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New york university fall conference luncheon speech
Japan and the World Economy 3 (1991) 203-213 North-Holland
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New York University Fall Conference Luncheon Speech * James Fallows November 16, 1990
Good afternoon. It is an honor to have a chance to address an audience of this caliber, and it is challenging to appear at the end of the sort of discussion we have heard for the past day and a half. It is perhaps more challenging to try to take a positive approach and outline the steps the United States could take for a smoother and more successful relationship with Japan. This whole subject - improving the U.S.-Japanese relationship, which for convenience I’ll call ‘The Relationship’ from this point on - is deceptively familiar. I suspect that this is not the first such gathering most of you have attended, at which responsibilities for troubled US-Japanese relations are discussed. The very familiarity of the subject is itself a problem. It encourages a habit of mind that is destructive to all parties, but especially to the United States. Most discussions of The Relationship, especially the friendliest and most constructive-seeming ones, start from the premise that blame for frictions between the two countries is one big entity, which fair-minded people can divide up fairly between the responsible parties. The ideas of the correct distribution of blame may vary: perhaps America is 85 percent to blame for the problems, because of its deficits and other failings, or perhaps it is fairer to say that the blame is fifty-fifty. But whatever the arguments may be over the algebraic proportions, the idea that there is one big, related set of problems, to which both countries must apply themselves diligently, has become almost a reflex. The clearest recent illustration of this mentality was of course the Structural Impediments talks, in which Japan and the United States accused each other of practices that worsened the relationship. * The Journal will publish lectures and short papers by renowned administrators, statesmen and scholars who have influenced economic policy. This paper is one of those series of policy papers.
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My starting point today is to argue that this kind of reflexive linkage, which seamlessly connects Japan’s trading practices with America’s domestic problems, should be re-examined and rejected. Preserving The Relationship is indeed crucial for both countries; it is the best way to maintain a more-or-less free regime of world trade, and to avoid destructive military and political upheavals in Asia. I will be speaking only of the steps America should take, to strength itself and to improve The Relationship; I believe it is more sensible for America to tend to its own problems than to lecture Japan about things it should or should not do. In order to see its way clearly, the United States should think about two separate questions in two clear and distinct ways. The first of these questions concerns the changes, renovations, and remedies the United States should undertake for its own self-interested reasons changes in its political economy that would make its society more robust, more vigorous, fairer, truer to the country’s potential and ideals. The motivation for these changes should have nothing to do with Japan at all. The second set of questions concerns how America should re-craft its understanding of and policy toward Japan - whether or not it has made significant progress in dealing with its own internal problems. The answers to one question may have an effect on the other, but we should think about them separately. The first step, then, is to consider what America should do - for its own reasons. If Japan’s economy collapsed tomorrow, if America’s trade and investment figures soared into surplus, if the dollar soared against the yen and mark, if all countries except America disappeared into the sea so that Americans could chortle about being Number One in everything, there would still be certain deep questions about the nation’s social and economic welfare that should focus America’s attention. What, exactly, are these problems. We are used to hearing general references to ‘American decay’ or ‘the American disease’, so it is important to be specific about just what these ‘internal weaknesses’ might be. I think the real problems America should concentrate on - whether or not there was an Iraq, a Soviet Union, a Britain, or a Japan, a Uruguay Round or a Structural Impediments Initiative - fall into six categories. First, there is the question of mobility and opportunity in America. Different societies have different myths and imaginative vehicles to keep them going. The United States cannot use the myths and incentives that motivate some other countries. It is not ethnically or culturally homogeneous. At any given moment, foreign observers have been amazed by the extremes and inequalities of American-life - this is what Charles Dickens noted in the mid-19th century and what many Japanese visitors see today, as they move from the leafy suburbs to seeing panhandlers on the city streets. The social bargain that includes these extremes has been tolerable to America, at least so far, because to most individuals it has seemed temporary: the culture has promoted the belief that there was always another chance, if not for you then for your
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children. There is clear evidence that in the last ten years the extremes of American society have grown farther apart. There are ambiguous indications about whether American society is becoming less mobile than it used to be. Some studies suggest that mobility is as rapid as ever before, and that immigrants are arriving and ascending as they have in other periods. Other studies say that mobility is decreasing as a semi-permanent urban underclass is formed. Making the society more equal and more fluid is the first American challenge. Second, America needs to find a better balance between investment in public and private facilities. Anyone who has seen the houses, country clubs, private schools, and resorts of America knows that it has been able to invest in private facilities. But over the last ten years, the share of the national wealth that has gone into the ‘public infrastructure’ - roads, airports, public schools, national parks, etcetera - has declined. (In 1970, the federal government invested about 1 percent of the GNP in new physical facilities, almost half of 1 percent in education, and about one third of one percent in non-defense research and development, for a total of 1.8 percent of the GNP. By 1990, the total for this sort of investment had fallen to about 1.3 percent of the GNP.) It does not take an economist to imagine the long-term effect of such an investment shortfall; historians can draw a similar conclusion by observing the benefits of ample public investment in the mid-19th and mid-20th centuries. The problem of public investment is connected to a larger ‘market failure’ in public finance. Over the last generation, the overall tax burden on the American public has been more or less constant, but the share spent for two forms of consumption - the military during the early 1980s and ‘entitlement’ programs for retirees - have gone steadily up. Each of these programs has its justification, and American politics has been so arranged that politicians believe they will be defeated if they propose upsetting this balance. The result is that the country simply has less money to spend on the public investments that build future prosperity - or simply help hold the line against deterioration and decline. When the Structural Impediments talks focus on America’s ‘savings shortfall’, they are getting at the same phenomenon. But for Americans, the real reason to be concerned about public investment is the future prospects for their own society, not simply the effect on payments balances. Third, Americans need to begin a fundamental re-assessment of markets and the role of the ‘invisible hand’. Nearly everyone in Japan and America alike is familiar with the complaint about the ‘short-term mentality’ in American business. As many of you are aware, this is not mainly a by-product of a frontier mentality, or a sign of moral weakness. In many cases it is a wholly rational response to the rules of the game as it has to be played in the United States. If the financial market really is a markets and pension funds and other investors will move their money in and out as immediate returns dictate, then managers have little option but to do what is necessary to attract
