Capitalisn’t: Why Capitalism Stopped Working in Japan

Takeo Hoshi: What failed was the idea that Japan has a special, different capitalist system that works better. They didn’t really have it.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: Today, I want to start with something you might not expect. Have you heard about One Piece? It’s a Japanese comic, but it’s not just a Japanese comic. It’s the world’s best-selling manga with over half a billion copies sold, translated into dozens of languages, spun into TV shows, films, video games, and even a Netflix adaptation. It’s a cultural juggernaut that has reached audiences across the globe. In a strange way, it offers a window into Japan’s paradox. While the country’s economy has stalled, its culture was out there conquering the world.

Luigi: The question is whether Japan’s fate is unique or whether it’s a map for others, including the United States today.

Bethany: Japan was once the envy of the world. By the 1980s, it looked poised to surpass the United States. Real-estate prices in Tokyo were so high that people joked the land under the Imperial Palace was worth more than all of California. Stock-market valuations seemed unstoppable. The entire world was looking at Japan and asking, had they found a superior model of capitalism?

Luigi: But then came the crash. The bubble burst in the early 1990s, and what followed was not a quick recession and rebound, as we have often seen in the United States, but decades of stagnation. Growth slowed to near zero, deflation became entrenched, and the banking system turned into a drag rather than an engine for recovery.

Bethany: The Bank of Japan pushed interest rates to zero and later below zero, long before the Fed or the ECB ever considered such steps. It pioneered quantitative easing. Yet, despite these extraordinary measures, Japan never returned to sustained growth. If anything, does its experience show us the limits of what central banks can do once a bubble has burst and demographics are moving against you?

Luigi: At the same time, for decades now, analysts and investors have been predicting that Japan was about to go bankrupt under the weight of its massive public debt. Those predictions have never come true, at least not yet. The Japanese government has continued to finance itself largely through domestic savings, and the debt markets have remained remarkably stable.

But that doesn’t mean the warnings are meaningless. They highlight the tension between fiscal sustainability and monetary policy and the ongoing debate about whether Japan is living on borrowed time.

Bethany: It matters far beyond Japan. Setting One Piece aside, if you can, Japan remains one of the world’s largest economies and a pivotal creditor to the rest of the globe. Its government bond market is among the most consequential on earth. Shifts in Japanese yields or policy ripple across global interest rates. The yen is a key funding currency for so-called carry trades, so big currency moves can tighten or loosen financial conditions worldwide.

Japan is also a critical node in supply chains, autos, precision machinery, and components used in semiconductors, and a major importer of energy. A stumble in Japan can reverberate through trade, capital flows, and risk appetite. A genuine renaissance could reprice global assets, strengthen the yen, and reshape where capital and production go next, which brings us back to today.

As we sit here in 2025, many people are asking whether the United States might be in its own kind of bubble. Tech valuations are sky-high. Housing affordability is stretched. Government debt is exploding, and interest rates are moving in unpredictable ways. Are we heading toward our own version of Japan’s Lost Decades?

Luigi: Some argue the analogy doesn’t hold. They say Japan’s problems were uniquely Japanese, tied to its politics, its demographics, and its banking system. But others argue that bubbles always follow similar scripts: euphoria, leverage, denial, and then painful adjustment. In that sense, Japan is less a special case and more a preview of what can happen when policymakers hesitate to confront reality.

Bethany: Today, we want to ask what really happened in Japan. What lessons are valid for the US and Europe, and what lessons are misleading? And is the US on the cusp of its own bubble aftermath, or do we have the institutions and the flexibility to avoid Japan’s fate?

Luigi: To help us sort through those questions, we are joined by a very special guest, Takeo Hoshi. He’s a professor of economics at the University of Tokyo and one of the leading experts on Japan’s financial system and economic stagnation. He actually studied in the United States and worked in the United States for decades. He was, at some point, a fellow at Stanford, and his research has deeply influenced how scholars understand the cause of Japan’s Lost Decades, from the slow resolution of the banking crisis to the role of corporate governance, demographics, and fiscal policy.

