The real danger for the U.S. — as it was for Japan — is that industrial policies encourage investors to take poorly measured risks In the 1980s, Japan appeared to have the world by the tail, only to see its economy collapse into a “lost decade” and general malaise. A similar fate for the U.S. seems unimaginable nowadays. The U.S. is scoring big wins in the latest, fast-growing technologies: artificial intelligence, including Microsoft’s investment in OpenAI; Alphabet, Amazon.com and Meta Platforms leading the tech giants exploiting the internet; and Elon Musk’s Neuralink and SpaceX pushing the limits of innovation.

Yet misguided government policies could cast the U.S. economy into an abyss. In the 1970s and 1980s, Japan powered its economy through exports — in particular to the U.S. market — through a combination of management’s commitment to quality and protected domestic markets, government subsidies and state coordination. Japan’s keiretsu network of interlocking ownership among major banks, trading companies, retailers, manufacturers and suppliers was instrumental to this strategy.

In this way, Japan seized large global market shares in one manufacturing industry after another. The semiconductor industry, for instance, was pioneered in America and made a stopover in Japan before foundries in Taiwan and South Korea took the top spots.

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Industrial policies that propel exports often inspire foreign defensive reactions. Ultimately, Japan negotiated voluntary export restraints with the U.S. in textiles, steel, color televisions, machine tools, automobiles and semiconductors, and Japanese automakers built factories in the U.S.

Industrial policies too often encourage misuses of capital and inefficiencies, and a reliance on a narrowing group of national champions to power growth. Even through the worst of Japan’s downturn, Sony Group 6758, +2.09%, Nintendo 7974, +1.00% and Toyota Motor 7203, +1.63%, for example, remained highly competitive.

The real danger for the U.S. economy — as it was for Japan — is that industrial policies encourage investors to take poorly measured risks and squander capital. For example, General Motors GM, +0.02% benefits from the Biden administration’s auto and battery subsidies, but has made bad bets on self-driving vehicles and ignored the hybrid vehicles that car buyers now want.

Those subsidies provide cover for excessive CEO compensation — GM CEO Mary Barra earns far more than her counterparts at Toyota and Honda Motor 7267, +1.32%. The new United Auto Workers contract makes it more difficult for Detroit’s Big Three automakers to compete against Asian imports in quality and price without protections.

Biden’s union preferences and costs associated with social-justice training for workers and employer-provided daycare mandates only worsen matters. For example, U.S. semiconductor manufacturers suffer under a 44% cost disadvantage with Asian foundries. U.S. computer chip-makers will likely require tariff protection, more subsidies and arm-twisting to sell the chips that government-financed factories produce — an American version of the keiretsu.

Throwing good money after bad The keiretsu helped build Japan’s economy but balkanized Japanese capital markets. Usually centered around banks and built on equity cross-ownership, keiretsu preferences in lending wasted capital and rolling over loans created “zombie” companies.