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funds. If government bureaucrats believe they should sell their post-retirement services on a completely open market, then they will with good conscience go to work for whoever pays the most money, including companies that are essentially hiring them as spies to report on the decisions they only recently were making. The larger and more iinteresting question for the United States is to determine just where the market fails as a tool for making decisions. To put it slightly different, the United States has acted in the last ten years as if anything the market will support, except perhaps drugs and commercial sex, is by definition morally and socially acceptable. Not all societies feel the same way. Ronald Dore, the British sociologist, has said, ‘The Japanese have never caught up with Adam Smith. They don’t believe in the invisible hand. They believe . . . that you cannot get a decent, moral society, not even an efficient society, out of the mechanisms of the market powered by the motivational fuel of self-interests’. The United States will have to examine its own faith in market forces. Fourth, America needs to consider one difficult human dimension of the ‘market’ question. For the last generation, the United States has led most other developed societies in removing barriers based on gender. This is to America’s credit, even though the movement is very, very far from complete. But even the partial progress toward equality of the sexes has revealed a very troubling consequence. As women are freed from the purely traditional requirement that they concentrate on raising children, the society has not found a way to make up the slack. That is, as men and women alike have greater incentive to pursue career opportunities, neither gender has been given a compelling offsetting incentive to concentrate on child-rearing. Preparation of the next generation of citizens is the most fundamental act of social investment. As with other forms of public investment, America is facing a ‘market failure’ in this case too. To be perfectly clear about my point: I am certainly not advocating that the U.S. return to a traditional policy of keeping women at home with the children while the men go off to work. The ideal, if not yet the reality, of equal opportunity between the sexes and among the races is a principal American virtue. But pursuing this ideal has its consequences, which America has not yet found a way to cope with. Fifth, the United States needs to keep dealing not with the consequences of ‘multi-racialism’, as it is often described in Japan, but with the more specific after-effects of several centuries of slavery. Multi-racialism is not a problem for the United States: immigrants from a variety of racial backgrounds, including recent immigrants from Africa, continue to be absorbed and to succeed. But the effects of slavery still twist relations between many blacks and whites, and constitute the society’s central social problem. I was impressed, on moving back to the United States after nearly four years in Asia,
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at how far the ideal of black/white integration had been pursued - and by how very far it still has to go. Sixth, the United States needs - for itself, as well as for the world - to think once again about what kind of world power it should be. In many ways the United States is ideally suited to its post-war role as all-purpose policeman. It still has great resources, it has an ethnic make-up that increasingly gives it ties to all parts of the world, it is geographically far away from most scenes of conflict except in Latin America, which therefore makes its armed force somewhat less threatening than the same force wielded by certain other countries would be. But in other ways, America is uniquely ill-suited to the world-policeman’s role. Our political system is not well equipped for realpolitik - our politicians want to be able to tell us that our allies are morally admirable and that we are on the right side of every war. President Bush has been wrestling with this problem since the day Iraq invaded Kuwait. The real reasons Bush sent troops to Saudi Arabia had to do with energy supplies and the threat of endless instability in the Middle East. But he has not been able to say so, in so many words: he has had to give speeches to the American public about ‘resisting aggression’, and has had to equate Saddam Hussein with the devil himself. With their own vast country all around them, Americans are notoriously prone to look inward and forget about the rest of the world; they quickly lose enthusiasm for foreign commitments that become costly in money or blood. At the same time, Americans are more and more aware of what two generations of what Seymour Melman called the ‘permanent war economy’ have done to the American productive base. Completely apart from its policy toward Japan, the United States will be re-evaluating its policy toward the world as a whole. To be sure, American society has a number of offsetting strengths that are peculiar to it - that might, indeed, be called ‘unique’ if this word were not such a problematic cliche in Japanese-American discussions. America’s latent resources and productivity remain enormous. To a man from Mars, its economic problems would look laughably easy to solve. (If a federal gasoline tax meant that Americans paid two-thirds as much for gasoline as Japanese drivers do - roughly $2.50 per gallon, versus roughly $1.50 now - the U.S. budget deficit would virtually disappear, freeing ample money for investment of all sorts.) America’s openness to talent from around the world - Taiwan, the Soviet Union, Cuba, and yes Japan - is a tremendous long-term advantage over almost every other industrial society. It is precisely the tension between these strengths and its current problems that the U.S. needs to attend to, since they affect the viability of its social contract - whether or not Japan exists. America’s social contract depends on both abundance and mobility, and when they are threatened so is the society. But however we assess the strengths and weaknesses America has, they are
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America’s problems, not some kind of bargaining chips to be traded against reforms of the large-store law. The reason for going through this list of problems is to clarify the agenda for America - not because of the effect these factors may or may not have on Japan. Some of these American problems show up directly or indirectly in trade performance; some do not. Their impact on Japan should in either case be secondary. The reason to address these problems is that they hold America short of its potential.