He has written extensively on the lessons Japan offers to the rest of the world, including the dangers of forbearance in banking, the limits of monetary policy, and the political-economy forces that shape policy responses. Few economists are better positioned to help us think about whether Japan’s experience was unique or whether it’s a warning for the rest of us.

Many people talk about one, two, even three lost decades. Do you agree with this interpretation of the history of Japan in the last 30 years?

Takeo Hoshi: Yes, I agree, in the sense that the Japanese economy stagnated for the last 30 years, but I think the recession that followed the bursting of the bubble in the early 1990s was quite normal. If I use a term in macroeconomics, the aggregate demand shrank, and the economy went into a recession. The solution to that was to stimulate the aggregate demand, and the Japanese government did.

The policy interest rate was cut from, I think, 4 percent in 1990 to 0.5 percent by 1995, and the economy responded. 1996 was actually quite a good year. That’s when the Japanese government raised the consumption-tax rate, the value-added tax rate. As they worried about the accumulation of the budget deficit and the increasing debt-to-GDP ratio, they thought it was a good time to reestablish fiscal discipline. Then what happened was the Japanese banking crisis and also the Asian economic crisis, which put the Japanese economy into recession again.

Bethany: How much of what happened over the last number of decades . . . Well, maybe, let’s confine it to that specific interval, then, the 1990s. How much of the failure of Japan’s economy to recover broadly was the fault of policymakers for not doing more, for not seeing more, for not acting differently, and how much was the fault of economic forces outside the control of policymakers in Japan itself?

Takeo Hoshi: I think the policymakers have to be blamed for most of the stagnation in Japan after the 1990s. As a result of the bursting of the bubbles, many Japanese banks found themselves having lots of nonperforming loans. The value of their loans declined, but they didn’t deal with those nonperforming-loan problems. The nonperforming loans and also the nonperforming companies, which are behind the nonperforming loans, were allowed to continue doing business.

The fact that the Japanese government or the financial regulators allowed the banks to continue going on as usual when they started to suffer from large nonperforming loans is, I think, an important reason why Japan had to go into a banking crisis and recession again after the late 1990s.

Luigi: If the major reason was this failure to clean up the nonperforming loans, and in part, I think you wrote about the existence of zombie firms that linger too long, et cetera, you would have expected a major slowdown in productivity growth. But if we measure productivity by GDP per hour worked, Japan did as well as most European countries, slightly less than the United States, but twice as well as Italy and Spain during the same period.

You don’t see a dramatic slowdown in productivity. A lot of it has to do with demographics, that people get older and they retire, and also, they work a little bit less than they used to. But before, Japan was working many more hours per worker than most countries. I would say that you don’t see a slowdown in productivity, really.

Takeo Hoshi: I don’t think that number is right, because I’ve done this calculation.

Luigi: OK.

Takeo Hoshi: After 1995, productivity measured by GDP per total hours worked declined, or the growth rate declined a lot.

Luigi: Declined until what year? From ’95 to when?

Takeo Hoshi: 2024. It’s still declining. Many people use the working hours of regular workers, but the Japanese companies have been using lots of part-time workers, and the part-time workers tend to work less. If I use the total number of hours, which includes not only full time but part time, those hours have been declining, but not very much, so that the growth rate of GDP per hours worked declined a lot after 1995.

Bethany: I’m just thinking as I listened to this about that famous line from Mark Twain, “Lies, damned lies, and statistics.” Not that anybody is lying here, but even on something that should seem fairly simple and straightforward, like growth and productivity, we could have an entire podcast about what the number actually is.

Takeo Hoshi: That’s right. Yeah. We could disagree and talk about the difference.

Luigi: To what extent have the failures of Japan, starting with the failure to resolve the banking crisis quickly, been the result of capture by vested interests in Japan?

