Economic policy debates in the United States suffer from the fact that participants often have trouble deciding whether the problem is too much of something or too little. They do however know the problem is really bad. Steven Rattner treats us to an excellent example of the which way is up problem in a column in the NYT today.

The focus of the piece is Japan. He notes Japan's recent upturn in growth following the aggressive stimulus policy being pursued by its new prime minister, Shinzo Abe. He tells readers:

"In the endless global debate about the importance of macroeconomic budgetary and monetary policies, insufficient attention is often given to the unsexy, often politically toxic pile of smaller-bore policy challenges that can be critical to restarting a faltering economy."

Okay, let's see what these policies look like. Rattner goes on to tell readers:

"During even a short visit, it’s easy to see that the need for microeconomic reform is glaring. All told, Japan’s labor productivity is 71 percent of America’s — and on a par with Italy’s. While Japan is still a wealthy country, its return on capital is equally unsatisfactory."

Okay, high productivity is definitely better than low productivity, but the second sentence is a non sequitur. What does Rattner mean that Japan's "return on capital is equally unsatisfactory?" To whom is it unsatisfactory?

Economists would look for evidence of an unsatisfactory return in Japan's rate of investment. Investment is a higher share of Japan's output than it is of U.S. output. Furthermore, we expect wealthy countries to have lower returns on capital than poorer countries. (Capital is plentiful.) Instead of "while," Rattner's sentence would have made more sense with the word "because." It is difficult to assign any meaning to "satisfactory" in this context other than Rattner thinks that people with lots of money should be making more money at the expense of workers.

We then get:

"Take, for example, the effect on staffing levels resulting from Japan’s longstanding aversion to firing. Over drinks, an American friend working at a major Japanese bank bemoaned his company’s lack of cutting-edge computerized systems, which he ascribed to the bank’s having so many people that it was more cost effective to have work done manually."

Economists would advocate adopting new technologies when they would lead to savings. Apparently the "cutting-edge computerized systems" desired by Rattner's drinking buddy would not save his company money. Why would any good business person then want his company to adopt them?

Rattner later tells readers:

"Some other industries troubled by noticeable inefficiencies include health care, retailing and agriculture."

According to the OECD, Japan spends 40 percent as much per person on its health care as the United States yet achieves comparable outcomes. (Life expectancy is considerably longer in Japan.) What criteria of inefficiency is Rattner using here? It seems to have nothing to do with either cost or output.

Here's more bad news:

"Japan creates new companies at half the rate of the United States; as a result, the number of companies is shrinking and Japan ranks last among 24 developed nations in its level of entrepreneurial activity. The country also needs corporate governance reforms, like stronger boards to force change at turgid huge companies."

Let's see, the vast majority of new businesses in the United States don't last a decade. If we have more new businesses than Japan, but they are far more likely to fail, then are we better off? Is it good to have people take their life savings and throw it in the toilet on a failed business venture?

As far as corporate governance, unlike the United States, Japan doesn't have failed CEOs getting tens of millions of dollars from the companies they wrecked. It also doesn't have board members who pocket hundreds of thousands of dollars to look the other way as the CEOs rip off their companies.

Then we get:

"And much like the United States, it needs better tax policy: fewer loopholes, lower rates on income ..."

Yep, the rich people are being forced to pay too much in taxes -- that's a real structural problem.

And finally, we have:

"For example, despite a declining population, no one in Japan — essentially a closed society — is talking seriously about reforming exceptionally strict immigration laws."

Okay, but Rattner told us earlier that Japan could adopt all these cutting edge technologies but doesn't because companies are saddled with excess labor. So if labor gets to be in short supply due to the declining population, then why wouldn't the country just adopt these cutting edge technologies? That's a classic which way is up problem.

We have a similar which way is up problem earlier in the piece when Rattner complains about the United States:

"with its shortsighted slant toward consumption in place of saving and investment."

Okay, let's imagine that tens of millions of people read Rattner's piece and cut back their consumption and started saving. In other words, they bought fewer cars, cut back on restaurant purchases and spent less on travel and tourism. How exactly will this increase investment? Are businesses going to invest more when they see demand for their product falling?

There are times when you can tell a story like this, but not in the United States in the last decade. The story would be that less consumption would lead to lower interest rates, which would boost investment. That story can't be told in the last decade since interest rates were in general very low and the economy was mostly operating well below full employment meaning that both investment and consumption could be increased.

There is one other point that Rattner gets at least partially wrong that is worth noting. He refers to Abe's commitment to get:

"to increasing the number of women in the work force by expanding child care."

I don't know the progress Japan has made in expanding child care, but it has had a huge surge in employment of women so that the employment to population ratio among prime age women (45-54) in Japan is actually higher than in the United States.

It is hard to see much coherence to Rattner's complaints. The only thing that is clear is that he thinks that Abe should be pushing policies that would cause more money to go to rich people.