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 Japanese nearby.

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 every year.

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 rate.

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 1980s.

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