A Website on the U.S. Trade Policy Disaster || UNSUSTAINABLE.org

Described by one commentator as a “bravely original minded writer,” Eamonn Fingleton has repeatedly been vindicated in bold predictions about everything from the 1990 Tokyo financial crash to the post-Saddam quagmire in Iraq. Here, in reverse chronological order, is a retrospective on his insights:

On the American Financial Services Industry

In an extended analysis in 1999 Fingleton identified financial deregulation as a potent threat to America's long term economic health. Anticipating by nearly a decade the American financial meltdown of 2008, he showed how financial deregulation had already then spawned the growth of malignant new forms of financial instruments. Writing in In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity, he described such growth as "the economics of the cancer cell."

Reporting that mainly thanks to deregulation, financial trading was growing one hundred times faster than the overall American economy, he commented: "The evidence is that as deregulation has proceeded, markets have become increasingly volatile and are therefore valuing assets more and more irrationally....Most fund managers are adrift in a sea of make-believe and self-delusion.....The development of increasingly complex derivatives in recent years has been a particular boon to financial criminals. In a typical pattern, securities firms deliberately concoct instruments that are so complex that most institutional investors cannot fully understand them. Moreover, the market in any particular type of instrument is typically extremely thin, and thus prices can be readily manipulated by the securities industry"

He coined the term "financialism" to describe "the increasing tendency for the financial sector to invent gratuitous work for itself that does nothing to address society's real needs but simply creates lucrative jobs for financial professionals." He explained: "The financial sector can get away with this because the people ultimately paying the bill usually don't know they are doing so. The beneficiaries of big pension funds, for instance, rarely have any knowledge of, let alone control over, how their money is invested."

He warned: "The apotheosis of American finance in recent years is based on an utterly wrongheaded reading of the role that finance should play in an economy. Forgetting that services should serve people, the financial services industry has come to regard itself as somehow superior to society.....Most of the new financial activities the postindustrialists extol feed parasitically on the rest of the economy. What we have is not a goose that lays golden eggs but a different feathered vertebrate entirely: a cuckoo in the economy's nest."

For Fingleton's full analysis click on this link:

http://unsustainable.org/index.asp?type=article&contentID=37

On Alan Greenspan

Few policymakers have seen their public esteem plummet so rapidly as former Federal Reserve chairman Alan Greenspan. Long revered as an economic magician, he is now widely regarded as the principal author of the massive financial coronary the United States suffered in the fall of 2008. Greenspan's personal reputational bear market came as no surprise to Eamonn Fingleton. In the introduction to Unsustainable, which is the paperback edition of In Praise of Hard Industries and was published in 2003, Fingleton spotlighted Federal Reserve chairman Alan Greenspan’s failure to sound the alarm about America’s mounting foreign indebtedness. Pointing out that the problem was caused by soaring U.S. trade deficits, Fingleton wrote: “Where trade is concerned, Greenspan and his officials have been almost entirely silent.” Fingleton suggested that because Greenspan had failed to learn the lessons of the New Economy stock implosion of 2000, he should resign forthwith and added: "By making a graceful exit now, Greenspan can hope to be remembered for his intellectual courage in admitting his mistakes.....If he hangs on, the result in the end will be certain obloquy. He will be fated to be remembered as the man who lost America." Although Greenspan did not take the hint and retire early, he went some way to acknowledge Fingleton's criticisms. In November 2004 he made world headlines when, in a tone reminiscent of Emperor Hirohito’s admission that “the war situation has developed not necessarily to Japan’s advantage,” he characterized America's soaring trade deficits as a “problem.” The growing foreign indebtedness incurred on Greenspan's watch contributed massively to the worldwide financial crisis which eventually broke out in the fall of 2008.

On the Iraq War

In the run-up to the Iraq war of 2003, Fingleton pronounced the Bush administration’s strategy “badly misconstrued” and, almost alone among Tokyo-based commentators, ridiculed the then consensus that a defeated Iraq would respond like Japan at the end of World War II. In an editorial page article in the International Herald Tribune (March 18, 2003), he added: “The trouble with the Japanese precedent is that few of the conditions which made it possible apply to Iraq. Even in defeat Japan was an orderly nation; the same is unlikely to be true of a conquered Iraq…. Japan played the role of model prisoner, gracefully putting up with many indignities the sooner to regain freedom. For people to behave like this requires a sense of far-sighted discipline that few nations have shown in defeat. Yet post-war Iraq will lack even the most basic decision-making structures necessary to enforce such discipline.”