Now we move to the second distinct question, which is how America should approach Japan whether or not America makes progress against these domestic problems. The challenge here for the United States, I will suggest, is one of ideas. The United States has no fundamental complaint about what Japan is or how it behaves. America’s problem lies in the difference between what Japan is and what America has for at least 45 years believed Japan to be. This whole topic may sound unbelievable to observers from outside the United States, since America’s view of Japan reflects traits peculiar to America itself. The usually-unstated but enormously-influential heart of America’s policy toward Japan, at least since Douglas MacArthur’s arrival in Tokyo Bay, is that Japan is a kind of America-in-the-making, a social, economic, and political system naturally and inevitably ‘evolving’ toward convergence with the American Way. The point is almost never stated in that way, since it would sound patronizing if actually stated. But the assumption of inevitable convergence is visible in many aspects of the American approach. In one sense, it is inevitable that America thinks of Japan this way. Every one of the 5 billion individuals in the world is a potential American. Therefore it is tempting for Americans to conclude that whole societies are potential Americas - especially if they are modern, competent, and advanced. The stated purpose and assumed achievement of the US Occupation was to convert Japan into a capitalist democratic state, and institutions are in place that make Japan structurally similar to the U.S. or other Western states. Diplomats from both countries have fed the impression of inevitable convergence - those on the American side by emphasizing the fragility and value of The Relationship, and those on the Japanese by stressing until recently its role as eager tutee. The American economics profession has played its own crucial role in this process of making Japan seem to be an embryonic United States, albeit with its own distinctive language and managerial practices and colorful costumes. The maxims of neoclassic economics teach us that in any rational system consumer welfare will ultimately prevail and so systems will come to be like ours. This leads to the constant American news stories about consumer revolt in Japan. In addition, neoclassical economics has its ‘Mahatma Ghandi school, made of those who argue that even if other countries want to take the
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benighted course of protectionism, we should not imitate their self-destructive practices. This idea of Japan has crucial consequences. The most important is the assumption that time is inevitably on the side of smoother economic relations between Japan and the rest of the world. As Japanese society grows more prosperous, it will inevitably behave much more like other industrialized societies - so the theory holds. Leisure will increase; savings will fall; imbalances will go away because equilibrium is the nature of interactions among similar systems. But what if this idea is profoundly wrong - or even if it is pretty much wrong? This is not the time to argue the full case for why it might be wrong, but let me summarize the key elements. It is possible that, rather than an America in the making, Japan is its own version of capitalism, pursuing a non-converging path. Although it has all the structures of democratic capitalism, it may differ in several significant ways: _ first, in its understanding of the purpose of economic growth. According to Anglo-American theory, this is not even an interesting question. The ultimate purpose and justification of economic growth is more consumer welfare, including greater consumer choice. In the Japanese model, as with other catch-up models the world has seen, consumer welfare is clearly not the paramount goal, Some combination of other goals, including strengthening the productive base within the nation or under the nation’s control, takes precedence over giving consumers the lowest possible prices and the broadest possible choice. _ second, in its view of power. Much of the momentum of American history has concerned the effort to break up concentrations of power. Anglo-American economic theory gives a theoretical justification for trying to shatter power, because monopolistic or oligopolistic powers will distort the market and decrease the consumer’s welfare. The Japanese model seems to assume, on the contrary, that there will be large agglomerations of bureaucratic and corporate power; it is concerned less with breaking them up than with ensuring that the operate smoothly. _ third, in its fundamental suspicion of untrammeled market forces. The phrases ‘excessive competition’ or ‘confusion in the market’ are quite familiar in discussions within Japan. It is hard even to find concepts that would approximate them in English; American economists would be more likely to call the same circumstances ‘perfect competition’. Anglo-American economic theory is based on the faith that the unpredictable results produced by true market forces will be beneficial in the long run; ‘creative destruction’ will be destructive, but its creative powers are assumed to be even greater. In the Japanese model there is much less faith in what will happen if all controls are released.
