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January 10, 2007

[SSJ: 4317] Re: Abe's success so far?

From: Ronald Dore
Date: 2007/01/09

I much enjoyed reading Richard Katz's spirited rejoinder, and am delighted to know that he too sees the current source of economic anorexia -- what is preventing the spendid performance of the export manufacturers from leading to a real recovery --is the brake on consumption caused by the reduction in wages and the impoverishment of households. I didn't know that Japan had now overtaken Turkey and Mexico to have the second highest poverty rate in the OECD's statistics, but I am not surprised.

But why then is it that the really influential economists are not shouting loud and clear that the Keidanren is wrong in urging its members to continue to hold back wages? Why are they not calling on Rengo to remind its unions that the strike weapon could still be made to work; that the unions in the most opulent firms that can easily afford a few days' strike, have a "patriotic" duty to take the lead? Why are the economists of the foreign financial community -- who now greatly influence the agenda of the Japanese economist community -- all concerned, not with wages and demand management, but with whether or not Abe will continue the Koizumi/Takenaka reform agenda -- see Robert Feldman in this week's Ekonomisuto whose only complaint against the Abe government is to warn it of the accusation of double-talk because it is contemplating restrictions on foreign take-overs. The increasing concentration of the smartest brains and the most articulate and effective voices, as well as the highest incomes, in the finance industry -- something James Tobin was warning the world about in his AEA presidential lecture back in the 1980s -- is part of the increasing dominance of finance over the economy shown in the national income statistics I quoted last time. It serves to make the interests of the financial community, however short-sighted they may be, the dominant voice in policy discussions.

Richard Katz writes;

> The notion that firms were traditionally run for
> their employees--or so-called "employee sovereignty"
> in Japan--is almost as much an ideology as the
> notion of the Soviet Union as a "workers' state."

The notion that firms should be run for their employees is indeed an ideology. The notion that that was, in fact, an ideology which dominated the concerns of the managers who made the allocation decisions for their firms in the 1970s and 1980s, depends on one's reading of historical fact, and -- apart from the vast literature on nihonteki keiei and the philosophizing of businessmen -- the figures seem to support it. One of the strongest pieces of evidence that managers identified their own interests as being identical to those of (what they considered their fellow-) employees rather than with shareholders lies in the pay statistics. In 1960 corporate directors in the large firms I quoted in my last mail were paying themselves in salaries and bonuses something like 8 times the average wage. Thereafter, as nihonntekikeiei became consolidated with shunto as one of its key institutions, that ratio steadily decreased until at the time of the oil-shock recession it was down from 8 to about 2 and a half times. Thereafter, between 1976 and 1999 it fluctuated only between 2.4 and 2.7. In 2005 it had nearly doubled to 4.7.

Having lived through Mrs. Thatcher's years in England I am well acquainted with the ideology of the "share-holding democracy" that appeals so much to Richard Katz. High returns to equity and low wages are a recipe for a highly skewed income distribution whether the bulk of the equity is held directly by households or by pension funds, and a fortiori if the choicest and most high-yielding quarter of the equity is held by foreigners as in Japan at the moment. What kept household consumption at a low level of GDP was the exceedingly high level of corporate and public investment, not government consumption -- and that, plus the high expenditure on R&D and the inventiveness of the people it supported, was a major stimulant of productivity growth (not just fierce competition and shareholder power, Richard) as long as the wage share was high enough to provide the necessary demand. Maekawa reportish moralising about the wickedness of keeping the household consumption share of GDP so low, mistakes the purpose of that report which was chiefly to assure Americans that Japan was doing its bit to restrain the relentless surge of exports that was upsetting Congress so much. (Remember that stuff ab out yutori and jikan-tanshuku at the same time?)

If we talk about, not GDP as a whole but the value added of the big corporations which set the pace for both the financial and employment institutions, what has changed is not so much the share of capital as the composition of payments to capital. In 1980, when, by my calculations, capital was getting a 23% share, interest payments were six times dividends. In 2005, when the capital share was down to 19%, interest payments were a half of dividend payments The other big change is the enormous increase in rent -- presumably mostly leasing -- from under 20 to over 40% of payments to capital. In the 80s, that capital flow of interest was recycled to households via savings accounts. OK, real interest rates on deposits were lower than they might have been -- not only from what the experts oddly call "financial repression" but also because of the inefficiency and undeservedly high salaries of the banks. But they were only occasionally, as in the mid-1970s, negative and they were widely distributed. That is certainly not the case with either the dividend payments or the leasing payments that have replaced them.

The other interesting thing about the value added figures is the declining share of taxes. In the first half of the 1980s corporations were contributing to the public purse in all forms of taxation -- car taxes, stamp duties, juminzei, profits tax etc. -- 13% of their value added. Forget the disaster year of 2001 when they paid less than 7%. Throughout the recovery since then they still have not paid more than 10% despite the dire state of public finances. And they still claim that they can't compete unless corporation tax is reduced!

Anyway, history is one thing. The present situation is another. The more you can do to bang on about the wage issue in the Oriental Economist, Richard, the better.

Ronald Dore
loc. Cavanazza 14
Grizzana Morandi
40030 BO
Tel: 39051 913550
Fax: 39051 6730128

Approved by ssjmod at January 10, 2007 11:25 AM