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Domestic adjustment to international shocks in Japan and the United States

Published online by Cambridge University Press:  22 May 2009

M. Stephen Weatherford  and
Haruhiro Fukui
M. Stephen Weatherford
Affiliation:
Professor of Political Science at the University of California, Santa Barbara.
Haruhiro Fukui
Affiliation:
Professor of Political Science at the University of California, Santa Barbara.
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Abstract

Economic interdependence complicates domestic policymaking by interposing the decisions of foreigners in the loop that links policy instrument settings to economic outcomes. Nowhere was this vulnerability to external decisions demonstrated more forcefully—even for the world's major economies—than by the energy supply shocks of 1973 and 1979. The oil shocks posed challenges that offer unusual insight into the way nations choose policies: their severity forced a policy response; their unpredictable timing and (at least in 1973) unprecedented nature ruled out conventional formulas and brought to the fore explicit policy trade-offs. This article seeks to explain how policymakers in the world's two major economies responded to these external shocks. The analysis successively employs three vantage points—system, society, and state—in tracing the sources of domestic adjustment policies. It focuses specifically on the extent to which policies accommodated or extinguished each shock's inflationary impulses and on the coherence and consistency with which the executive in each government formulated and pursued particular policy goals. A comparison of these four cases illustrates the strengths and weaknesses of increasingly detailed theoretical frameworks for explaining policy choice. Although the research does not contradict the depiction of the United States and Japan in terms of state strength, it does underscore the importance of looking beyond formal institutional arrangements to consider how elite policy preferences, ambitions, and capacities can define the way constraints influence policy.

Type
Articles
Information
International Organization , Volume 43 , Issue 4 , Autumn 1989 , pp. 585 - 623
Copyright
Copyright © The IO Foundation 1989

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References

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23. Edward Gramlich estimates that welfare losses would be minimized by a policy that traded 1 percent more unemployment for 2.4 percent more inflation, and Stanley Fischer draws a similar conclusion from a comparison of welfare losses associated with price variability and those associated with declining real output. See Gramlich, Edward M., “Macro Policy Responses to Price Shocks,” Brookings Papers on Economic Activity, no. 1, 1979, pp. 125–66CrossRefGoogle Scholar; and Fischer, Stanley, “Relative Shocks, Relative Price Variability, and Inflation,” Brookings Papers on Economic Activity, no. 2, 1981, pp. 315–80Google Scholar. By early fall of 1974, indicators of recession were clear (the GNP had declined for three successive quarters), and the public's perception of the nation's primary economic problem had shifted sharply from inflation to recession. See Hibbs, D. A. Jr, “The Mass Public and Macroeconomic Policy: The Dynamics of Public Opinion Toward Unemployment and Inflation,” American Journal of Political Science 23 (08 1979), pp. 705–31CrossRefGoogle Scholar.

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25. See The Economist, 1 December 1973, 12 January 1974, 26 January 1974, 1 June 1974, and 29 June 1974; and The New York Times, 25 August 1974.

26. The administration was not unaware of these arguments: the weighing of domestic claims against international claims was a considered one. See, for example, Fellner's memo to President Ford, “International Financial Conditions,” 4 October 1974, White House Central Files on Business and Economics, housed in the Ford Library.

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30. Of such consequences, policymakers were particularly concerned about the impact on small businesses, which in 1971 accounted for only about half of the total manufacturing output but accounted for over 99 percent of the total number of enterprises and nearly 70 percent of the total number of employees in the manufacturing sector. See Keizai Kikakuchō Chōsakyoku (Economic Planning Agency, Research Bureau), Keizai yōran: Shōwa 61-nen ban (Economic handbook, 1975 edition) (Tokyo: Ōkurashō Insatsukyoku, 1975), p. 208; and Sasaki Takeo, “Infure to shotoku seisaku” (Inflation and income policy), report presented at a Monday meeting of the Kenkyūkai, Kokumin Seiji (National Association for the Study of Politics), Getsuyōkai Repōto, no. 653, 8 10 1973, p. 34Google Scholar.

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35. Some 660 billion yen ($2.2 billion) was held by six major trading companies alone at the end of September 1972, according to MITI Minister Nakasone Yasuhiro.

36. See Asahi Shimbun, 2 January 1973; Nihon Keizai Shimbun, 13 April 1973; Miyazaki, , Nihon keizai, p. 46Google Scholar; and Sasaki, , “Infure to shotoku seisaku,” p. 29Google Scholar.