Takeo Hoshi: Here, the main obstacle to forcing banks to get rid of nonperforming loans, to restructure those loans, was the fear of unemployment. By forcing the restructuring of the nonperforming companies, all those companies go out of business, and people will lose jobs. The banks have the responsibility to help those companies who continue to employ the people.

Luigi: Sorry for my ignorance, but I thought that Japan had a fairly good safety net. No?

Takeo Hoshi: Well, this was the safety net.

Luigi: There wasn’t any safety net that was independent from firms. You had to save the firms to save the workers.

Takeo Hoshi: Right. Right.

Luigi: Oh, OK. That’s exactly the problem.

Takeo Hoshi: The public safety net wasn’t that generous, or it wasn’t used very much.

Luigi: But then, can we talk more about the causes of this dramatic slowdown? Of course, I come from Italy, which most people don’t realize has a history pretty similar to Japan. We had our miracle in the ’50s and ’60s. I think it lasted a little bit less time than the Japanese one, but it was pretty miraculous, too. We did not have a bubble. We did not have a major banking crisis, at least until very recently, and certainly not at the magnitude of Japan.

But we slowed down terribly. In the last 20-something years, we’ve had zero per-capita GDP growth. We did worse than Japan. I don’t know whether you can speak for Italy, but speak for Japan, and then maybe we can see the similarities. To what extent is this an advanced country’s disease that somehow the US and, in part, the UK escaped, and to what extent is it an idiosyncratic factor of Japan?

Takeo Hoshi: I don’t think this is an idiosyncratic factor in Japan. Italy and Japan, both of those were in the catch-up phase of economic growth. They recovered from the devastation after the war, and they introduced the technologies from more advanced countries and worked hard, and the economy grew. But at some point, both Japan and Italy came close to the frontier of economic growth, and their model—roughly speaking, importing new technologies from abroad and working hard to improve that—didn’t work very effectively.

They had to change their economic model to fit more advanced countries’ economic growth. Both Japan and Italy failed to do that. In Japan, the speculative bubble basically covered up that problem. That made it harder for us to see that the problem was really happening. In Italy, I guess, it may have been easier to see the problem.

Luigi: Maybe there’s another element in common with Italy in that it was very much an export-led economy. It suffered all the global shocks with a multiplier and also suffered from the competition with China in a much more severe way. I might have realized too late that Italy is kind of like the Midwest of the United States, and the Midwest has been pretty devastated by the competition from China.

The point is that there are the two coasts that covered this up, and Italy lacked the two coasts in the sense of the technological support and the advanced industries that compensated for the collapse of the manufacturing sector.

To some extent, the exception—since we are talking about the Axis powers now—is Germany, which, up to now, was able to push that export-led system without having an enormous high-tech sector. I suspect that now, the chickens have come home to roost with the higher cost of energy. We see the end of that model.

Takeo Hoshi: Mm-hmm. Yeah. I agree with that. Japan depended too much on exports and continued to depend on exports. Even today, Japan’s exports depend too much on automobiles. When the US started to impose higher tariffs on Japanese auto exports, the whole economy panicked.

Luigi: Italy and Japan have another thing in common, which is a very, very high level of debt. You have written for many years about how terrible the fiscal situation is in Japan, that it cannot continue, but so far it has continued.

Takeo Hoshi: I was wrong.

Luigi: Yeah. I agree. It feels a bit like, I remember when I was on the job market—we’re talking about the winter of ’92—everybody was asking about whether the fiscal situation of Italy was feasible. I was saying no, and people said, “Oh, but so far, so good.”

I used the metaphor that when you jump out of a high-rise building, the first 20 floors are fine. It’s when you arrive at the end that you get . . . I was actually vindicated, unfortunately, because in the summer of ’92, Italy had a major crisis. I think eventually, it will come, but why don’t you tell us why you’ve been worried and why you’ve been wrong? And will you continue to be wrong, or at some point, will you be right?

