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Saturday, April 27, 2002

'Cures' are killing the patient

The Japanese economy is said to be showing signs of recovery. And so it should. You can't keep a strong economy down for ever -- though a lot of people have been trying hard to do just that.

The problem for an economy in strife is the deluge of wrong and contradictory advice. Each pundit insists his or her hobbyhorse is the key to economic recovery.

The problems of the Anglo-Saxon economies in the 1970s and '80s were blamed on everything from taxes and tariffs to trade unions, trade deficits with Japan and the lack of female liberation. Some Japanese pundits in 1988 ran a large advertisement in The Washington Post calling on the United States to repent of its fiscal sins before it was too late. Then when Japan went into decline a few years later, it was the U.S. pundits who were warning Japan about its own fiscal deficit.

Other advice to Japan has focused on everything from faults in the education system and geriatric managers, to lack of competition, the "keiretsu," the weak service sector, gangsters, the tax system, an inability to speak good English, timid entrepreneurs, the lifetime-employment system and even women's status. The London Economist has now weighed in with its verdict: faults in the political system.

This advice is very fine. But didn't all these "faults" and more exist when Japan was at its economic peak? Nobody criticized them then. On the contrary, some of them -- the education and enterprise management systems especially -- were seen by many, including the London Economist, as the keys to Japan's success. Maybe it is time for a new approach.

The basic cause of Japan's economic problems since the 1970s has been the chronic lack of consumer demand, as reflected in the very high level of savings and personal financial assets. Once basic demands had been fulfilled, the Japanese for their own good reasons did not follow the rest of us in splurging on lifestyle demands -- long vacations, second houses, second cars, yachts, etc.

In prebubble days this demand problem was obscured by export surpluses plus speculative demand financed by asset appreciation. With the bubble's collapse the problem came into the open, reinforced by two more factors -- yen appreciation and negative psychology.

Although few wanted to admit it at the time, Japan was in serious trouble. A move by Keynesian-minded Prime Minister Kiichi Miyazawa to inject funds into the banking system was laughed out of court. The decline worsened.

But no economy, not even one as mood-driven and as transfixed by bubble collapse as Japan's, can decline for ever. People eventually will want to come out of their foxholes and start spending, even if only for replacement purposes. That, plus low interest rates and some sensible fiscal stimulation policies, made Japan a prime candidate for recovery by the mid-'90s, which is exactly what happened.

At 3 to 4 percent per year, Japan in 1996 had the highest growth rate of the member countries of the Organization of Economic Cooperation and Development. The only thing that could have stopped continued progress was unbelievably bad economic policies. Sure enough, the unbelievable happened; the recovery was strangled by the ideologues of fiscal stringency.

A return to sensible fiscal policies in the late 1990s helped the economy to another recovery. But that, too, was pushed off the rails by the hobbyhorse policies of the Koizumi administration.

The current catch-call, both in Japan and the West, is for Japan to commit to something called "structural reform." So privatization of the efficient postal system will revive Japan's economy? Someone has to be joking. As for fiscal deficits, another Koizumi hobbyhorse: The U.S. has already shown how that problem solves itself once an economy recovers.

Bad bank loans are also seen as a key villain. But they, too, are a result of the economic problems, not the cause. Urging their disposal is like foot amputation to cure tinea. Very effective, but very damaging to the patient.

If the London Economist wants to find reasons for Japan's collapse it need look no further than its own pages extolling the virtues of the supply-side, laissez-faire economic policies in the Reagan-Thatcher years of the U.S. and Britain. Introducing these policies to Japan has done more harm than what any number of computer viruses could do to the Internet.

A key point in these policies -- the promise to cut government spending -- was never properly implemented in either the U.S. or Britain. The two main factors in the U.S., Britain and other Anglo-Saxon economy recoveries to date have had little to do with supply-side economics. One was the high octane of incessant lifestyle demands causing a dangerous reliance on consumer debt and foreign funding. The other was protection for domestic producers as a result of currency depreciations induced by supply-side policy mistakes.

Even the positive aspects of supply-side policies were largely irrelevant to Japan. Liberalizations that improve the supply of goods and services are of little use in an economy that already has a surplus supply of goods and services.

But for Britain and other Western rightwingers, supply-side economics has become an ideology with global imperatives. Demand-creation policies have been blackballed as leftwing Keynesianism.

Even economies that desperately need demand-creation policies for progress have been forced by the International Monetary Fund and other supply-side ideologues to obey the doctrines of free trade, laissez faire and fiscal stringency.

Japan did not need to be forced; its naive planner-ideologues marched right in with hobnail boots. They were delighted to have the chance to stomp on the Keynesianism that had once dominated Japanese economic thinking. The wreckage they have caused lies on every side -- rising unemployment, unnecessary bankruptcies, more negative psychology and a dangerous deflationary spiral.

True, part of Japan's problem is the bureaucratic over-regulation that stunts some lifestyle demands. Large-scale liberalization that gave entrepreneurs the freedom to find and meet those demands would be useful. But the Koizumi agenda had put this well down the list, below postal privatization and other hobbyhorses.

Over the long term, however, Japan will have to accept the role of government in mobilizing surplus savings and using it for the public good. The "supply-siders" will be upset. But that is their problem.

Gregory Clark is a former Australian diplomat and honorary president of Tama University. He was also a member of former Foreign Minister Makiko Tanaka's private discussion group on foreign policy matters.

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