Last of the series
Neo-liberalism could not only achieve its promises, but it also could
not make a consistent policy system in the contemporary societies.
Political intervention to the market economy by means of operation of
fiscal and monetary policies can not be eliminated. For instance, the
Japanese government and monetary authority positively operated
economic policies to lower the rate of interest from the end of 1986,
and to add a large quantity of public expenditure in spring 1987.
These policies were a result of international politics to answer to
the US government's strong request to expand Japanese domestic demand
in order to mitigate the trade friction. As we noted, the resultant
monetary and fiscal policies at that time obviously worked to initiate
and promote the bubble economy. It was then an inevitable policy
option to cause a setback of excessive speculative bubbles by
tightening monetary policies in 1989-90. Against the neo-liberal
creed, economic policies thus intervened in the working of market
order in this period of Japan. However, they could not effectively
control the destructive volatility of the market economy, but rather
initiated and amplified its bubbly instability.
In the subsequent process of the 1990's depression, neo-liberal
policies have been pushed forward. For example, labour laws and
controls of employment relations are being deregulated so as to enable
firms to use various types of workers more flexibly in a competitive
labour market. Restrictions of large-scaled retail shops to protect
small family businesses in local regions were deregulated.
Liberalization of financial businesses to correspond with the global
financial big bang has been promoted. However, being inconsistent with
such neo-liberal policy stance with a belief in smaller government,
the Japanese government has still strongly intervened in and affected
the working of market economy. It actually expanded public
expenditure, and injected an enormous amount of public money into
rescue operation of banks and other financial institutions suffering
from bad loans. The Bank of Japan cooperated with the government and
reduced the official rate of interest from 6 per cent in 1990 step by
step to an extremely low level of 0.5 per cent in 1995 to maintain
this until now.
It must be clear that these intervenient policies have had a large
scaled income redistribution effect as well as unfair distortion of
the economic order against the assertion of neo-liberalism. Economic
policies under neo-liberalism thus could not reduce the roles of the
State one-sidedly. Especially Japanese economic policies lack
consistency with the neo-liberal theories, and tend to give priority
to mitigating the burden of economic crisis of big businesses in the
fields of construction, banks and other financial institutions among
others. In contrast, they tend to neglect the increasing economic
difficulties and sacrifices among majority of workers and weaker
people by emphasizing self-responsibility of individual persons in
market principles. Such tendencies are observable also in the
treatment of issues of fiscal crisis of the State.
4.3.2 Political Economy of the Fiscal Crisis of the State
Through the period of high economic growth until 1973, Japanese
government used to maintain practically balanced budget. Although the
influence of Keynesianism grew among bureaucrats and leading
politicians, the government did not need to operate deficit finance.
While a large scale of public expenditure to construct infrastructure
for industrial growth and urbanization were continuously necessary, it
was sufficiently financed by the 'natural increase of tax' along with
the high economic growth. After 1973, however, when the continuous
economic crisis began to persist, the outstanding government bonds
began to increase rapidly. Initially public expenditure was expanded
for economic recovery in accord with Keynesianism, but it was
unsuccessful to restore both economic growth and tax revenue. As a
result, the outstanding government bonds largely increased from 7.6
trillion yens (6.5 per cent against GDP) in 1973 to 70.5 trillion yens
(28.7 per cent) in 1980, as we see in Table 4-1. In the 1980's, as the
basic tone of economic policies turned to neo-liberalism, government
expenditures for social security and education were severely curbed,
and State-owned enterprises were privatized so as to cut down
subsidies. Nevertheless, the attempt to restrain the government
expenditure could not meet the tendentious stagnation and fall in tax
revenue. Therefore the deficit of government continued at a high level
(Table 1-2). Resultantly, the outstanding government bonds further
increased to 166.3 trillion yens (37.9 per cent against GDP) in 1990
and more to about 254 trillion yens (49 per cent against GDP) in 1997.
The last number is about five times of annual tax revenue of the
State.
missing{(Table 4-1)}
If we add to it other public debt of the central and the local
governments, total public debt amounts to 476 trillion yens by the end
of 1997. Its ratio against GDP is 92.6 per cent, and much higher than
the similar ratio in other major capitalist countries in the same
year. The comparable ratio is 64.1 per cent in the USA, 60.7 per cent
in the UK, and 64.4 per cent in Germany. 476 trillion yens public debt
means that the public debt of 3.78 million yens per capita or 15.12
million yens per household with four members are on the shoulders of
Japanese people for the future. Its burden is still growing. Here is
an additional difficulty like a black hole for the Japanese economy to
recover its real growth.