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_ fourth, in its view of national borders. In economics courses, Americans are taught that national borders have become meaningless artifacts. We are all part of an interdependent ‘ borderless economy’ now, in which the ‘world-wide welfare function’ is the most important criterion of sane and effective policies. Western moral philosophy also teaches that, at least in theory, people on every part of the globe are subject to treatment according to the same universal norms. So far, the Japanese economic and social models have placed much greater stress on the difference between inside and outside - between us and them, Japanese and non-Japanese. There are quite understandable historical and cultural reasons for Japan’s resistance to accepting refugees or foreign labor, or for the absence of foreigners among its corporate management ranks. With time - and with, perhaps, the spread of Japanese-language fluency - it is possible that the difference between ‘inside’ and ‘outside’ will be reduced. But for now, the world’s most dynamic economic systems are those that pay more attention to the ‘national’ than to the ‘worldwide’ economic functions. Capitalism and democracy take many forms around the world, and in some aspects the Japanese practices are closer to those of Continental Europe than America’s are. But overall the differences of degree between the Japanese and American approaches amount to a difference of kind. In American terms, the closest parallel to the long-term operation of this system is the short-term operation of the U.S. economy during World War II. Everyone here is familiar with speeches and articles that analyze the differences between Japan and various Western models. My intention is not to engage in that kind of ‘Nihonjinron’, and certainly not to call one system better, or worse, or fairer, or less fair than another. My purpose is instead to suggest that America’s ‘Japan problem’ may essentially be the difference between its view of Japan and the nature of the Japanese system itself. It is possible, of course, that my suggestion is incorrect - that the Japanese system is indeed what Douglas MacArthur thought he created, and what the neoclassical economists now say it is. On the other hand, it is possible that I am right. Given this uncertainty, I argue that it is much safer to assume that my argument is right than the other way around. If I am wrong, then all the talk about incompatibilities will naturally resolve itself. Warnings about Japanese-American incompatibilities will sound like yesterday’s news - just as happened in Europe after the U.S. investment boom of the 1960s when the American companies localized themselves and no one was too upset any more. But it is also possible that the prevailing view is wrong, and the consequences of that error are much more dangerous. The United States will keep waiting for equilibrium and convergence to occur - and it will wait and wait. Lacking any other way to account for persistent trade problems, the U.S. will leap to moralistic theories: Japan and other countries must simply be cheating, since it is unacceptable to argue that a legitimate but different system lies
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behind their achievements. America’s criticism of ‘unfair’ practices, and its desperate sense of losing control of its own destiny, will put in peril the things that really do matter between the countries, specifically their strategic relationship and the overall regime of free trade that has helped make both of them more prosperous. One could argue that the post-war decades brought out the best in both Japanese and American society. Japan was stoic, determined, and uncomplaining as it rebuilt; the U.S. was, by historic standards, generous and far-sighted as an occupying power. But a perceived shift in roles brings out each society’s less attractive traits. Anxiety makes Americans more grudging at just the moment when some Japanese thinkers seem to feel that, if Japan is not clearly inferior to the United States any more, it must have become superior. It may sound odd to say that preserving the military bond and the free trade system is the reason the U.S. should change its view of Japan, but that is, in my view, the truth. What, then, is to be done by America? The answers to this question are what should occupy American politics in the next decade. For the moment let me suggest a brief check-list. The items fall into two major streams, consistent with the two major problems I have mentioned. One is to fix problems in the United States for their own sake, which will as a side-effect remove some of the psychological poison from the relationship with Japan. The other, as a separate matter, is to adopt some Japan-specific policies that will help preserve the relationship. My wish-list for domestic reforms would start with: _ a heavy tax on short-term trading profits, and a light overall securities trading tax, to accompany gasoline taxes. Reducing the federal budget deficit is the most direct way to equip America to invest in its future, and these are some of the few taxes whose side-effects are beneficial. _ returning the Social Security and Medicare programs to an ‘insurance’-type function, with their benefits concentrated on those in financial need. Coping with the ‘middle class entitlements’ is the central challenge of U.S. fiscal policy. - investing more money in the public infrastructure. Part of the labor for these projects could be provided through a ‘workfare’ program, as in the Great Depression, which would guarantee jobs to all able-bodied applicants - but require them to work if they wanted public benefits. - a radically expanded Head Start program, to prepare children who otherwise would be highly likely to fail in school. _ a reduction in military spending of at least five percent a year, in real terms, over the next decade. Steps like these, to repeat, would be important to America whether or not they have any effect on relations with Japan. But at the same time, the U.S. should develop a ‘Japan policy’, through steps in these areas:
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_ a shift in trade negotiations, away from the endless haranguing that led to the Structural Impediments talks and toward a more ‘results-oriented’ policy. Japanese negotiators have typically been more comfortable with specific goals ~ a certain market share for foreign producers - than with general exhortations to ‘open’ the market. This approach would probably increase the power of the bureaucrats over the Japanese market, which is unfortunate. It is more likely to defend American interests than continuing the SII-style approach. _ a more nationally-minded view of industry, in keeping with past American practice. Neoclassical economics postulates that it is no different to make a product within your borders than to be able to buy it from some other supplier. The American government has not always acted as if it believed in this theory: it has deliberately encouraged the aircraft industry, and satellites, and computers and semiconductors in their early days. Neoclassical economics also says it is impossible to ‘pick winners’, but in those cases the U.S. government has encouraged winners, as the Japanese and Korean governments have in many other cases. The evidence of the last decade, reinforced by new ‘strategic trade’ theory, is that governments that encourage high-value industries will eventually have more of them than governments that don’t. The U.S. should act as if other industries were as important to it as aircraft have been. _ the U.S. should ensure that Japanese companies behave in a ‘borderless’ way when they operate in the United States, including hiring and promoting local talent and developing local suppliers rather than importing the entire keiretsu structure. The European countries that have imposed such requirements have had a happier experience with Japanese corporations than the ones that have not. ~ the U.S. should encourage Japan to take a ‘peaceful leadership’ role in the world, not by hastening its rearmament but by leading a worldwide crusade for environmental protection. Japan has the money and the technology to direct world efforts to head off environmental disaster. After this list of recommendations, let me leave you with the three dilemmas that I think will be hardest for each country to resolve. First, the United States has been comfortable in the past running an industrial policy - as long as the Pentagon has been running it. Is it possible for the United States ever to guide or encourage industries without relying on the ‘national security’ excuse? Second, the U.S. and Japan have worked themselves into a ‘guiatsu trap’. The United States has a moral and ideological obligation to defend causes it believes in, from free-market operations and consumer rights to individual liberties. But the last two decades should have demonstrated that it is a losing game for America to stay in a role as Japan’s scold, serving as the real opposition party in Japanese politics. Somehow each country must find a
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different balance - the U.S. defending what it believes in without hectoring Japan, Japan developing the capacity to change without the crutch of gaiatsu. Third, the U.S. needs to solve a gaiatsu dilemma of its own. The nature of this big, complacent society is that it often requires a kind of shock, usually administered from outside, to face its duties. Too often, the shock has involved war - or the sense of threat from the outside, as after the launch of Sputnik. Measuring itself against Japan may be a way for America to motivate itself.
