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Monday, Jan. 15, 2001

JAPANESE PERSPECTIVES

Next U.S. president should use surplus to pace savings rate


Amid growing signs of a slowdown in the U.S. economy, the whole world is closely awaiting the new policies of President-elect George W. Bush, who prevailed in one of the closest presidential races in U.S. history after more than a month of unprecedented legal wrangling.

Bush will launch his administration later this month backed by a slim Republican majority in Congress, but it is not yet clear how his "compassionate conservatism" slogan will translate into specific policy measures.

The main difference between the economic policies of the Bush and Gore campaigns was their proposals on how to use the fiscal surplus of the federal government.

Bush promised tax cuts, saying the surplus belongs to the people and should be returned to the taxpayers.

Here, I would like to point out that the budget surplus is not the only thing that Mr. Bush is taking over from the Clinton administration. He will also inherit the expanding and accumulated current account deficit.

If the new president says the fiscal surplus belongs to the people, he should also realize that the external deficit is the people's borrowings from overseas, and that taxpayers should shoulder the burden of the debts.

The U.S. current account deficit reflects the shortage in savings of the government and private sectors combined. The government may have a surplus, but the private sectors are borrowing a far greater amount of money from abroad to finance their spending and investment spree. The question here is whether tax cuts under the Bush administration will help the private sectors -- or the American people -- repay their external debts.

Consumer spending, one of the two major segments of private-sector demand, accounts for 60 percent of the U.S. gross domestic product. Recently, retail sales are slowing down and housing starts are declining, but the biggest problem is the continuing fall of the savings rate over the last several years.

Since 1992, consumer spending has grown faster than the rise in income. This phenomenon has been supported by the stock market boom that has inflated average Americans' personal assets, but the trend is now at crossroads.

In the corporate segment, meanwhile, profitability at American firms has begun to fall, especially in information technology fields. The NASDAQ index of high-tech stocks, once the symbol of the success of America's IT revolution, has plunged to roughly half its peak level of about 5,000 points. There is no doubt the IT revolution has boosted U.S. industrial productivity, but if it were a continuous trend, the U.S. economy would never have been affected by minor interest rate hikes. In fact, the stock market has become extremely sensitive to monetary policy changes, a sign that growth in productivity may be slowing.

The recent fall in stock prices, stemming from a correction of asset-inflated factors, is in fact a good opportunity to urge consumers to stop their excessive spending and increase savings, and prompt American firms to review their investment spree.

The question is the pace at which this process should be pursued. Too rapid a change would result in a "hard landing" for the economy. This delicate task will be the immediate priority of the new administration, which must ensure its tax cuts will lead to increased savings.

It must be noted that the growth in U.S. productivity in recent years did not lead to improvement in the nation's current account balance. Expansion of the service industries alone will not sustain people's lives.

America's external deficit soared to record levels as the nation imported goods consumers needed. And this is another job facing the Bush administration -- correcting a U.S. industrial structure that relies too heavily on the service sectors.

In light of the savings shortage, the new president would obviously not be able to end the strong dollar policy, but where to find an appropriate exchange rate for the dollar is a different question. There will be adjustments in the yen-dollar exchange rate, reflecting changes in the euro's level and the U.S. external deficits.

These two major tasks facing the U.S. administration are the mirror image of what Japan is required to do. The government must pursue economic policies, including tax reforms, to encourage people to spend more of their savings for domestic consumption and investments, and pull the nation out of its dependence on export demand.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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