The increase in the quantity of interest payment for public debt is
relatively restrained by the monetary policy to keep the interest rate
extremely low. Still the interest payment just for the government
bonds amounts to 11.7 trillion yens in 1996, and spends more than 60
per cent of income tax. This works as a powerful means of income
redistribution from the great number of tax-paying workers to the
owners of State bonds. In 1996, banks and other financial institutions
own 27.5 per cent of the outstanding government bonds, and if we add
to them the Bank of Japan, financial institutions own more than 41 per
cent of government bonds. In comparison, little if any of State bonds
are owned by the majority of workers' households. So far as banks
borrow from the Bank of Japan by 0.5 per cent of interest payment just
to invest in public debt, the large portion of interest payment for
public debt works practically as subsidy to banks. In 1966, the part
of the compensation of employees in the national income statistics is
283 trillion yens. It is not at all a small problem to see 4.1 per
cent of this workers income is redistributed as interest on government
bonds, or nearly 8 per cent for interest on total public debt.
Interest payment just for the government bonds already amounts to
nearly twice as much as the total government expenditure on education
and culture, and approaching the size of that on social security.
The worry of a further increase in necessary expenditure for interest
on public debt must be a reason to make the Japanese government and
the monetary authority reluctant to revise the extremely lowered
official rate of interest. Together with the depressed demand for
loans among depressed private firms and consumers, the Japanese
deposit rate of interest has been kept very low, almost near to zero
following the official rate. This gives a great difficulty for pension
funds to keep the promised pension payment, as well as for retired
older persons who expected to gain some interest on their savings.
Notwithstanding such a lowered rate of interest, the burden of
interest payment on cumulative government bonds became in itself a
source of fiscal crisis of the State, by making the total amount of
government expenditure so hard to reduce. In this regard, the Japanese
State budget resembles the reckless business firms, which have to
increase their debt in order to meet the need for interest payment in
the form of Ponzi finance. It is indeed curious to see that the State
budget in Japan is falling into such a deep crisis just like in many
Third world countries. Because the Japanese economy has simultaneously
realized a position as a great economic power by strong business firms
with the largest foreign exchange reserve and the largest net foreign
asset in the world. There must be something wrong and unsound in the
Japanese economic order and the ways of policy operations.
Among others, the failure of the government to recognize the much
lowered growth trend must be a source of deepening fiscal crisis.
Japanese government has continuously tended to expect a higher
economic growth and therefore a greater amount of State revenue
annually, and was actually betrayed by the lowered real growth trend
with a wide shortage of tax revenue. Especially in the 1990's,
excepting 1995-96 the economic outlook by the Japanese government has
been actually betrayed by the real achievement of the economy with the
lowered trend, as we see in Table 4-2. The government used to assume
that the growth rate around 3 per cent is easily achievable in the
Japanese economy, and could not lower its outlook nearer to the actual
new trend. After several years, it finally shifted down the growth
rate in the outlook closer to the lowered trend in 1997. Even this
lowered outlook was betrayed rather fairly widely by the negative rate
of growth.
missing{(Table 4-2)}
There were reasons for the Japanese government to make the shift down
of the economic outlook difficult. While the annual size of budget is
directly constrained by the economic outlook, the reduction of
expenditures in the budget has been not easy. The government had to
expect a higher economic growth in order to draw up budget plans with
certain levels of expenditures. On the other side, under
neo-liberalism, the government publicly promised to reconstruct
balanced budget without tax increase, kept various special tax
exemptions for corporations, and actually reduced inheritance tax and
land price tax rates for wealthier persons. Thus, while the State
revenue tended to stagnate and severely restricted in the real process
of depression, the budget expenditure for social security was hard to
cut down in transition to an aged society, and the burden of interest
payment on public debt continuously increased. Besides, there is an
important aspect in the Japanese fiscal crisis originating from a
series of State policies to mitigate the difficulties of big
businesses.
For example, despite of the government promise to reconstruct balanced
budget, national defense and official development aid (ODA) have
continued to increase as sacred precincts in the expenditure budget
since the 1980's. Even after the end of the Cold War, against the
common trend to reduce the military expenditure among advanced
countries, the Japanese budget for national defense continued to
increase. The Japanese government has taken over more and more shares
of costs to keep the US military base in Japan, and purchased more of
sophisticated military aircraft and other weapons mainly from the USA.
