Investment.  It is absolutely the buzz word of the day following Obama’s state of the union address on Wednesday.  Of course, the inherent contradiction in the speech is his call for investment side-by side with his call for fiscal discipline. 

In a way, Obama was right to claim this time as a Sputnik moment for our country.  To be sure, we are facing an enemy that threatens the viability of our nation moving forward, but that enemy is not from without– in the form of emerging industrial nations– but from within: our ballooning debt.

Those in favor of Obama’s investment strategy point to state economic involvement similar to that of Japan and South Korea, and they are not wrong to say that they are far ahead of the United States in many areas of development.  However, the danger of more state control is not necessarily a short run concern, but a long-run promise of self destruction.

In Japan, we’re beginning to see those dangers manifest themselves.

Japan experienced a wave of innovation and development in the mid to late 1900s due to a strong tradition of what Obama might call “state investment.”  It would be true to say that Japan is far ahead of the United States in terms of the type of development Obama desires: infrastructure and education namely; however, what cost has that rise incurred?  The New York Times paints a bleak picture of Japan’s future both in terms of innovation and quality of life:

Many social experts say a grim economy has added to the pressures to conform to Japan’s outdated, one-size-fits-all employment system. An online survey by students at Meiji University of people across Japan ages 18 to 22 found that two-thirds felt that youths did not take risks or new challenges, and that they instead had become a generation of “introverts” who were content or at least resigned to living a life without ambition.

“There is a mismatch between the old system and the young generations,” said Yuki Honda, a professor of education at the University of Tokyo. “Many young Japanese don’t want the same work-dominated lifestyles of their parents’ generation, but they have no choices.”

In essence, Obama is creating that same one-size fits all economy.  He is dictating the direction that innovation should head in this country.  He wants more investment in infrastructure and clean energy.  He wants oil to be “yesterday’s energy.”

Furthermore, in order to make all of this come to pass, he plans to essentially shape the direction of the market to fit a mold of competitiveness designed by states like Japan.  The problem here is that the United States is not Japan.  We are not South Korea.  We have never followed the same path as these other nations, and yet, here we stand at the top of the food chain.  There are those who might argue that we will not stay there for long if we do not embrace the same state investments as these other nations, but that sentiment is shortsighted.

I am all for upgraded infrastructure, increased technological innovation, and efficient renewable energy, but what exactly are the tangible costs associated with said investment at a time when our nation faces a fiscal crisis?  Let’s look at Japan’s fiscal house of cards today:

Standard & Poor’s, the credit ratings agency, downgraded Japan’s long-term sovereign debt on Thursday, a sharp reminder of the heavy burden plaguing the world’s third-largest economy at levels that stand out even in an increasingly debt-ridden world.

S.& P. lowered its sovereign credit rating for Japan to AA- from AA. That is three levels below the highest possible rating, and S.& P.’s first downgrade of Japanese government debt since 2002. With the lower grade, Japan’s debt rating is now on par with China’s, which last year overtook Japan as the world’s second-largest economy, after the United States.

But by size, Japan’s ballooning deficit is an anomaly. Japan’s liabilities will hit 204 percent of its gross domestic product this year, overshadowing even the 137 percent for beleaguered Greece, according to figures from the Organization for Economic Cooperation and Development.

That’s bad, and that is absolutely the result of shortsighted spending in the face of a foreboding fiscal reality.  Here’s how the Japanese are affected by this turn of events:

Social experts say the need to cut soaring budget deficits means that younger Japanese will never receive the level of benefits enjoyed by retirees today. Calculations show that a child born today can expect to receive up to $1.2 million less in pensions, health care and other government spending over the course of his life than someone retired today; in the national pension system alone, this gap reaches into the hundreds of thousands of dollars.

That’s the reality.  Increased spending in a time of ballooning national debit might provide short term growth, but nothing is free.  The next generation of Japanese citizens are going to have to pay for the decisions of a past era of spenders.  Fact is that we can’t afford increased spending on infrastructure without realizing this fate, and we certainly can’t have it both ways as Obama would suggest.  He sounds a little bit like Japanese Prime Minister Naoto Kan:

S.& P., in downgrading Japan, warned that the Japanese government had no “coherent strategy” to address its ballooning deficit, and that its already high debt burden was likely to continue to rise further than it had anticipated before the financial crisis. A rapidly aging population is adding to the country’s woes, raising the likelihood of increasing social security and pension obligations in the future.

Prime Minister Naoto Kan had little reassurance to offer. “I just heard that news,” a flustered-looking Mr. Kan told reporters. “I am a little ignorant on those kind of matters,” he said. “Let me look into it more.”

Well, at least he can admit it…

Those are the tangible costs associated with an increase in state control, but the tough balancing act between increased state involvement and entrepreneurialism results in even more dire, unexpected consequences:

But perhaps nowhere are the roadblocks to youthful enterprise so evident, and the consequences to the Japanese economy so dire, as in the failure of entrepreneurship.

The nation had just 19 initial public offerings in 2009, according to Tokyo-based Next Company, compared with 66 in the United States. More telling is that even Japan’s entrepreneurs are predominantly from older generations: according to the Trade Ministry, just 9.1 percent of Japanese entrepreneurs in 2002 were in their 20s, compared with 25 percent in the United States.

“Japan has become a zero-sum game,” said Yuichiro Itakura, a failed Internet entrepreneur who wrote a book about his experience. “Established interests are afraid a young newcomer will steal what they have, so they won’t do business with him.”

Many Japanese economists and policy makers have long talked of fostering entrepreneurship as the best remedy for Japan’s economic ills. And it is an idea that has a historical precedent here: as the nation rose from the ashes of World War II, young Japanese entrepreneurs produced a host of daring start-ups that overturned entire global industries.

But many here say that Japan’s economy has ossified since its glory days, and that the nation now produces few if any such innovative companies…

So, does investment really increase competitiveness? Does it really provide for future generations?  It is easy to say “yes” given that there are so many immediate gains, but the reality is that such spending is hard to cut in the long run.  The illusion of investment is a tricky one, and for many years, America has relied primarily on its people, not its government, to provide such investment.  There is no doubt that we need to increase our competitiveness in the world, but let’s not run with the illusion that our state has the leeway to make it happen without paradoxically destroying our future.