net means that people who join a new company that fails really suffer.

A Waseda professor told me about a very smart friend who worked for Sharp. Initially, Sharp was a fantastic pioneering company that took a lot of risks, but over time, it became very stodgy. This guy got bored because his superiors kept telling him, "Don't make a mistake,” and he didn’t feel challenged. Then Foxconn bought it, and said: “Don't be foolish, but do take a chance. If it doesn’t work, it's a learning experience.” And then suddenly, this guy in his 50s is excited about going to work again.

As conditions change, so do attitudes and behavior. It can take a while, but culture does not prevent recovery.

Smith: Americans are brainwashed, too, but in a different way.

Katz: Yes, Trump rose because people with rough lives were looking for someone to blame, and Trump offered them culprits: immigrants, imports, universities, liberals.

Smith: I'm optimistic because fixing a few things will go a long way in Japan. I'm pessimistic about America because we've succeeded for so long that overconfidence has led us to allow things to rot throughout so many sectors of our society and our economy. Japan has been changing one thing after another, but I think it really just needs a few more things. And this is the O-ring theory.

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