On the New Economy

In his book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999), Fingleton exposed the logical flaws on which America’s dot.com boom was based. Early reviewers, writing in the autumn of 1999, found his analysis “far-fetched” and for a while he had few intellectual allies (albeit, including as they did such opinion leaders as Warren Buffett, Rupert Murdoch, Ernest F. Hollings, and Julian Robertson, they made up in reputation what they lacked in numbers). The book went on to be named one of the ten best business books of 1999 by Amazon.com. It received this cover comment from James Fallows: “His [Fingleton’s] skeptical look at the software/Internet boom is important while the boom is going on and will seem even more intriguing once it is over.” A few months later — in March 2000 — the dot.com bubble began to implode and millions of unwary savers were caught in the subsequent crash.

On U.S. Software Jobs

Fingleton was early to spot the threat that cheap foreign labor posed to American software jobs. Citing the rise of the Indian software industry in a commentary in 1995, he debunked the then widely held view that Americans enjoyed a unique cultural edge in software. He added: “Increasingly America’s software workers are pitted in head-to-head wage competition with workers in other countries.…. Software know-how migrates quickly around the world via textbooks and journals, not to mention the reverse engineering of innovative products. Virtually the only thing needed to create software is brainwork. And these days brainwork is a commodity that can be sourced anywhere there are modems and telephone lines.”

On Japan’s War Legacy

Fingleton broke new journalistic ground when in 1995 he directly contrasted how Japan and Germany had dealt with their respective World War II legacies. As he pointed out in Blindside (p. 122 and pp. 365-366), Japan had paid a mere $1 billion to victims of its war crimes — a pittance compared to Germany’s $72 billion. This disclosure came at a time when other commentators tacitly fell in with a long-established pattern of self-censorship on the issue. At the government-controlled Japan Times, for instance, whenever the topic of Japan’s war guilt came up, reporters were expected to focus narrowly on the semantics of Japanese apologies, while avoiding any mention of compensation (for fear of provoking class-action suits from American lawyers). The semantics-only approach was also followed — generally unwittingly — by Western correspondents. Even Ian Buruma in The Wages of Guilt, a book on Japanese and German war guilt which was published in 1994, failed to note the sharp divergence in the two nations' compensation policies. Fingleton’s initiative was followed quickly by Iris Chang who highlighted the compensation issue in her best-selling book The Rape of Nanking. This precipitated a flood of class actions in California but failed to elicit a policy change in Tokyo.

Fingleton and Chang were subsequently targeted in an elaborate Internet-based black propaganda effort. This took the form of a racist website entitled East of the Rising Sun, which purported to embrace and promote their writings while referring to the Japanese people in racist terms (and using a Satanic image to depict them). The site was presented as if it had been set up either by Fingleton or by someone closely associated with him. The site's true owner has proved untraceable but for a time the site came up as many as four times in the top ten results for Fingleton's name in major search engines. Chang, who complained repeatedly about threats and dirty tricks operations emanating from Japan, died in a reported suicide in 2004.

On America's "Victory" in High-Definition Television

In the mid 1990s the American press universally hailed a supposed stunning comeback by the American television set industry. Zenith and RCA had "turned the tables" on the Japanese electronics industry by developing the world's first digital version of high-definition television. Described as a "big blow" to Japan by the New York Times, the American system was widely presented as having rendered almost worthless a vast 20-year investment in a rival standard by a government-led Japanese consortium. Fingleton was almost alone in rebutting this interpretation, which he did most notably in an interview with Irv Chapman on CNN in June 1995. As he pointed out, the Americans had no ability to manufacture to the new standard and, irrespective of which standard won out, the Japanese would entirely dominate the high-end manufacturing tasks in making key components. A month later Zenith, America's last maker of television sets, was bought by the Koreans and soon thereafter the Japanese acquired the American technology for a knockdown price. As of 2008, their lock on high definition television extended not only across Asia and America but even into Europe, which up to the mid-1990s had tried to maintain an independent television manufacturing industry.

