Pete Peterson’s 1993 Forecast of Japanese Domination

My colleague David Weigel has written about Pete Peterson’s 1993 proclamation that “inevitably, Clinton’s deficit path will mean a much larger public debt” but paging through the same book I found at the end the print version of Peterson’s “slideshow” of what he termed “real leading indicators” for the United States. It included this pearl of early-nineties wisdom about Japan leaping past the United States in productivity.

That was, obviously, mistaken. And it’s a mistake that a lot of people made at the time. But it continues to be relevant to today’s debate.

Peterson’s specific concern about the deficit at the time was that given the fiscal conditions of 1993 it was contributing to high interest rates that tended to “crowd out” private sector investment. That was more or less accurate, which is precisely why the Clinton administration spent 1993 pursuing a deficit reduction package—albeit one Peterson didn’t like because it didn’t take the hammer to the elderly. The link to productivity here is the concern that a lack of investment leaves the country “capital poor” which reduces labor productivity.

And indeed when you look at countries like Japan in the 60s and 70s or China in the 90s and 2000s that are engaged in rapid growth, typically what they’re doing is experiencing booming investment levels and massively increasing their per capita levels of capital. But the fallacy Peterson (and many others) were engaging in at the time was not realizing that this kind of capital-deepening is a process with a limited lifespan. There’s only so much capital that can be usefully added. For rich countries what really drives productivity forward isn’t more capital goods its either developing new ideas or else deploying new ideas that have been developed elsewhere. The dual focus on deficit reduction and tax reform is an agenda that’s all about increasing the supply of capital and the supply of labor—exactly the kind of things that are crucial today to economic growth in, maybe, a country like Mexico or Brazil.

In a country like the United States things like barriers to innovation (our terrible patent system) or barriers to deploying existing innovations (widespread bans on the use of steel frame construction and elevators to fit more people onto scarce land) are much more important than the race to accumulate capital goods.