This must be regarded as necessary costs for Japanese politicians and
business circle to keep the largest exporting market open in the USA
by mitigating the trade friction. Corresponding to the international
request, the Japanese ODA rapidly increased to 14.5 billion dollars in
1995, almost twice as much as that of the USA and of Germany. This
serves in many cases practically also as a sort of subsidy for the
Japanese business firms to expand their multinational activities in
the surrounding Asian countries, besides serving as another device to
reduce the trade friction with the USA and other countries.
At the same time, the amount of public expenditure has been rather
increased and kept at a high level mostly in favour of civil
engineering and construction industrial firms, although this is very
inconsistent with the neo-liberal policy stance against Keynesianism.
The size of public investment in terms of the government fixed capital
formation (total investment to public utilities including attached
facilities and equipment of the central and local governments minus
the costs of purchasing necessary land) against GDP used to be 4 per
cent level before 1970. The ratio increased widely to 6 Per cent level
after 1972, and reached 6.6 per cent in 1978-79 when the economic
crisis began and deepened under Keynesianism. With the turn to
neo-liberalism in the 1980's, it declined to 4.9 per cent in 1985 by
the request to curb expenditure budget aiming at balanced budget.
However, it upsurged again with the policies to expand domestic demand
in the late 1980's, and rose also additional emergency economic
policies against the persistent deepening depression in the 1990's.
Thus the ratio increased to 6.9 per cent in 1996, more than 30
trillion yens in real number. Its relative size against GDP is almost
4 times of the similar ratio in the USA, and more than 3 times of that
in Germany.\footnote{Okonogi, K. (1998), p.139-40.} If we add with it
the purchasing costs of necessary land and highway construction costs
by the public corporation, the total amount of investment in public
utilities reaches 50 trillion yens. This occupies 10 per cent of GDP,
and is close to total tax revenue of 55 trillion yens in that year. It
can not be an exaggeration to characterize Japan as a civil
engineering and construction nation State with the enormously
disproportionate spending for public utilities.
This enormous amount of expenditure for public utilities directly
serves for politicians and bureaucrats to secure their vested
interest. Politicians in the government parties can impress their
service to their regional voters by its effect to construct utilities
and to maintain employment for construction, and can expect political
donation from the construction companies. Bureaucrats would expect to
secure the descending appointment positions in the related private
companies. At the same time, its effect to mitigate the deterioration
of prices of land and real estate and to stimulate the land market is
also expected. In this regard, the increased public investment
contains political intention to help financial institutions with a
heavy burden of bad loans relating to the lowered prices of land and
real estate.
However, the increased public investment have not worked as an
effective pump priming policy in the context of the linkage of
depressive pressures in the Japanese economy in the 1990's. The
pressure of asset deflation has bee so heavy. Besides, the consumption
demand, which occupies about 60 per cent of total demand, has been
cooled down by uneasy worries for the future economic life among
people, and thus makes the economic recovery harder. Construction and
repair of roads and highways would no longer much effect in expansion
of domestic sale of cars. Employment effect of public investment
became less and less as the civil engineering and construction
industry introduced more of heavy machinery to economize direct labour
costs. Thus the multiplier effect of public investment in civil
engineering and construction has been substantially
reduced.\footnote{On this issue, Jichitai-mondai Kenkyusho [Research
Institute of Local Communities' Problems] (1998) presents an
input-output analysis to show a much reduced multiplier effect of
public investment.}
Since the monetary policy to set and maintain the extremely low rate
of interest, and fiscal policy to add to public investment did not
work sufficiently for economic recovery, the threat of asset deflation
kept on and spread a possible fear for a chain reaction of failures in
financial institutions. Therefore a new type of public spending
started. The first case was injection of 685 billion yens of public
money into the related financial institutions, when seven specialized
housing loan companies failed in 1996. Then under the name to maintain
the financial market order, the maximum amount of 60 trillion yens of
public money was allowed to be injected into banks and other financial
institutions so as to save their failures or to work as saucer banks
for depositors of failed banks. This type of new policy works clearly
to counter the destructive effect of asset deflation and to protect
economic interest of the asset holders among big firms, wealthier
persons as well as of financial institutions with bad loans. Sometimes
the policy is legitimated as a means to protect general depositors.