On "Westernizing" Japan

Beginning in the late 1980s, Japan’s public relations spokesmen began proclaiming the Westernization of the Japanese economy and “the end of Japan Inc.” Japan was supposedly opening up to free trade and would therefore be forced to abandon such hallowed economic institutions as permanent employment (which depends on protected markets to work), the so-called keiretsu system, cartelization of production and marketing, and minute bureaucratic control of almost every aspect of Japanese life. Led by the Economist magazine and the Wall Street Journal, the Western media took the bait. Fingleton was almost alone in rejecting the story. In his 1995 book Blindside, he showed that far from being “dysfunctional cultural remnants,” Japan’s distinctive economic institutions worked together in highly counterintuitive (and never before explained) ways to further the central objective of Japanese economic policy: the domination of the world’s most advanced manufacturing industries. Ridiculing the conventional view of a “Westernizing Japan,” he argued that Japanese leaders were determined to retain their special economic structures and arrangements -- and that they would succeed. They did. As of 2008, nearly a decade after the end of the 1990s, Japan's economic structures were stronger than they had been when he first arrived in Japan in the mid-1980s.

On Japan’s Trade Surpluses

Fingleton has consistently opposed the long-held conventional wisdom that Japan’s trade surpluses were destined inevitably to decline. He first made the case in the Atlantic monthly, where he argued in 1989 that earning large and rising surpluses was central to Japanese policy-making. This was the same year that the Economist’s future editor-in-chief Bill Emmott premised a whole book on the opposite view. Emmott argued that, under supposedly inexorable pressure from the “Westernization” of the Japanese economy, Japan’s trade surpluses were destined not only to decline but would disappear entirely before 2000. The evidence is now in. Japan’s current account surplus in 2007 topped $200 billion, up nearly fourfold since 1989 (the peak year of American concern about Japan’s “juggernaut” trade policies). In the same period America's trade deficit multiplied sixfold. In Fingleton's words, Japan in the 1990s "cleaned America's clock in advanced manufacturing."

On U.S.-Japan Economic Rivalry

Fingleton's best known -- and most criticized -- prediction was the subtitle to Blindside, his 1995 book on the Japanese economy: "Why Japan is Still on Track to Overtake the U.S. By the Year 2000." The outcome was, of course, quite different, at least as conventionally measured. At market exchange rates, which is, of course, the standard yardstick for such purposes, Japan ended the 1990s with an economy not quite half of America's.

That said, at a deeper level Fingleton's analysis proved highly prescient. Why? His analysis emphasized the salience of advanced manufacturing as the fundamental battle ground between the American and Japanese economic systems and went on to show that the United States was losing the battle.

All "basket-case Japan" talk to the contrary and despite serious problems in Japanese banking, Japanese manufacturers proved spectacularly successful in seizing control in virtually every sector of so-called producers' goods -- goods that are invisible to consumers but are pivotally important to the world economy because other manufacturers depend on them to make consumer goods. Examples include key high-tech materials, components, and capital equipment.

As Fingleton showed, at the top end of manufacturing (meaning manufacturing that is both highly capital-intensive and highly knowhow-intensive) there is a strong tendency for dominant manufacturers to establish ever stronger monopolistic control of world markets -- a tendency that was the cornerstone of American power when American manufacturers led the world in the 1950s and 1960 s. By the mid 1990s, thanks to Japan's national strategy of "targeting" one advanced manufacturing industry after another, Japanese manufacturers had displaced American rivals in everything from semiconductor-grade silicon and carbon fiber to jet engine spindles and car-body presses. As Fingleton predicted, Japan's success in advanced manufacturing has continued apace ever since.

The point has been vindicated by the remarkably contrasting pattern in the two nations' trade: as already noted, Japan's current account surplus increased nearly fourfold between 1989 (the last year of the Tokyo stock market boom) and 2007, while America's current account deficit increased sixfold in the same period.

Even many of Fingleton's critics have now acknowledged, at least implicitly, that he was right all along. An outspoken example is Jesper Koll, who in his former capacity as a top Tokyo-based Merrill Lynch analyst once was a key proponent of the lost decade story. As of 2008 Koll hailed Japan's "hyper-competitiveness" and added: "During what seemed like a lost decade, corporate Japan has done exactly what it should have done in order to build the best foundation for a strong future....R & D was ramped up very aggressively from the mid-1990s, rising from barely 2 percent of GDP to almost 3.5 percent....Japan's innovation power spans almost the entire spectrum of consumer and capital goods." Koll has acknowledged moreover that Japan now enjoys monopolistic leadership across huge swathes of the world's most advanced manufacturing industries -- a central point in Blindside.

This point has now also been strongly endorsed by the Monitor consulting group, whose co-founder the famous Harvard-based competitiveness guru Michael Porter was a principal critic of Fingleton's claim in Blindside that Japan was surpassing the United States in advanced manufacturing.