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New York University Fall Conference Luncheon Speech * James Fallows November 16, 1990
Good afternoon. It is an honor to have a chance to address an audience of this caliber, and it is challenging to appear at the end of the sort of discussion we have heard for the past day and a half. It is perhaps more challenging to try to take a positive approach and outline the steps the United States could take for a smoother and more successful relationship with Japan. This whole subject - improving the U.S.-Japanese relationship, which for convenience I’ll call ‘The Relationship’ from this point on - is deceptively familiar. I suspect that this is not the first such gathering most of you have attended, at which responsibilities for troubled US-Japanese relations are discussed. The very familiarity of the subject is itself a problem. It encourages a habit of mind that is destructive to all parties, but especially to the United States. Most discussions of The Relationship, especially the friendliest and most constructive-seeming ones, start from the premise that blame for frictions between the two countries is one big entity, which fair-minded people can divide up fairly between the responsible parties. The ideas of the correct distribution of blame may vary: perhaps America is 85 percent to blame for the problems, because of its deficits and other failings, or perhaps it is fairer to say that the blame is fifty-fifty. But whatever the arguments may be over the algebraic proportions, the idea that there is one big, related set of problems, to which both countries must apply themselves diligently, has become almost a reflex. The clearest recent illustration of this mentality was of course the Structural Impediments talks, in which Japan and the United States accused each other of practices that worsened the relationship. * The Journal will publish lectures and short papers by renowned administrators, statesmen and scholars who have influenced economic policy. This paper is one of those series of policy papers.
0922-1425/91/$3.50
0 1991 - Elsevier Science Publishers B.V. All rights reserved
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My starting point today is to argue that this kind of reflexive linkage, which seamlessly connects Japan’s trading practices with America’s domestic problems, should be re-examined and rejected. Preserving The Relationship is indeed crucial for both countries; it is the best way to maintain a more-or-less free regime of world trade, and to avoid destructive military and political upheavals in Asia. I will be speaking only of the steps America should take, to strength itself and to improve The Relationship; I believe it is more sensible for America to tend to its own problems than to lecture Japan about things it should or should not do. In order to see its way clearly, the United States should think about two separate questions in two clear and distinct ways. The first of these questions concerns the changes, renovations, and remedies the United States should undertake for its own self-interested reasons changes in its political economy that would make its society more robust, more vigorous, fairer, truer to the country’s potential and ideals. The motivation for these changes should have nothing to do with Japan at all. The second set of questions concerns how America should re-craft its understanding of and policy toward Japan - whether or not it has made significant progress in dealing with its own internal problems. The answers to one question may have an effect on the other, but we should think about them separately. The first step, then, is to consider what America should do - for its own reasons. If Japan’s economy collapsed tomorrow, if America’s trade and investment figures soared into surplus, if the dollar soared against the yen and mark, if all countries except America disappeared into the sea so that Americans could chortle about being Number One in everything, there would still be certain deep questions about the nation’s social and economic welfare that should focus America’s attention. What, exactly, are these problems. We are used to hearing general references to ‘American decay’ or ‘the American disease’, so it is important to be specific about just what these ‘internal weaknesses’ might be. I think the real problems America should concentrate on - whether or not there was an Iraq, a Soviet Union, a Britain, or a Japan, a Uruguay Round or a Structural Impediments Initiative - fall into six categories. First, there is the question of mobility and opportunity in America. Different societies have different myths and imaginative vehicles to keep them going. The United States cannot use the myths and incentives that motivate some other countries. It is not ethnically or culturally homogeneous. At any given moment, foreign observers have been amazed by the extremes and inequalities of American-life - this is what Charles Dickens noted in the mid-19th century and what many Japanese visitors see today, as they move from the leafy suburbs to seeing panhandlers on the city streets. The social bargain that includes these extremes has been tolerable to America, at least so far, because to most individuals it has seemed temporary: the culture has promoted the belief that there was always another chance, if not for you then for your
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children. There is clear evidence that in the last ten years the extremes of American society have grown farther apart. There are ambiguous indications about whether American society is becoming less mobile than it used to be. Some studies suggest that mobility is as rapid as ever before, and that immigrants are arriving and ascending as they have in other periods. Other studies say that mobility is decreasing as a semi-permanent urban underclass is formed. Making the society more equal and more fluid is the first American challenge. Second, America needs to find a better balance between investment in public and private facilities. Anyone who has seen the houses, country clubs, private schools, and resorts of America knows that it has been able to invest in private facilities. But over the last ten years, the share of the national wealth that has gone into the ‘public infrastructure’ - roads, airports, public schools, national parks, etcetera - has declined. (In 1970, the federal government invested about 1 percent of the GNP in new physical facilities, almost half of 1 percent in education, and about one third of one percent in non-defense research and development, for a total of 1.8 percent of the GNP. By 1990, the total for this sort of investment had fallen to about 1.3 percent of the GNP.) It does not take an economist to imagine the long-term effect of such an investment shortfall; historians can draw a similar conclusion by observing the benefits of ample public investment in the mid-19th and mid-20th centuries. The problem of public investment is connected to a larger ‘market failure’ in public finance. Over the last generation, the overall tax burden on the American public has been more or less constant, but the share spent for two forms of consumption - the military during the early 1980s and ‘entitlement’ programs for retirees - have gone steadily up. Each of these programs has its justification, and American politics has been so arranged that politicians believe they will be defeated if they propose upsetting this balance. The result is that the country simply has less money to spend on the public investments that build future prosperity - or simply help hold the line against deterioration and decline. When the Structural Impediments talks focus on America’s ‘savings shortfall’, they are getting at the same phenomenon. But for Americans, the real reason to be concerned about public investment is the future prospects for their own society, not simply the effect on payments balances. Third, Americans need to begin a fundamental re-assessment of markets and the role of the ‘invisible hand’. Nearly everyone in Japan and America alike is familiar with the complaint about the ‘short-term mentality’ in American business. As many of you are aware, this is not mainly a by-product of a frontier mentality, or a sign of moral weakness. In many cases it is a wholly rational response to the rules of the game as it has to be played in the United States. If the financial market really is a markets and pension funds and other investors will move their money in and out as immediate returns dictate, then managers have little option but to do what is necessary to attract
