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Monday, Oct. 8, 2001

STRUCTURAL REFORM

Koizumi's soft-headed side


Princeton Professor Alan Blinder, who was a member of the Council of Economic Advisers and vice chairman of the Federal Reserve Board under the administration of U.S. President Bill Clinton, is an orthodox Keynesian economist known for his outstanding achievements in the study of macroeconomic theory.

In his enlightening book "Hard Heads and Soft Hearts" (1987), he says in effect: "Hard-headed" economic policy is based on the principle of efficiency, and "soft-hearted" economic policy on the principle of fairness. The traditional Republican Party supports a "hard-headed and hard-hearted" policy that pursues efficiency at the expense of the weak.

By contrast, the traditional Democratic Party advocates a "soft-headed and hard-hearted" policy that tends to tolerate inefficiencies in pursuit of fairness.

Blinder is a sharp critic of the economic policy of President Ronald Reagan, who was if office from 1981 to 1988. Blinder says so-called Reaganomics combined the worst of the two contrasting policies: soft head and hard heart. Reaganomics, to be sure, was soft-headed in the sense that it did not give full play to free-market efficiency, but it was truly hard-hearted in firmly maintaining a strictly conservative attitude toward the weak.

In Blinder's view, the various theories that supported the Reagan policy, such as supply-side economics, monetarism and the macroeconomics of rational expectations were all soft-headed and hard-hearted.

An ideal government should aim to formulate and implement a hard-headed, soft-hearted economic policy. In reality, however, this effort is always trampled by distributive politics. That's because "Murphy's Law" is at work: Economists have the least influence when their knowledge is most widespread with minimal differences among them and the most influence when their knowledge is least available with wide differences among them. From this rule flows "Blinder's Law": When economists offer a number of competing proposals, the worst one is adopted.

A little explanation is in order. When economists are in agreement, their view is considered self-evident. But when they are widely divided, pork-barrel politicians take advantage of the disagreement to adopt policies that suit their convenience.

Here in Japan, people with law degrees have a dominant say in the policymaking process. This influence is epitomized by the phrase "hoka banno" (the law department is almighty). According to the "logic of law-degree holders," a conclusion is reached first and then a logic is constructed to justify the conclusion. So Murphy's Law and, hence, Blinder's Law apply perfectly.

Government offices choose from a variety of economic theories and views to justify their policies. Whether the adopted policies represent the "worst" choices is arguable. It is clear, though, that they do not represent the best choices.

I agree with Blinder's choice of the hard-headed and soft-hearted economic approach. In America in the 1980s, defeating distributive politics was considered an effective way of breaking Murphy's Law.

In Japan today, defeating the logic of law-degree holders, who rule the administrative center in Kasumigaseki, seems to be an effective way of breaking Murphy's and Blinder's laws.

Prime Minister Junichiro Koizumi's economic policy can be diagnosed in terms of Blinder's Law. It is hard-hearted because he says there is no reform without pain. Since it is removed from market fundamentalism or the principle of efficiency first -- the administration's banner slogan of "structural reform" boils down to clearing bad bank loans and cutting the ballooning public debt -- the policy is soft-headed.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Economic Research Institute.


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