Greetings from Amazon.com Delivers Business and Investing A booming stock market, burgeoning corporate profits, and an economy that seems unstoppable. So what's wrong with this picture? Eamonn Fingleton's "In Praise of Hard Industries" takes a contrarian view of America's new economy and warns of the dangers of the postindustrial age. Amazon.com's Business & Investing editor, Harry C. Edwards, recently spoke with Fingleton about the distorted view that Americans have of Japan and about the software industry in the U.S. You can find "In Praise of Hard Industries" at http://www.amazon.com/exec/obidos/ASIN/0395899680/entertainmentsit Amazon.com: The picture of Japan that most Americans see is that of a very sick economy. Typical of this view would be Lester Thurow's when he writes, "Japan is the sickest country on the Pacific Rim. Japan's crash occurred in 1990, yet eight years later it has made no progress toward recovery" (from "Building Wealth"). Your picture of the Japanese economy is much different. What gives? Eamonn Fingleton: What gives is that I have been in Tokyo since 1985 and, therefore, have a big advantage over Lester Thurow. Although I have the greatest respect for him, in writing about Japan, he is a victim of what he reads in his morning paper. The American press has imagined that because Japanese stocks staged a 1929-style crash, the Japanese economy should follow the American script of the 1930s. This logic does not apply at all, because the Japanese economy is so different. I was one of the few commentators who predicted the crashes in both Japanese real estate and stocks and I can therefore claim to understand what has been going on better than most. The truth is that although a tiny, if highly visible, minority of previously plutocratic Japanese citizens has been impoverished by the financial turmoil, the vast bulk of Japanese people have never had it so good. Just look at the quality of the cars on the roads in Japan these days. Look at how many more Japanese citizens are taking foreign vacations these days. The numbers are up nearly 70 percent since the 1980s. The American press ignores all the real numbers on Japan. As the Economic Policy Institute economists John Schmitt and Lawrence Mishel have pointed out, in the first eight years of the 1990s, per-capita gross domestic product actually grew faster in Japan than in the supposedly booming United States. Amazon.com: The subtitle of your last book, "Blindside," was "Why Japan Is Still on Track to Overtake the U.S. by the Year 2000." Do you stand behind this prediction, and, if so, in what ways will Japan overtake the U.S.? Fingleton: As conventionally defined, an economy's size is its total output converted at current exchange rates. Thus, on a conventional view, the dollar would have to fall to around 70 yen for my prediction to be fulfilled. Although I am strongly bearish about the dollar over the longer term, I doubt we will see a move on this scale so quickly. That said, on several other measures of economic clout, many of them more important than this conventional yardstick, Japan has indeed passed the United States. Take savings. In 1997, the latest year available to us, Japan accounted for more than one-third of the OECD area's savings. By contrast, the United States accounted for less than one-quarter. Japan has now also passed the United States in net exports, that is, exports netted for imported content. Perhaps the most stunning way in which the United States has lost ground to Japan in recent years has been in the ability to project economic power abroad. On the IMF's figures, Japan increased its net overseas assets from $294 billion to $891 billion in the first seven years of the 1990s. The story for the United States was very different. The United States, of course, no longer has net foreign assets but rather net foreign liabilities. And these ballooned from $71 billion to $831 billion in the first seven years of the 1990s. These figures are of profound historic importance, yet, as far as I know, not a single American media organization has noticed them. Amazon.com: You view the software industry as the quintessential postindustrial business and yet find its growth prospects in this country vastly overrated. Why? Fingleton: There is no doubt software has grown enormously in recent decades. What concerns me is the industry's ability to export. American software exports are quite disappointing, given the industry's size. The industry's export prowess has been seriously impaired by foreign piracy, among several other things. Another reservation I have concerns the long-term outlook for American software wages. Software is a very labor-intensive industry, and with the plummeting of international telecommunications costs in recent years, American software companies are beginning to shift jobs to low-wage countries such as India, Russia, and even China. It is notable that Japan has made little effort to develop its software industry in recent years, and the reason is that the Japanese realize that a high-wage economy has a much better chance of retaining and enhancing its international competitiveness if it emphasizes manufacturing rather than postindustrial businesses. The reason is that manufacturing, at least the sort of manufacturing the Japanese do, is highly capital-intensive, and in capital-intensive industries, a high-wage economy can enjoy huge productivity advantages that enable it to pay ultra-high wages and still dominate world markets. Amazon.com: You're not very kind to the financial-services industry in this country. You call it the cuckoo in the economy's nest. Fingleton: In a previous life, I worked on Wall Street, so I know that the vast majority of Wall Street people are decent and well intentioned. But Wall Street is one of the key ideological mainsprings of the complacency that has persuaded the United States to acquiesce in the wasting away of its once world-beating manufacturing prowess. I am also critical of Wall Street for the explosion in financial activity that has followed deregulation. Take the many new financial instruments that have been invented in recent years. As Warren Buffett has pointed out, their main effect is to tempt people to speculate, and, therefore, in general they serve little or no purpose other than to line Wall Street's pockets. Amazon.com: What about the valuations in the U.S. market. Do you see a big shakeout coming? Fingleton: U.S. stock market valuations are very high. Although I would not rule out at least one more upward leg to the boom, anyone investing at these levels will be disappointed with the performance over the longer term. That said, I am not among those who are predicting a Tokyo-style crash for Wall Street. My guess is that any landing will be a soft one and there is still plenty to go for, among certain small-cap stocks. The full text of Amazon.com's interview with Eamonn Fingleton is at Business & Investing Featured in this e-mail: "In Praise of Hard Industries" by Eamonn Fingleton http://www.amazon.com/exec/obidos/ASIN/0395899680/entertainmentsit ****** You'll find more great books, articles, excerpts, and interviews in Amazon.com's Business & Investing section at Business & Investing
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