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funds. If government bureaucrats believe they should sell their post-retirement services on a completely open market, then they will with good conscience go to work for whoever pays the most money, including companies that are essentially hiring them as spies to report on the decisions they only recently were making. The larger and more iinteresting question for the United States is to determine just where the market fails as a tool for making decisions. To put it slightly different, the United States has acted in the last ten years as if anything the market will support, except perhaps drugs and commercial sex, is by definition morally and socially acceptable. Not all societies feel the same way. Ronald Dore, the British sociologist, has said, ‘The Japanese have never caught up with Adam Smith. They don’t believe in the invisible hand. They believe . . . that you cannot get a decent, moral society, not even an efficient society, out of the mechanisms of the market powered by the motivational fuel of self-interests’. The United States will have to examine its own faith in market forces. Fourth, America needs to consider one difficult human dimension of the ‘market’ question. For the last generation, the United States has led most other developed societies in removing barriers based on gender. This is to America’s credit, even though the movement is very, very far from complete. But even the partial progress toward equality of the sexes has revealed a very troubling consequence. As women are freed from the purely traditional requirement that they concentrate on raising children, the society has not found a way to make up the slack. That is, as men and women alike have greater incentive to pursue career opportunities, neither gender has been given a compelling offsetting incentive to concentrate on child-rearing. Preparation of the next generation of citizens is the most fundamental act of social investment. As with other forms of public investment, America is facing a ‘market failure’ in this case too. To be perfectly clear about my point: I am certainly not advocating that the U.S. return to a traditional policy of keeping women at home with the children while the men go off to work. The ideal, if not yet the reality, of equal opportunity between the sexes and among the races is a principal American virtue. But pursuing this ideal has its consequences, which America has not yet found a way to cope with. Fifth, the United States needs to keep dealing not with the consequences of ‘multi-racialism’, as it is often described in Japan, but with the more specific after-effects of several centuries of slavery. Multi-racialism is not a problem for the United States: immigrants from a variety of racial backgrounds, including recent immigrants from Africa, continue to be absorbed and to succeed. But the effects of slavery still twist relations between many blacks and whites, and constitute the society’s central social problem. I was impressed, on moving back to the United States after nearly four years in Asia,
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at how far the ideal of black/white integration had been pursued - and by how very far it still has to go. Sixth, the United States needs - for itself, as well as for the world - to think once again about what kind of world power it should be. In many ways the United States is ideally suited to its post-war role as all-purpose policeman. It still has great resources, it has an ethnic make-up that increasingly gives it ties to all parts of the world, it is geographically far away from most scenes of conflict except in Latin America, which therefore makes its armed force somewhat less threatening than the same force wielded by certain other countries would be. But in other ways, America is uniquely ill-suited to the world-policeman’s role. Our political system is not well equipped for realpolitik - our politicians want to be able to tell us that our allies are morally admirable and that we are on the right side of every war. President Bush has been wrestling with this problem since the day Iraq invaded Kuwait. The real reasons Bush sent troops to Saudi Arabia had to do with energy supplies and the threat of endless instability in the Middle East. But he has not been able to say so, in so many words: he has had to give speeches to the American public about ‘resisting aggression’, and has had to equate Saddam Hussein with the devil himself. With their own vast country all around them, Americans are notoriously prone to look inward and forget about the rest of the world; they quickly lose enthusiasm for foreign commitments that become costly in money or blood. At the same time, Americans are more and more aware of what two generations of what Seymour Melman called the ‘permanent war economy’ have done to the American productive base. Completely apart from its policy toward Japan, the United States will be re-evaluating its policy toward the world as a whole. To be sure, American society has a number of offsetting strengths that are peculiar to it - that might, indeed, be called ‘unique’ if this word were not such a problematic cliche in Japanese-American discussions. America’s latent resources and productivity remain enormous. To a man from Mars, its economic problems would look laughably easy to solve. (If a federal gasoline tax meant that Americans paid two-thirds as much for gasoline as Japanese drivers do - roughly $2.50 per gallon, versus roughly $1.50 now - the U.S. budget deficit would virtually disappear, freeing ample money for investment of all sorts.) America’s openness to talent from around the world - Taiwan, the Soviet Union, Cuba, and yes Japan - is a tremendous long-term advantage over almost every other industrial society. It is precisely the tension between these strengths and its current problems that the U.S. needs to attend to, since they affect the viability of its social contract - whether or not Japan exists. America’s social contract depends on both abundance and mobility, and when they are threatened so is the society. But however we assess the strengths and weaknesses America has, they are
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America’s problems, not some kind of bargaining chips to be traded against reforms of the large-store law. The reason for going through this list of problems is to clarify the agenda for America - not because of the effect these factors may or may not have on Japan. Some of these American problems show up directly or indirectly in trade performance; some do not. Their impact on Japan should in either case be secondary. The reason to address these problems is that they hold America short of its potential.