But as a means to protect smaller amounts of depositors, there must be
more economical means such as to strengthen the savings insurance
organizations. Anyway direct injection of big amount of public money
directly in order to save banks and other financial institutions is
totally inconsistent with neo-liberalism. It can not easily
legitimated also by the Keynesian theories, and would not signify a
return to Keynesian policy stance. From the view of economic theories,
it can not be logically explained. It thus shows theoretical
confusions in economic policies, though it still basically follows the
spirit of company-centered socio-economic order.
Correspondingly, the burden of fiscal crisis of the State has been
transmitted broadly to working people. The consumer tax, which is a
typical mass taxation, was introduced at a rate of 3 per cent in 1989,
and the rate was raised to 5 per cent in 1997. The government
misunderstood the increased consumer demand in 1996 due to consumers'
behavior to purchase in advance to avoid the announced rise of
consumer tax, and believed it as a strong sign for a real economic
recovery. The government thus assumed it timely and possible to come
back to reconstructing the budget. Therefore it increased the private
burden for medical services from 10 per cent to 20 per cent of actual
costs, and abolished the special reduction of income tax, besides
raising the consumer tax to 5 per cent from April 1997. The total
amount of increased burden on the mass of people reached annually 9
trillion yens. The government's optimistic projection, that the effect
of such increased burden would be short and light, was widely
betrayed. As the consumer demand cooled down again, the Japanese
business activity re-strengthened depression. The Asian monetary and
financial crises also reciprocally intensified the Japanese economic
difficulties. As a result four financial institutions including
Yamaichi Security and Hokkaido Takushoku Bank failed in November of
the same year 1997, and further deepened the economic difficulty and
worry for the future among working people for the following two years
by now with rapidly increasing unemployment.
Thus, while neo-liberalism became a basic policy stance to meet and
restructure the fiscal crisis of the State, a series of fiscal and
monetary policies were implemented in favor of big businesses,
especially in the civil engineering and construction industry and the
financial business area. The swell and burst of huge bubbles was
initiated and promoted by such operations of economic policies. In the
1990's depression, the scale of monetary and fiscal policies was
rather extended as we have seen. Those concrete policy operations
served to mitigate the crises of financial institutions, big
businesses and wealthier persons in the process of asset deflation.
However, they are clearly inconsistent with neo-liberalism,
theoretically confusing as in the case of injecting huge public money
into financial institutions, exasperated the fiscal crisis of the
State, and still have not work well for macro economic recovery. In
the meanwhile, the burden of fiscal crisis of the State has been
sifted more and more to households of living and working people in the
form of increase in consumer tax and personal payment of medical
services among others.
The whole operation of recent Japanese economic policies is in these
regards thoroughly capitalistic despite of its theoretical confusion
and inconsistency. It pays little attention to the economic
difficulties with increasing worries for the future among living and
working people. It does not present proper social policies to solve
the problems concerning a rapid fall in birthrate, a transition to an
aged society, and the worsening employment conditions with increasing
unemployment. The depressed consumer demand by worrying working people
tends to counter the economic recovery and consequently the reduction
of bad loans. The failure of economic policies in 1997 as we noted
typically exemplifies such a problem in the Japanese economy.
Can we not hope to convert such a basic direction of Japanese economic
policies? It must be surely desirable from the view of economic
democracy to change the excessively capitalistic policies, putting
priority to big business with huge amount of public investment. The
potentiality of the Japanese economy can and need to be redirected so
as to form a strong economy for living and working people with stable
social policies easier to grow children. Such a conversion of basic
policy stance may not instantly enable to overcome the lowered trend
of economic growth. However, the current vicious circle between the
worsening employment situations with increasing unemployment and the
deflationary pressure in the economy can be solved and stabilized by
restoring an easy and more guaranteed feeling for the future among
people so as to revitalize consumer demand from below. Anyway,
neo-liberalism as well as the inconsistent emergency economic policies
in favor of big business and financial institutions need not be
believed as inevitable policy options for the Japanese economy. It is
rather counter-progressive and destabilizing.
It is unfortunately difficult to find effective political parties in
the contemporary Japan to present such critical policy options for
working people, excepting still relatively small Japanese Communist
Party. As The Japanese Socialist Party changed its character, became a
government party once in cooperation with the conservative Liberal
Democratic Party, and altered its name into Japanese Social Democratic
Party in the 1990's, following the dissolution of Sohyo with weakened
left-winged labour movements. However, this unfortunate political
situation would not discount but in a sense elevate the importance of
critical analyses of the roots of degeneration and confusions in
Japanese economic policies for the future of economic democracy and
socialism.
ricardo.ecn.wfu.edu
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Alot of authors beliefs intermixed with very good research.
Jack |