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40. Kurogane Yasumi, “Sekiyu kiki no gen dankai” (The current stage of the oil crisis), Getsuyōkai Repōto, no. 661, 3 12 1973, p. 21Google Scholar. The best estimate was a 10–20 percent reduction in oil supply for an indefinite period after January 1974. See also Naomi, Nishimura, ”Nankyoku ni dou taisho suru ka” (How we might cope with the emergency), Getsuyōkai Repōto, no. 663, 24 12 1973, pp. 16–17Google Scholar.

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43. Sasaki, , “Infure to shotoku seisaku,” pp. 38–39Google Scholar. The majority of Japanese labor unions were affiliated with either of the two national federations, the pro-Socialist General Council of Japanese Trade Unions (Sōhyō) and the pro-Democratic Socialist Confederation of Labor (Dōmei). As of June 1970, the former claimed about 48 percent of the nation's organized workers and the latter 23 percent. See Shimbunsha, Asahi, Asahi nenkan (Asahi yearbook) (Tokyo: Asahi Shimbunsha, 1971), p. 475Google Scholar.

44. See Yoshio, Kaneko, “Chingin, bukka, shotoku seisaku” (Wages, prices, and incomes policy), Getsuyōkai Repōto, no. 688, 1 07 1974, p. 13Google Scholar; and Yoshitomi, , Nihon keizai, pp. 4 and 52–53Google Scholar.

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46. Nihon Keizai Shimbun, 24 November 1973.

47. The two bills were the Law on Fair Demand and Supply Balance in the Oil Market and the Emergency Law for the Stabilization of People's Livelihood. See Murakami, , Tsūsanshō no chōsen, pp. 87–89Google Scholar; and Nishimura, , “Nankyoku ni dou taisho sura ka,” pp. 29–33Google Scholar.

48. Throughout this article, Japanese names are given in the Japanese style with the family name listed first.

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50. ōkurashō, , Shōwa 30-nendai, pp. 5 and 209–25Google Scholar. Ministry of Trade bureaucrats differed over instruments, however, preferring price control by informal administrative guidance and voluntary price agreements among firms, an approach strongly opposed by the Fair Trade Commission as a violation of the Anti-Monopoly Law. See Miyazaki, , Nihon keizai, pp. 150–51Google Scholar.

51. See Ōkurashō, , Shōwa 30-nendai, p. 215Google Scholar; and Hisao, Kanamori and Osamu, Shimomura, “Jōshiki hazure no yosoku to keikoku” (The forecasts and warnings that defy common sense), Chūōkōron 99 (03 1974), pp. 118–25Google Scholar.

52. Kazuo, Shioya, “Kiki no naka de no hansei to zakkan” (Reflection and some random thoughts in the midst of a crisis), Getsuyōkai Repōto, no. 659, 19 11 1973, pp. 2–3Google Scholar.

53. The LDP lost seven seats, the Communists gained nine, and the Socialists gained three. See Masao, Soma, ed., 1976-nen nihon no sōsenkyo: Lockheed senkyo to kyōsantō no haiboku (The 1976 general election in Japan: The Lockheed election and the defeat of the Communist party) (Tokyo: Kokumin Seiji Kenkyū Sentā, 1979), pp. 115–19Google Scholar; and Ōkurashō, , Shōwn 30-nendai, pp. 215 and 221Google Scholar.

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56. Seizaburō, Sato and Tetsuhisa, Matsuzaki, Jimintō seiken (The Liberal Democratic government) (Tokyo: Chūōkōronsha, 1986)Google Scholar.

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58. In a December 1971 Asahi Shimbun poll, 12 percent of the respondents mentioned rising prices as the most frequent topic of conversation at home and at work, but by July 1972 a Japan broadcasting corporation (NHK) poll showed that 63.5 percent wanted the Tanaka cabinet to give priority to price stabilization. An August 1972 Asahi Shimbun poll showed a similar distribution. Public support for the Tanaka cabinet fell precipitously in the first nine months of Tanaka's administration, and the LDP suffered substantial losses in the December 1972 House of Representatives general election. See Kōhōshitsu, Naikaku Sōridaijin Kambō (Office of the Prime Minister, Department of Public Information), Seron chosa nenkan (Yearbook of public opinion surveys) (Tokyo: Okurasho Insatsukyoku, 1972 and 1973), p. 579 in 1972 and pp. 403 and 416 in 1973Google Scholar.