Now we move to the second distinct question, which is how America should approach Japan whether or not America makes progress against these domestic problems. The challenge here for the United States, I will suggest, is one of ideas. The United States has no fundamental complaint about what Japan is or how it behaves. America’s problem lies in the difference between what Japan is and what America has for at least 45 years believed Japan to be. This whole topic may sound unbelievable to observers from outside the United States, since America’s view of Japan reflects traits peculiar to America itself. The usually-unstated but enormously-influential heart of America’s policy toward Japan, at least since Douglas MacArthur’s arrival in Tokyo Bay, is that Japan is a kind of America-in-the-making, a social, economic, and political system naturally and inevitably ‘evolving’ toward convergence with the American Way. The point is almost never stated in that way, since it would sound patronizing if actually stated. But the assumption of inevitable convergence is visible in many aspects of the American approach. In one sense, it is inevitable that America thinks of Japan this way. Every one of the 5 billion individuals in the world is a potential American. Therefore it is tempting for Americans to conclude that whole societies are potential Americas - especially if they are modern, competent, and advanced. The stated purpose and assumed achievement of the US Occupation was to convert Japan into a capitalist democratic state, and institutions are in place that make Japan structurally similar to the U.S. or other Western states. Diplomats from both countries have fed the impression of inevitable convergence - those on the American side by emphasizing the fragility and value of The Relationship, and those on the Japanese by stressing until recently its role as eager tutee. The American economics profession has played its own crucial role in this process of making Japan seem to be an embryonic United States, albeit with its own distinctive language and managerial practices and colorful costumes. The maxims of neoclassic economics teach us that in any rational system consumer welfare will ultimately prevail and so systems will come to be like ours. This leads to the constant American news stories about consumer revolt in Japan. In addition, neoclassical economics has its ‘Mahatma Ghandi school, made of those who argue that even if other countries want to take the
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benighted course of protectionism, we should not imitate their self-destructive practices. This idea of Japan has crucial consequences. The most important is the assumption that time is inevitably on the side of smoother economic relations between Japan and the rest of the world. As Japanese society grows more prosperous, it will inevitably behave much more like other industrialized societies - so the theory holds. Leisure will increase; savings will fall; imbalances will go away because equilibrium is the nature of interactions among similar systems. But what if this idea is profoundly wrong - or even if it is pretty much wrong? This is not the time to argue the full case for why it might be wrong, but let me summarize the key elements. It is possible that, rather than an America in the making, Japan is its own version of capitalism, pursuing a non-converging path. Although it has all the structures of democratic capitalism, it may differ in several significant ways: _ first, in its understanding of the purpose of economic growth. According to Anglo-American theory, this is not even an interesting question. The ultimate purpose and justification of economic growth is more consumer welfare, including greater consumer choice. In the Japanese model, as with other catch-up models the world has seen, consumer welfare is clearly not the paramount goal, Some combination of other goals, including strengthening the productive base within the nation or under the nation’s control, takes precedence over giving consumers the lowest possible prices and the broadest possible choice. _ second, in its view of power. Much of the momentum of American history has concerned the effort to break up concentrations of power. Anglo-American economic theory gives a theoretical justification for trying to shatter power, because monopolistic or oligopolistic powers will distort the market and decrease the consumer’s welfare. The Japanese model seems to assume, on the contrary, that there will be large agglomerations of bureaucratic and corporate power; it is concerned less with breaking them up than with ensuring that the operate smoothly. _ third, in its fundamental suspicion of untrammeled market forces. The phrases ‘excessive competition’ or ‘confusion in the market’ are quite familiar in discussions within Japan. It is hard even to find concepts that would approximate them in English; American economists would be more likely to call the same circumstances ‘perfect competition’. Anglo-American economic theory is based on the faith that the unpredictable results produced by true market forces will be beneficial in the long run; ‘creative destruction’ will be destructive, but its creative powers are assumed to be even greater. In the Japanese model there is much less faith in what will happen if all controls are released.
