December 3, 1989
"Japan Gives U.S. What It Wants"
San Jose Mercury News
By Timothy Taylor
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JAPAN saved the U.S. economy from itself during the 1980s.
If you have trouble believing that, just consider what would have happened
if the United States had gone on a borrowing and consumption binge without the
First of all, U.S. investment could have been strangled. In a typical year
in the 1980s, the U.S. economy has invested about $600 billion. However, about
70 percent of that total went to replace old investments that had worn out, leaving
about $180 billion of new investment.
Federal budget deficits averaged nearly $160 billion a year from 1980 to 1988.
Without foreign investors to send capital to the U.S. economy, the deficits could
have sopped up an amount nearly equal to all the funds available for new investment.
Even with the inflow of foreign funds, net U.S. investment in the 1980s has been
about 30 percent lower than in the 1970s, after adjusting for inflation.
Second, trade with Japan probably saved the U.S. economy from a resurgence
of inflation. The enormous U.S. budget deficits since the mid-1980s would have
led to a situation of too many dollars chasing too few goods, except that additional
goods were supplied at low prices by Japan.
Of course, Japan doesn't deserve all the credit here. America's other trading
partners have also helped to provide investment capital and inexpensive imports.
But as the price for avoiding a collapse of investment and a surge of inflation,
America is accumulating an ever-increasing foreign debt. And as is usual for debtors
who run into problems, America has tended to blame its economic problems on those
who loaned the money.
Thus, Japanese investors are often blamed for "buying up America,"
which is the catch-phrase for investing in the United States. The fear of Japanese
owning all of America is generally exaggerated: For example, Japanese investment
in the United States is now about $120 billion greater than U.S. investment in
Japan, which is not a lot in the context of a U.S. economy that produces $5 trillion
In addition, only about one-sixth of the Japanese investment is directly in
real estate or business; the rest is in financial assets, like U.S. Treasury bills.
More to the point, the reason Japanese investors have money and American investors
don't is precisely because America has chosen to consume rather than to invest;
as a share of disposable income, the Japanese save at about three times the American
It is not Japan's fault that the U.S. government decided to run enormous budget
deficits in the 1980s, nor is Japan to blame for the fact that U.S. personal savings
rate fell from about 8 percent of disposable income in the 1970s to only 5.4 percent
in the 1980s.
In a similar vein, Japan is often blamed for being a closed economy that refuses
to buy U.S. exports. The facts tell a different story. Total U.S. exports worldwide
increased from $237 billion in 1981 to $316 billion in 1988, a rise of 33 percent.
Over the same period, U.S. exports to Japan increased from $21 billion to $37
billion in 1988, an increase of 76 percent. Despite all the anecdotes about Japanese
reluctance to buy American, U.S. exporters have had more luck increasing sales
to Japan than to practically any other country.
But even if it were true that Japan refused to buy U.S. exports, it would remain
true that the U.S. brought its trade deficit on itself by the decision of households
and the federal government to consume rather than save.
America's trade problems did not spring up in the early 1980s because the world
economy suddenly united in an unfriendly conspiracy against U.S. exports. The
real gripe that the U.S. has with Japan is not that it has unfairly manipulated
the rules of the world trading system -- every country always tries to manipulate
the rules -- but that Japan has been too darn productive and accommodating.
If America wants to consume high quality products without producing them, Japan
is willing to produce and provide those products, at high quality and low cost.
It the U.S. government wants to borrow extraordinary amounts of money, Japanese
investors are willing to take the dollars they have earned from exporting and
invest them back in the U.S. economy.
The real complaint about Japan is that, out of all America's trading partners,
it has been the best at giving the United States exactly what it wanted in the
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