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60. Tanaka published a book on the subject with great fanfare while campaigning for the prime ministership in the summer of 1972, and the book proved a best seller. Moreover, in at least one prefecture-level public opinion poll conducted in November of that year, an overwhelming majority (74.2 percent) of the respondents approved of Tanaka's plan, although nearly two-thirds of them did so with some reservations. See Kakuei, Tanaka, Nihon rettō kaizo ron (Remodeling the Japanese archipelago) (Tokyo: Nikkan Kōgyō Shimbun, 1972)Google Scholar; and Sōridaijin, Naikaku, Seron chōsa nenkan, 1973, p. 410Google Scholar.

61. In the May 1974 Kyodo Press poll in which respondents were asked to name the most important issue, 67.7 percent named inflation and 13.9 percent named improvement of the social security system. These two issues remained the greatest concerns of respondents in the June 1974 Yomiuri Shimbun poll (with 61 and 13 percent, respectively, naming them) and in the Mainichi Shimbun poll (with 52 and 13 percent, respectively, naming them). Moreover, the salience of inflation continued to rise after the election until Miki Takeo replaced Tanaka as the new prime minister. See Sōridaijin, Naikaku, Seron chōsa nenkan, 1975, pp. 457, 459–60, 463, 477, and 483Google Scholar.

62. Yomiuri Shimbun, 5 July 1973.

63. During 1978, the rate of increase of major inflation indexes rose about 2 percent: the GNP deflator rose from 6.1 percent in 1977 to 8.3 percent in 1978, and the consumer price index (CPI) rose from 6.8 to 9.7 percent during the same period. Productivity (private nonfarm output per hour) grew barely 1 percent.

64. See Kantowicz, Edward R., “The Limits of Incrementalism: Carter's Efforts at Tax Reform,” Journal of Policy Analysis and Management 4 (Winter 1985), pp. 217–33CrossRefGoogle Scholar.

65. Corrected by the CPI with a rental cost index substituted for mortgage rates, the real wage drop was about 2.5 percent.

66. The CPI excluding energy and food increased 7.2 percent during the year ending November 1979, but it increased more than 10 percent during the year ending November 1980.

67. Economic Report of the President, Together with the Annual Report of the Council of Economic Advisors (Washington, D.C.: U.S. Government Printing Office, 1980), p. 49Google Scholar.

68. Viscusi, W. Kip, “The Political Economy of Wage and Price Regulation: The Case of the Carter Pay-Price Standards,” in Zeckhauser, Richard J. and Leebaert, Derek, eds., What Role for Government? (Durham, N.C.: Duke University Press, 1986), pp. 155–74Google Scholar. The guidelines were apparently important in convincing Chrysler workers to accept a wage rollback as part of the highly publicized bailout.

69. The adoption of a money growth rule (in place of interest rates as the indicator of monetary stringency) in October 1979 was partly a response to the apparent inability to approach monetary targets by means of traditional instruments. The CEA's survey of 1979 admitted that “it is difficult to assess the degree of restraint exercised by monetary policy in the first three quarters” (Economic Report of the President, 1980, p. 54)Google Scholar. The objectives of the Federal Reserve Board were for Ml growth of 1.5–4.5 percent and M2 growth of 5–8 percent for the year. (Ml consists of currency, checkable deposits, and travelers’ checks. M2 consists of Ml plus savings and small time deposits, overnight repurchase contracts, Eurodollars, money market mutual funds, and money market deposit accounts.) During the first quarter. Ml actually declined and M2 increased only 2 percent; but for the next two quarters, the growth rates of both were well above 10 percent. Control improved in the fourth quarter, when Ml growth fell to 3.1 percent.

70. These behavioral changes in the private sector—the acceleration of purchases by consumers and economizing on cash balances by corporations—should not be conceptualized as purely economic phenomena, since the process of forming economic expectations integrates assumptions about probable government policy and its anticipated success. Thus, the behavioral changes are especially important from the perspective of a study of policy making, because both sprang from declining public confidence in Carter's ability to manage the economy. Personal savings rates rise (or remain unaltered) in the face of inflation if consumers expect that the government will soon succeed in moderating price rises; dissaving implies that consumers are pessimistic about the prospects for success in stopping inflation. Similarly, firms continue to produce in the face of declining sales if they think that demand will soon be restored; as their pessimism grows about the government's ability to return aggregate demand to its prior growth path, it makes sense to cut production more quickly and fully when sales fall.