Bethany: Yes, or if he’s even been wrong, Luigi. He may not be wrong. His timing may just be off.

Takeo Hoshi: Right. I still think the debt-to-GDP ratio in Japan is too high, and I worry more about the fact that the Japanese government doesn’t have a plan to reduce the debt-to-GDP ratio without relying on an increased growth rate. The reason I’ve been wrong for the last 15 years at least, maybe 20 years, is that the interest rate on the government debt has continued to decline.

I wrote a paper with Taka Ito in 2011—15 years ago—assuming that the interest rate didn’t go down and could go up. The interest rate on the 10-year JGB was 1.3 percent back then, and we didn’t think it could go down. If that didn’t go down, the amount of debt the Japanese government issued would exceed the total financial assets of the households in Japan, and that could not happen.

But what happened was the interest rate continued to decline below 1 percent and below zero percent at one point. That made it possible for the Japanese government to continue increasing the amount of debt. Now, the interest rate is rising very slowly on the short end. The Bank of Japan stopped its zero-interest-rate policy, and now the policy interest rate is 0.5 percent. Long-term government bonds, 30 or 40 years, are quite high. They’re 3 percent, 4 percent. We are in a dangerous situation now, more dangerous than 15 years ago. But again, I could be wrong.

Bethany: What does Japan’s experience and your experience in being wrong tell us about how to think about a world awash in debt and a United States awash in debt? It’s obviously a very timely topic. Is it that, at the end of the day, the only thing that matters is the interest rate that you pay, and the path of interest rates is somewhat unpredictable, or are there bigger lessons in this for how to think about the world’s debt today?

Takeo Hoshi: What happened in Japan, I think, is that the bond market believes the government eventually will do something to fix the situation so that the current level of debt is justified, but that expectation can change very quickly. So far, it hasn’t changed.

Luigi: To continue with my morbid metaphor, you always hope that the parachute will be pulled at some point as you’re going down, but as you’re approaching the ground, you realize that at some point, you lose hope. By that time, it’s terrible.

Bethany: Splat.

Takeo Hoshi: Yes.

Luigi: Yes.

Takeo Hoshi: By then, it’s too late. Right?

Luigi: By then, it’s too late. Actually, several years ago, I asked the question of how this will end to a high-level official in Japan, and he said, with a smile, “Inflation, but don’t tell anybody.” Is inflation the only way out?

Takeo Hoshi: Well, I don’t think even inflation is a way out. The best inflation can do is to eliminate the existing debt. But as long as you continue to run a budget deficit, you start accumulating debt again.

Luigi: How big is the primary deficit?

Takeo Hoshi: We are talking about 3 percent of GDP or so.

Luigi: The primary deficit, net of interest, is 3 percent of GDP?

Takeo Hoshi: Yeah.

Luigi: Wow.

Takeo Hoshi: Maybe 2 percent.

Bethany: Yeah.

Takeo Hoshi: It was high in 2020 because of covid and so on, and it declined a bit. But Japan still runs a quite substantial primary deficit. They almost always forecast that the primary deficit will come to close to zero, every year for the last two or three years.

But what happens is that’s based on the initial budget number. They always have been coming up with a supplementary budget during the year in order to respond to a crisis, which has to happen every year. Right? The primary deficit has not been shrinking as much as they forecasted.

Bethany: It’s fascinating. It’s like a company taking a one-time loss that’s supposed to be nonrecurring, so investors look through it and pretend it isn’t happening. It’s the government emergency that happens every year that necessitates more government spending. At what point does that no longer become—

Takeo Hoshi: Yes. There seems to be a continuation of emergencies all over the world.

Bethany: Right. Always. Is there a broader lesson here? Could you say that maybe austerity is never the right answer until it’s the only answer? Is that the way this works with government debt?