Indeed virtually the entire Blindside analysis has now been vindicated. The book's prescience is most obvious in the case of Japan's peculiar economic structures -- keiretsus, cartels, permanent employment, and so on -- which were repeatedly reported by commentators in the Wall Street Journal, New York Times and the Economist to be breaking down. As Blindside predicted, they triumphantly survived the strains of the 1990s.

But what of the Japanese yen, which Fingleton argued would more than double against the dollar during the 1990s? (This was the basis for the prediction in Blindside's subtitle.) Although the yen did rise during the 1990s, its progress fell short of Fingleton's prediction. Fingleton argues that his error reflected no misreading of the Japanese economics but rather of American politics. His bet was that a far-sighted Clinton administration would opt for a massive devaluation of the dollar to pull American manufacturing out of its death spiral. Instead President Clinton opted for a high-dollar policy -- a policy perpetuated by the administration of George W. Bush. This policy proved a great boon in the short run for American consumers and importers, but the benefits have been won at the expense not only of the near collapse of America's crucial manufacturing base but of massive national indebtedness.

Fingleton argues that, absent massive support by the central banks of Japan, China, and other East Asian nations, the dollar would long a go have collapsed.

Basket case note: America's 2008 current account deficit represented nearly 5 percent of gross domestic product. The only case of any other major nation exceeding this level outside a time of war or in the immediate aftermath of war was Italy in 1924. In January 1925, Benito Mussolini seized dictatorial powers in Rome.

On the Japanese Trade Lobby

In 1989 Fingleton showed that world-renowned McKinsey consultant Kenichi Ohmae had systematically misled American officials, executives, and journalists over many years about the nature of Japanese trade policies. Ohmae’s career never recovered and he was eventually “let go” by his embarrassed McKinsey partners. Once so prominent in the trade debate that he was described as Japan’s most famous citizen, Ohmae has now disappeared into almost total obscurity.

Ohmae's key message -- presented as a major theme in several books -- was the Japanese market was as open as that of the United States. The truth was officially admitted only years later when, in a devastating gaffe at the Foreign Correspondents' Club of Japan in 2000, Mitsubishi Corporation president Minoru Makihara referred to the Japanese market of the late 1980s as “closed and tightly protected.”

On the Tokyo Crash

Fingleton was virtually alone among Tokyo-based observers in the late 1980s in predicting the Japanese financial crash. His concerns were first aired in Euromoney magazine in September 1987. In a six-page article he showed that Japanese banks were lending heavily to a highly inflated real estate market (click on this link to read article -- http://72.167.117.219/pdf/euromoney-0987a.pdf ). The analysis was billed on Euromoney’s cover with the title: “Why the Japanese Banks are Shaky.” In the same magazine in February 1989 he made his first prediction of the coming Tokyo stock market crash. He wrote: “After the current tax-driven boom ends in April, Tokyo stock market volume will slump — and a prolonged bear market, starting probably in the next six months, will make the woes worse.” The bear market took a few months longer than Fingleton expected to arrive — it began in January 1990 — but its ferocity fully vindicated his fears. Fingleton's late 1980s bearishness contrasted starkly with a generally highly bullish view among Tokyo-based securities analysts and “strategists.”

On American Accounting Standards

In 1983 Fingleton highlighted an accounting loophole that enabled many American software companies to inflate their reported profits. He showed how instead of expensing software development, companies misleadingly treated it as a capital investment. Fingleton argued that software development costs should be treated as a form of R & D — a change that would require deduction in full against current profits. His analysis, published in Forbes magazine, was named the best accounting article of the year by the American accounting profession. The profession subsequently tightened U.S. accounting rules to eliminate the abuse.

On the American Newspaper Market

In 1982 Fingleton challenged the almost universally held view among American media professionals that the Gannett group's plans for a U.S. national newspaper were misguided. Writing in Forbes, Fingleton argued that Gannett's embrace of new technology would likely ensure success where a technologically less sophisticated previous venture had failed. The new newspaper duly caught on — so much so that it is now America's biggest selling daily. Its name: USA Today.

In a profile of Rupert Murdoch in Forbes magazine in 1981, Fingleton broke the news that Murdoch's Sydney-based company was considering entering satellite broadcasting in the United States. Murdoch duly pressed ahead. The resulting business is now a household name: Fox Broadcasting.

On the American Television Broadcasting Industry