71. Inflation exceeded 13 percent in the fourth quarter of 1979 and rose as high as 18 percent in January and February 1980, and the growth rate of retail sales rose from 13 to 43 percent in January. The producer price index (PPI) excluding energy rose at an annual rate of 16.5 percent, and demand for business loans grew at an annual rate of 24 percent in spite of the fact that the prime rate approached 18 percent.

72. For the whole year, real GNP declined; however, the entire fall was concentrated in a dramatic, policy-induced drop of nearly 10 percent during the second quarter.

73. Data available soon after the program began showed that activity was beginning to slow before the imposition of controls. See Economic Report of the President, 1981, pp. 136 and 160. The strictly temporary impact of controls was shown by the prompt resumption of activity after the program was removed (for example, by September 1980, retail sales were up 28 percent and housing sales up 70 percent from their May lows). Private economic actors postponed but did not scale back plans for borrowing and spending.

74. The supply shock politicized oil and energy policy and, to a lesser extent, economic policymaking in general. But it is not at all clear that this effect alone should have changed the likelihood of successful policy leadership. One interpretation exonerates the administration, noting that the supply shock's widespread impacts made the issue so electorally volatile that members of Congress could not afford to go along with the President's call for either oilconserving or inflation-fighting self-sacrifice. Another interpretation argues that national emergencies typically evoke rallying effects which strengthen leaders’ support.

75. Carter, Jimmy, Keeping Faith (New York: Simon & Schuster, 1978)Google Scholar.

76. Examples of the President's ambiguous operational goals for economic policy include the wage and price guidelines, the 1977 proposal for a tax rebate (withdrawn at the last moment), the dramatic shift in policy direction of the Federal Reserve Board when Paul Volker succeeded William Miller, the 1980 budget (altered significantly between its first and second versions), and the wrangle with Democrats in Congress over the balance between corporate and personal tax cuts in the 1978 bill.

77. See Stein, Presidential Economics.

78. These advisors included Stuart Eizenstat, Jody Powell, and Hamilton Jordan. On the structures of influence in the Carter White House, see Kessel, John, “The Structures of the Carter White House,” American Journal of Political Science 27 (05 1983), pp. 431–63CrossRefGoogle Scholar.

79. Interview with Charles Schultze, 1 September 1986. See also Silk, Leonard, Economics in the Real World (New York: Simon & Schuster, 1984)Google Scholar, chap. 9; and Viscusi, “The Political Economy.”

80. Yoshitomi, , Nilwn keizai, pp. 7 and 18Google Scholar.

81. See Zaisei, Kinyū, Sengo kinyū,pp. 59–60Google Scholar; Yoshitomi, , Nihon keizai, p. 253Google Scholar; Ōkurashō, , Shōwa 30-nendai, p. 6Google Scholar; and Hiroyasu, Toda, “Shin keizai shakai shichikanen keikaku ni tsuite” (The new seven-year social and economic plan), Getsuyōkai Repōto, no. 944, 3 09 1979, pp. 8–9Google Scholar.

82. See Yoshitomi, , Nihon keizai, pp. 198–99 and 270–71Google Scholar; and Ōkurashō, , Shōwa 30-nendai, p. 6Google Scholar.

83. See Yoshitomi, , Nihon keizai, p. 273Google Scholar; and Okurashō, , Shōwa 30-nendai, pp. 266–74Google Scholar.

84. See Chōsakyoku, Keizai Kikakuchō (Economic Planning Agency, Research Bureau), Nihon keizai no genkyo: Shōwa 55-nenban (The current state of the Japanese economy, 1980 edition) (Tokyo: Ōkurashō Insatsukyoku, 1980), pp. 161–63Google Scholar; Nihon Keizai Shimbun, 18 February 1980; and Ōkurashō, , Shōwa 30-nendai, pp. 6–7Google Scholar.

85. See Isamu, Miyazaki, “Tokyo samitto to kongo no keizai dōkō” (The Tokyo summit meeting and future economic developments), Getsuyōkai Repōtō, no. 937, 16 07 1979, pp. 30–31Google Scholar; and Katsuhisa, Yamada, “80-nendai no tsūsan seisaku no arikata” (What trade and industrial policies should be followed in the 1980s), Getsuyōkai Repōtō, no. 945, 10 09 1979, p. 24Google Scholar.