Takeo Hoshi: Yeah, I’m afraid so. Yes.

Luigi: To what extent is this a failure of the Japanese capitalist model? I remember, when I came to the United States in 1988, everybody was scared of Japan. We were talking about a new form of capitalism, the Japanese form of capitalism. Now, nobody talks about that anymore. To what extent is this a failure of Japanese capitalism, and to what extent is it a failure, more broadly, of capitalism? To what extent is it something idiosyncratic to Japan?

Takeo Hoshi: There’s certainly a failure of the idea of Japanese capitalism or the belief that Japan has a different capitalism that is superior to the usual capitalism. I think that led to the conceit of the Japanese policymakers and the Japanese businesspeople in the 1980s. Many Japanese companies were really serious about learning from the US in the ’60s and ’70s, learning or imitating the technology, or maybe sometimes stealing.

But around the late 1980s, when the Japanese economy was thought to be doing very well, they tended to become more domestically oriented, or they started to say, “Now, Japan has grown, and they don’t have anything to learn from the Western countries,” which was totally wrong.

Another thing is that the Japanese government, especially the Ministry of Finance, was confident that they could fix the problems better than, say, the US regulators. “We are not US financial regulators, which are totally divided and ineffective, but the Ministry of Finance has all the powers to control the financial system, so we should be OK,” which wasn’t the case.

I think what failed was the idea that Japan has a special, different capitalist system that works better. They didn’t really have it.

Bethany: Is the real lesson here that humility is always important in affairs of men and affairs of the—

Takeo Hoshi: I would think so. Yes.

Bethany: It seems that there has been in Japan, as well as in other parts of the world, this rise of populism. Do you tie that directly to Japan’s fiscal situation, or given how, in some ways, unique Japan’s fiscal situation is, does that make you think about the rise of populism in Japan as something that is simply part of this broader global phenomenon?

Takeo Hoshi: I don’t see the link to the budget crisis or the budget problem, but I realize that populism is growing here, too.

Luigi: But in other countries like Europe or the United States, this populism was triggered, or at least one of the explanations is it was triggered by massive immigration. Japan did not have much immigration. So why are people fearing that much? Is it something else? Is it that maybe when you don’t grow for 20 years, and you don’t see the prospect of growing, people start to resent the system?

Takeo Hoshi: If you look at the stock of the foreign-born population in Japan, it’s very small. Even if you look at the flow of the new immigrants, if you compare that to the level of the total population, it’s small. But if you compare the flow of foreign-born people into Japan to the stock of foreign-born people in Japan, that’s huge.

Luigi: That’s unfair, because if you start from zero, the ratio is infinity. Right?

Takeo Hoshi: Right. The number of foreigners, the number of immigrants, has been increasing by 10 percent every year, and they are becoming suddenly visible. I think it may be that the Japanese in general have a lower tolerance to the presence of foreigners, and that Japan may be getting closer to the tipping point that Europe and the US reached, but at a very low level of immigrants. That’s my hypothesis. I may be wrong again.

Bethany: Actually, Luigi, your question is fascinating because we tend to focus a lot on inequality in the US as part of the cause of our rancorous political environment and rising populism, and we did that episode on what happened in Chile that traced rising populism to rising inequality. Yet it does seem that very slow growth can be perhaps as damaging or as dangerous in that respect as growth with high inequality.

Does that make sense? In other words, it doesn’t seem like there’s one cure for populism. If you were to say that the cure in the US was, “Let’s just get rid of economic growth and share more broadly,” Japan’s experience might suggest that that wouldn’t work so well, either.

Takeo Hoshi: I think that’s what Japan has been trying to do: give up some growth and try to share that, but within Japanese people, and that’s been changing. At the same time that the number of foreigners coming into Japan has been increasing, some people, including economists, are saying, “We need more immigrants or foreign workers in order to restore the growth in Japan, in order to continue growing despite the declining population.” I think that can add to the conflict within Japan between the people who are more for growth and more for stability.