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_ fourth, in its view of national borders. In economics courses, Americans are taught that national borders have become meaningless artifacts. We are all part of an interdependent ‘ borderless economy’ now, in which the ‘world-wide welfare function’ is the most important criterion of sane and effective policies. Western moral philosophy also teaches that, at least in theory, people on every part of the globe are subject to treatment according to the same universal norms. So far, the Japanese economic and social models have placed much greater stress on the difference between inside and outside - between us and them, Japanese and non-Japanese. There are quite understandable historical and cultural reasons for Japan’s resistance to accepting refugees or foreign labor, or for the absence of foreigners among its corporate management ranks. With time - and with, perhaps, the spread of Japanese-language fluency - it is possible that the difference between ‘inside’ and ‘outside’ will be reduced. But for now, the world’s most dynamic economic systems are those that pay more attention to the ‘national’ than to the ‘worldwide’ economic functions. Capitalism and democracy take many forms around the world, and in some aspects the Japanese practices are closer to those of Continental Europe than America’s are. But overall the differences of degree between the Japanese and American approaches amount to a difference of kind. In American terms, the closest parallel to the long-term operation of this system is the short-term operation of the U.S. economy during World War II. Everyone here is familiar with speeches and articles that analyze the differences between Japan and various Western models. My intention is not to engage in that kind of ‘Nihonjinron’, and certainly not to call one system better, or worse, or fairer, or less fair than another. My purpose is instead to suggest that America’s ‘Japan problem’ may essentially be the difference between its view of Japan and the nature of the Japanese system itself. It is possible, of course, that my suggestion is incorrect - that the Japanese system is indeed what Douglas MacArthur thought he created, and what the neoclassical economists now say it is. On the other hand, it is possible that I am right. Given this uncertainty, I argue that it is much safer to assume that my argument is right than the other way around. If I am wrong, then all the talk about incompatibilities will naturally resolve itself. Warnings about Japanese-American incompatibilities will sound like yesterday’s news - just as happened in Europe after the U.S. investment boom of the 1960s when the American companies localized themselves and no one was too upset any more. But it is also possible that the prevailing view is wrong, and the consequences of that error are much more dangerous. The United States will keep waiting for equilibrium and convergence to occur - and it will wait and wait. Lacking any other way to account for persistent trade problems, the U.S. will leap to moralistic theories: Japan and other countries must simply be cheating, since it is unacceptable to argue that a legitimate but different system lies
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behind their achievements. America’s criticism of ‘unfair’ practices, and its desperate sense of losing control of its own destiny, will put in peril the things that really do matter between the countries, specifically their strategic relationship and the overall regime of free trade that has helped make both of them more prosperous. One could argue that the post-war decades brought out the best in both Japanese and American society. Japan was stoic, determined, and uncomplaining as it rebuilt; the U.S. was, by historic standards, generous and far-sighted as an occupying power. But a perceived shift in roles brings out each society’s less attractive traits. Anxiety makes Americans more grudging at just the moment when some Japanese thinkers seem to feel that, if Japan is not clearly inferior to the United States any more, it must have become superior. It may sound odd to say that preserving the military bond and the free trade system is the reason the U.S. should change its view of Japan, but that is, in my view, the truth. What, then, is to be done by America? The answers to this question are what should occupy American politics in the next decade. For the moment let me suggest a brief check-list. The items fall into two major streams, consistent with the two major problems I have mentioned. One is to fix problems in the United States for their own sake, which will as a side-effect remove some of the psychological poison from the relationship with Japan. The other, as a separate matter, is to adopt some Japan-specific policies that will help preserve the relationship. My wish-list for domestic reforms would start with: _ a heavy tax on short-term trading profits, and a light overall securities trading tax, to accompany gasoline taxes. Reducing the federal budget deficit is the most direct way to equip America to invest in its future, and these are some of the few taxes whose side-effects are beneficial. _ returning the Social Security and Medicare programs to an ‘insurance’-type function, with their benefits concentrated on those in financial need. Coping with the ‘middle class entitlements’ is the central challenge of U.S. fiscal policy. - investing more money in the public infrastructure. Part of the labor for these projects could be provided through a ‘workfare’ program, as in the Great Depression, which would guarantee jobs to all able-bodied applicants - but require them to work if they wanted public benefits. - a radically expanded Head Start program, to prepare children who otherwise would be highly likely to fail in school. _ a reduction in military spending of at least five percent a year, in real terms, over the next decade. Steps like these, to repeat, would be important to America whether or not they have any effect on relations with Japan. But at the same time, the U.S. should develop a ‘Japan policy’, through steps in these areas:
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_ a shift in trade negotiations, away from the endless haranguing that led to the Structural Impediments talks and toward a more ‘results-oriented’ policy. Japanese negotiators have typically been more comfortable with specific goals ~ a certain market share for foreign producers - than with general exhortations to ‘open’ the market. This approach would probably increase the power of the bureaucrats over the Japanese market, which is unfortunate. It is more likely to defend American interests than continuing the SII-style approach. _ a more nationally-minded view of industry, in keeping with past American practice. Neoclassical economics postulates that it is no different to make a product within your borders than to be able to buy it from some other supplier. The American government has not always acted as if it believed in this theory: it has deliberately encouraged the aircraft industry, and satellites, and computers and semiconductors in their early days. Neoclassical economics also says it is impossible to ‘pick winners’, but in those cases the U.S. government has encouraged winners, as the Japanese and Korean governments have in many other cases. The evidence of the last decade, reinforced by new ‘strategic trade’ theory, is that governments that encourage high-value industries will eventually have more of them than governments that don’t. The U.S. should act as if other industries were as important to it as aircraft have been. _ the U.S. should ensure that Japanese companies behave in a ‘borderless’ way when they operate in the United States, including hiring and promoting local talent and developing local suppliers rather than importing the entire keiretsu structure. The European countries that have imposed such requirements have had a happier experience with Japanese corporations than the ones that have not. ~ the U.S. should encourage Japan to take a ‘peaceful leadership’ role in the world, not by hastening its rearmament but by leading a worldwide crusade for environmental protection. Japan has the money and the technology to direct world efforts to head off environmental disaster. After this list of recommendations, let me leave you with the three dilemmas that I think will be hardest for each country to resolve. First, the United States has been comfortable in the past running an industrial policy - as long as the Pentagon has been running it. Is it possible for the United States ever to guide or encourage industries without relying on the ‘national security’ excuse? Second, the U.S. and Japan have worked themselves into a ‘guiatsu trap’. The United States has a moral and ideological obligation to defend causes it believes in, from free-market operations and consumer rights to individual liberties. But the last two decades should have demonstrated that it is a losing game for America to stay in a role as Japan’s scold, serving as the real opposition party in Japanese politics. Somehow each country must find a
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different balance - the U.S. defending what it believes in without hectoring Japan, Japan developing the capacity to change without the crutch of gaiatsu. Third, the U.S. needs to solve a gaiatsu dilemma of its own. The nature of this big, complacent society is that it often requires a kind of shock, usually administered from outside, to face its duties. Too often, the shock has involved war - or the sense of threat from the outside, as after the launch of Sputnik. Measuring itself against Japan may be a way for America to motivate itself.