86. Chōsakyoku, Keizai Kikakuchō, Nihon keizai, pp. 170–72Google Scholar.

87. See Asahi Shimbun, 4 July 1979; and Nihon Keizai Shimbun, 12 February 1980.

88. In the House of Representatives general elections of 1976 and 1979, the LDP won 48.7 and 48.6 percent of the seats, respectively, as compared to 59.2 percent in 1969, 55.2 percent in 1972, and 55.6 percent in 1980. See Stockwin, J. A. A., Japan: Divided Politics in a Growth Economy, 2d ed. (London: Weinfeld & Nicolson, 1982), pp. 112–13Google Scholar.

89. These are the results of polls conducted by Kyodo Press, Jiji Press, and Asahi Shimbun, respectively. See Sōridaijin, Naikaku, Sewn chosa nenkan, 1979, pp. 510 and 522Google Scholar; 1980, p. 511.

90. Miyazaki, , Nihon keizai, pp. 172–73Google Scholar.

91. The term “macroeconomic power” is adapted from Henning, C. Randall, Macroeconomic Diplomacy in the 1980s (New York: Croom Helm, 1987)Google Scholar.

92. American trade performance during the second oil crisis was one of the Carter administration's few bright spots: exports rose rapidly as the economic recovery in other nations Domestic adjustment 619 gained momentum in 1978 and 1979, and U.S. imports fell as domestic growth slowed, so that the trade account moved from a deficit in 1978 to a balance in 1979. During 1980, increasing oil prices were matched by rising revenues from “invisibles” (for example, financial services), producing a small current account surplus. In Japan, the current account shifted from a surplus to a deficit between 1978 and 1980, but this was due in large measure to price factors, since trade volumes remained robust. Overall, the volume of world trade was sustained much more successfully in 1979 than in 1974.

93. See Bruno, Michael and Sachs, Jeffrey D., Economics of Worldwide Stagflation (Cambridge, Mass.: Harvard University Press, 1985)CrossRefGoogle Scholar.

94. Economists writing about this period have noted similar limitations on a purely economic approach to explaining national economic performance. See Bruno and Sachs, Economics of Worldwide Stagflation; and Blinder, Economic Policy.

95. See Ikenberry, “The Irony of State Strength”; and Putnam, Robert D., “Diplomacy and Domestic Politics: The Logic of Two-Level Games,” International Organization 43 (Summer 1988), pp. 427–460CrossRefGoogle Scholar.

96. The following are representative of this body of literature: John Creighton Campbell, “Fragmentation and Power: Politicians and Bureaucrats in the Japanese Decision-Making System,” paper presented at the Midwest Seminar on Japanese Studies, Ann Arbor, Mich., 24 October 1987; Hideo, Ōtake, Gendai nihon no seiji kenryoku keizai kenryoku (Political power and economic power in contemporary Japan) (Tokyo: San'ichi Shobō, 1979)Google Scholar; Michio, Muramatsu, Gendai nihon no kanryōsei (The contemporary Japanese bureaucracy) (Tokyo: Toyo Keizai Shimposha, 1981)Google Scholar; Takashi, Inoguchi, Gendai nihon seiji keizai no kōzu: Seifu to shijō (The design of contemporary Japanese political economy: Markets and government) (Tokyo: Nihon Keizai Shimbunsha, 1983)Google Scholar; and Sato and Matsuzaki, Jimintō seiken.

97. See Oudiz and Sachs, “Macroeconomic Policy Coordination”; and Stewart, The Age of Interdependence.

98. See Weatherford, M. Stephen, “The International Economy as a Constraint on U.S. Macroeconomic Policymaking,” International Organization 42 (Autumn 1988), pp. 605–37CrossRefGoogle Scholar.

99. See Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, N.J.: Princeton University Press, 1984)Google Scholar; and Putnam, Robert D. and Bayne, Nicholas, Hanging Together: The Seven Power Summits (Cambridge, Mass.: Harvard University Press, 1984)Google Scholar.

100. The impact of these efforts in several European countries is more apparent than it is in the United States and Japan, where it is less clear that the efforts actually changed the behavior of private actors and enhanced the ability of market processes to promote adjustment. Although the Carter administration did pass the windfall profits tax, its proposal was unsuccessful in protecting from inflation the real incomes of workers who accepted wage increases below the government's guidelines, and the voluntary wage and price guidelines were not supported by a consistent package of other policies. Since Japan's cyclical position when the second oil shock hit ensured that pressures to raise wages would have been relatively weak in any event, attempts at “moral suasion” probably should not be attributed the bulk of causal influence.