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Dealing with the budget deficit, Japanese-style

JAPAN is frequently looked to by Americans as a model for how to do things right. In terms of business and productivity, there is certainly plenty of evidence that it is a good example to follow. Might we also emulate what Japan has done about its budget deficit? Japan's deficit has been higher than that in the United States for years. The total accumulated national debt resulting from deficit spending is 150 percent of the gross national product (compared with 30 percent in the US). Interest on the debt in Japan constitutes more than 20 percent of annual government expenditures -- 23 percent for this fiscal year.

Thus one would guess that the deficit problem in Japan is acute and that the US might draw some ideas from what the Japanese have done or intend to do. At least something might be gleaned from the seriousness of the Japanese concern about the problem.

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Lesson No. 1: The Japanese long ago learned that budget deficits are not a bad omen toward causing high interest rates, inflation, or a decline in productivity -- as many Americans have been predicting. These things simply have not happened as a result of deficit spending. Judging from the high and low deficit years, there isn't even a direct correlation.

One reason for this is that the Japanese people have a proclivity to save that is almost unmatched anywhere -- around 25 percent of household budgets (compared with around 5 or 6 percent in the US). The high rate of savings provides investment capital for business while it prevents government from competing with business in the capital market.

The US has followed the Japanese model to some extent in recent years. This is part of what is called Reaganomics. Savings are now about double the rate of five or six years ago. And they can probably be kept high or even increased if they aren't overtaxed, which obviously discourages thriftiness. (Japan does not tax its individual savings accounts.)

Also, because of tax changes, more companies (under Reaganomics) have been able to put more of their profits back into the company for future growth. This is again how the Japanese do it, except that rather than low corporation taxes Japanese companies borrow from the banks (where personal savings are held) and aren't beholden to stockholders to pay high dividends.

Hence Japanese companies don't compete with government in the money market. Contrary to what many Americans think, US companies are not competing with the government for money right now. That is why many economists were wrong when they predicted that bigger deficits in the US would cause interest rates to skyrocket.

Lesson No. 2: The Japanese know, or at least think they do, based on their experience, that deficits don't hurt business; high taxes do. Raising taxes has been followed by declines in productivity, unemployment, etc. At least when comparing the two they see higher taxes as worse than a bigger deficit. They also think that tax increases are likely to be more permanent than a deficit.

Japan's national and local taxes combined absorb only about 20 percent of the GNP each year. This is so despite the fact that standards of health and education are higher than in the US and that servicing the national debt is the largest item in the national budget.

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The US government, in contrast, takes about 30 percent of the GNP in national and local taxes, so much -- if we believe in the logic of the Laffer curve -- that economic growth is dampened and unemployment is increased.

Lesson No. 3: The Japanese realize that having a large item in the budget every year for debt service makes public servants think about the deficit as they are passing laws on spending. Thus they tend to be more conservative or restrained than they would be otherwise.

Also, since nearly a quarter of the budget is not something the Japanese can discuss or vote on, they can do less anyway if they have spendthrift ways. In fact, Japanese lawmakers are almost twice as constrained as US ones, who are now considered effective if they can get a colleague to support a funding bill in their district or for their pet project, in return for support of his: Paying off the national debt is only about 12 percent of the annual budget in the US.

Furthermore, since the public provides much of the money ``voluntarily'' through savings and the government needs this money to operate, the public has more control over spending and the bureaucrats less. In other words, thriftiness by the public is a sine qua non to keep the system afloat, and the government knows this and dares not set a bad example by unnecessary spending. One might say that in this respect the Japanese system operates more according to how the public wants it to -- i.e., via democracy.

In summary, the lessons to be learned from Japan are: If you can't cut spending to cut the deficit, then don't cut it. Raising taxes and increasing the public sector at the expense of the private sector is worse than a large deficit. Finally, a big deficit has a good side: It makes the government more vigilant about not being wasteful and more democratic, since the public is able to exert pressure on the decisionmaking process.

An interesting footnote: The US Department of State and the Department of Treasury want Japan to increase its deficit, even though it is much larger than ours -- in order to stimulate consumption and help relieve the trade imbalance with the US. State and Treasury must see some wisdom in the two arguments made above about Japan's knowledge about deficits.

John F. Copper is the Stanley J. Buckman professor of international studies at Rhodes College, Memphis.

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