Luigi: But if you don’t import more people, and you’re not going to solve the problem with inflation, the only possibility is that you have a spurt of productivity that has never been seen before. Otherwise, there’s no solution for fiscal sustainability.

Takeo Hoshi: Yes. If you think rationally, yes.

Luigi: You have to think irrationally? How do you think irrationally?

Bethany: Let’s all move to the land of magical thinking.

Takeo Hoshi: Most of the policymakers in Japan currently think, from economists’ point of view, irrationally, because what they’re proposing in order to combat inflation or in order to solve inequality is to cut taxes in general, but especially to cut taxes for low-income people.

To be fair, they talk about taxing the rich, but there aren’t many rich people in Japan. Mathematically, it doesn’t quite work out, but almost all the parties talk about reducing taxes and especially reducing taxes for low-income people in order to solve the problems.

Bethany: If you had to make a prediction about where Japan will be in five years or in 10 years, what would be your best guess?

Takeo Hoshi: I think there’s a huge possibility that, one, the Japanese economy is finally getting back to normal after 30 years of stagnation. The interest rate is in a positive range. Inflation is happening, but not so high for now, 2 percent to 3 percent, and stock prices have been rising. Maybe some bubbles, but probably not.

The Japanese economy is finally doing well enough. One scenario is this will continue without too-high inflation and without too many speculative bubbles in the stock market, and this comfortable situation continues. But another possibility is inflation can get out of hand, and at the same time, the interest rate goes up, and that triggers a crisis in the government-bond market, and that leads to a financial crisis and hurts the Japanese economy. I think there’s a huge range of possibilities.

Bethany: As always.

Luigi: What is your best bet? What is the most likely scenario?

Takeo Hoshi: For the most likely scenario, I tend to be more positive than negative. I hope the Bank of Japan continues to guide its policy carefully so that Japan doesn’t experience too much inflation but also does not get back into recession. I hope that policymakers or the Japanese government realizes the importance of talking about fiscal discipline and tries to come up with a plan in the future to close the gap between expenditures and tax revenue. That’s my hopeful scenario.

Luigi: You know that Antonio Gramsci, the Italian philosopher, used to say, “The pessimism of the reason and the optimism of the will.” It seems that you have the optimism of the will. You want to believe that this is the case.

Takeo Hoshi: Yes. Yes. I would like many policymakers in Japan to share my belief.

Bethany: On a rare note of optimism, I think this is a perfect place to end.

Takeo Hoshi: OK.

Bethany: Thank you.

Luigi: What I got out of our conversation—and maybe this is my reading, so I want your impression—the bubble, to some extent, is a bit of a sideshow. Number one, it covered up some structural problems for a decade or so, and then it covered up the decline. Everybody focused on the problems in the banking sector, et cetera.

But even after all this has been resolved, Japan is not growing, and I think that makes the point much broader. That’s the reason why I kept bringing up Italy. Of course, being born in Italy, I’m very attached to the country, but I think it’s an indication of another country with a very similar path.

Then you look at Germany, and it’s a bit delayed, but it’s similar. There was a model of development that was basically translating or importing—if you want, stealing, but it’s a big word; sometimes it was given—technology from the United States and applying it and using this to export a lot to the world. This model has been incredibly successful for all three of these countries.

Maybe it’s a coincidence, but those are the three countries who lost World War II, and they all adopted the same strategy, and they all did very well. There was a German miracle. There was an Italian miracle. There was a Japanese miracle. The Japanese miracle was the biggest of them all, but they are all in the same range.

All of them, sooner or later afterward, came into a crisis. Part of the crisis is that it’s difficult to be a catch-up country and a country at the frontier. Let me give you this analogy, if that helps. When I talk to my PhD students, I say: “The good news is that you arrived here because you’re very talented in studying. The bad news is that this talent has carried you so far, but it does not guarantee you success in the next step, because the next step is not studying what somebody else has done. It’s to create something new.”

