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January 10, 2007

[SSJ: 4321] Re: Abe's success so far?

From: Sanford Jacoby
Date: 2007/01/10

I think few would quibble with the notion that shareholder primacy is constituted in its most advanced form in the United States. Therefore, if the United States represents a desideratum for Japan or, for others, the wrong direction in which Japan is headed, it makes sense to understand the consequences of shareholder primacy in the United States.
We do know that income inequality in the United States has risen since the late 1970s. Usually this is chalked up to global trade (China) or to changes in the returns to education to do with technology. But recent research (Atkinson) shows that a substantial portion of the rise in aggregate inequality can be traced to shares held by the top income earners (top 10, 5, 1, .5 percent). That rise has been meteoric in the US since the 1980s but is only now just starting to increase in Japan.
It's unlikely that the top tier's rising share has anything to do with skill shifts or China. A more likely candidate is changes in corporate governance whose beneficiaries are those with a stake in the economy's financialization. The time correlation is good: inequality rises in the US at about the same time as does financialization. Correlation is not causation, but there is corroborating evidence showing a direct relationship between financialization (defined as CEO comp, comp of top corporate officers, Wall Street bonuses etc.), growth in top income shares, and growth in aggregate inequality.
Hence further financialization of Japan's economy -- a shift in corporate rents from labor and retained earnings to shareholders and top executives -- will surely raise overall inequality in Japan, beyond that produced by the rise in contingent employment. Whether this shift improves long-term productivity is another matter. It's a crapshoot to predict the factors driving long-term productivity in advanced economies. The US has adapted to financialization by relying more heavily on equity financing. But whether this would be a "good thing" for Japan to emulate is unclear. Japan has done very well by investing a big chunk of its retained earnings in corporate R&D, where it leads the world. In particular types of industries -- especially the almost-unique case of Silicon Valley -- equity financing may be superior for growth.
But it's dicey to generalize from one sector to an entire economy. Ask Ford Motor.
Equity financing means more risk and the presumption then is that this leads to higher returns. The question is, however, who bears the risk and who collects the returns? As least in the United States, the risk is presently being shifted from corporations and investors to relatively undiversified employee households (Hacker). And the evidence suggests that the returns are being creamed off by the top income earners. The data on income stagnation alongside rising productivity--see Krugman--support this picture.
But doesn't the median household in the US own a lot of stock these days, thanks to 401s and all that? Not really. Equity -- directly owned or in pensions --presently constitutes only 4.8 % of the median household's wealth.
So Japan's ongoing financialization surely will raise inequality and risk, but whether the returns contribute to long-term growth that benefits all households is an open question.

Approved by ssjmod at January 10, 2007 12:55 PM