The good news is, the two things are correlated. The bad news is, they’re not perfectly correlated, and that’s the reason why there are some mediocre students who are phenomenal researchers and some phenomenal students who are not doing that well as a researcher.

Bethany: Yeah. What do you think for countries? Do you think that that same thing holds true, that there is a correlation between the ability to adopt and copy a successful strategy and the creativity to transcend, or do you think maybe one thing has nothing to do with the other, or is there too little evidence to even be able to opine on that?

Luigi: There is a thing called absorbing capacity. First of all, copying advanced technology ain’t easy. If you don’t have enough people educated, you don’t really appropriate the technology very effectively. That is the reason why Japan has been very good at taking lessons from the United States and applying them to Japan, but you don’t see the same effect, for example, in Latin America.

Why? It’s because Japan has an extremely highly educated population, and Latin America, much less so. Latin America has very good universities at the peak, but the basic structure of the population is not as educated as Japan or East Asia. I think that is clearly an important element.

Now, it is also important how you structure your educational system. If you structure your educational system so that the most important thing is to replicate what somebody else has done or to memorize what somebody else has done, clearly, that’s not the most creativity-inducing method. I think that there might be a negative correlation here between the two, because if you’re really very good at copying, you might not be very good at creating.

Bethany: I’ve often wondered that, and it’s an ongoing argument about what true genius is. Is it the ability to take other people’s ideas and reassemble them in a particularly novel way, or is it really the insight into something nobody has ever thought of before? It’s an interesting question for people’s genius as well as for economies.

Luigi: Yeah. Absolutely. To be fair, what Takeo said, which is very interesting, is that I’m not so sure that the case of Japan was a lack of ability to innovate per se, but rather an unwillingness to bear the cost of innovation.

First of all, it’s very difficult to change something that has worked up to that moment. The famous saying is that you don’t change a winning horse. The more successful you have been, the harder it is to give up what you have done, and this is particularly true when giving up has a lot of social costs. Japan is much more attentive to the overall cost to society. I think in the United States, we’re a bit cavalier on the social cost.

I think the combination of the two has been pretty dreadful, because what Takeo is saying is, look, they knew what to do, but they also knew that this would cause enormous social tension, and they didn’t want to go through the social tension. And so, they kind of pushed this stuff under the rug.

Bethany: Isn’t that interesting for where the US and other countries are today? You would think that solving for the social tension might be the right thing to do, but it shows that it isn’t necessarily the right thing to do, and even more, solving for that in the short term can lead to more social tension in the long term, or doesn’t exempt you from social tension in the long term.

It’s so tempting to look at some of what’s happened in the United States and think: “Bad, bad, bad. We should have solved for social tension.” But maybe the most interesting takeaway from Japan is that that isn’t necessarily the right answer.

Luigi: The question is, the right answer for whom? Remember, Takeo said that Japan overall is a very happy society. The number one measure is that people live a long life. The big generation—Japan had a huge explosion of fertility immediately after World War II—is slowly dying out. This generation was the most important from an electoral point of view, and maybe it still is.

This generation, I think, had much better lives than probably the corresponding generation in the United States. The question is whether we leave that to future generations. Not surprisingly, many of the protest movements in Japan start from young people, because they feel left behind. I think there is a very important intergenerational issue.

Bethany: Yeah. It’s a fascinating question, because you could almost argue from the standpoint of personal happiness and health and culture that, in some ways, Japan got it right. Who cares about productivity growth? If it weren’t for this massive debt overhang that threatens everybody’s future, then the answer might be different.

Luigi: Yeah. I think you nailed it, because the real problem, the stuff that makes Japan unsustainable, is the debt. If you didn’t have debt, maybe it’s not exciting to live in a society without growth, but if everybody is happy, that’s fine. The problem is that the budget doesn’t clear, because they are spending more than they can afford to spend, and they’re counting on making it up with growth.

This growth is not going to come. It’s not necessarily going to come from productivity. It’s not going to come from immigration, or if it comes from immigration, it comes with a lot of social costs, as we start seeing. Either there is a major default or there is a major inflation, or I don’t know. I think that something has to give.

Bethany: Yeah. The question is—which there is no resolution for, as Takeo’s own experience and prediction prove, and I find that equally fascinating—you can look at all of this and, from a purely rational perspective, say, “This has to be what happens.” It hasn’t happened yet.

Luigi: Yeah. What I find interesting is that I’ve known Takeo for many years. At the end, he was less willing to make negative predictions, and I wonder to what extent that is from learning that he made mistakes in the past. At least for the timing, he made a mistake. Also, where you sit makes a very big difference. If you sit in the United States, it’s much easier to say that Japan is going downhill than if you’re sitting in Tokyo. The social pressure of not saying to everybody, “You’re doomed to fail,” is kind of different. I wonder.

Bethany: Exactly. I wonder if, in the end, and maybe there is some precedence or some thinking about this already in economics, the real danger of bubbles isn’t so much that they cause an excess of spending, and they collapse, and the economy has to be rescued from that. It’s that the bubble masks the underlying problems, and I think that’s a particularly profound question for the US today, where AI spending is driving our increase in GDP and is now more powerful than US consumer spending.

What are the costs if the AI bubble collapses, but also, what underlying weakness and problems is the AI bubble masking right now? Are those chickens going to come home to roost, for lack of a more eloquent way of putting it?

Luigi: Yeah. I think you’re absolutely right. To your point, is it true that when an economy has some underlying problems, it’s more prone to bubbles? Now, the obvious reason is because you have a more accommodating monetary policy, which makes bubbles more likely. That’s the obvious reason.

On top of that, there is a slackness in the economy that makes it easier for a bubble to expand. If you have an economy where there are a lot of other valuable investment opportunities, people don’t spend so much time on the crazy stuff. But when there is not, then people are more willing to believe in magic.

Bethany: Yeah. I think that would be a really interesting field of study about what the blowing of the bubble is masking instead of what the aftermath of the bubble is.

Luigi: To go back to the same point, I think one needs to factor in what the underlying causes are of the rise of the bubble. That makes the study more difficult, because you don’t know what is the cause and what is the effect.

I actually came out of the discussion much more pessimistic than Takeo and you were, because it seems that, to me, this is a disease that affects most of the West.

I don’t see an easy fix to this disease, and I think it’s something we need to remember. A lot of people talk about the magic period from 1945 to 1975, which the French call Les Trente Glorieuses, the glorious 30 years, but they were glorious just because we were transferring technology from somebody else—which, by the way, helped tremendously, because the United States . . .

This is the reason why it was not stealing. The United States purposely transferred massive technology to Europe and Japan, in part as a protection against the Soviets, against the expansion of communism, and so on and so forth. That really added enormous benefit. Also, the rest of the world was much, much behind.

If you are the only one able to absorb the technology and to reach the technology that is given so freely, you seem like you are a hero. But then, when you have a lot of other countries that are emerging, and the technology is not given to you so freely anymore, then all the problems start to arise, and it looks like a lot of the West is in this situation. It is in this situation at the same time as it’s facing a demographic crisis. The double whammy is really problematic.

Bethany: Yeah. I agree with that. I guess I was thinking about it from a slightly different perspective, which is that it is very easy to be generous when you have a sense of your own abundance, to play off a popular word today. When the economic opportunities available start to feel narrower and you start to feel threatened yourself, it’s much harder to be generous, and that’s true of people, and that’s true of countries.

We’re now in a place where the West is becoming miserly, because everybody feels threatened that there’s not enough even for them, adding to this demographic crisis, and those things can play out, I think, in really dangerous ways.

Luigi: Indeed.