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Commentary (August 3, 2004)

Thirsting for Just a Trickle

Takamitsu SAWA (Professor, Kyoto University)

John Maynard Keynes established a theory about why a government's fiscal and monetary policies of manipulating the official discount rate, tax rates and public works investment were a highly effective means of economic management.

Before Keynes' classic work "The General Theory of Employment, Interest and Money" was published in 1936, U.S. President Franklin D. Roosevelt revitalized an American economy in the throes of the Great Depression with his New Deal. His policies were based on the idea that Keynes was to expound later in his book. Keynes demonstrated, ex post facto, why the New Deal was so successful.

Keynesian economics is based on the theory that the market is imperfect, with nominal wages unlikely to decrease, frictional forces having effects and various forecasts often turning out inaccurate. Therefore, the theory goes, the government must intervene in the market with fiscal and monetary policies to correct imbalances such as unemployment and to eliminate uncertainties inherent in business cycles.

British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan, on assuming their posts in 1979 and 1981, respectively, vigorously pushed neoconservative market reforms. Both sought to create small governments by streamlining bloated governments.

Following Keynesian theories, Western governments implemented income redistribution policies through progressive taxation and expanded welfare systems. During economic slowdowns, they floated large amounts of bonds and expanded public works investments.

As a result of the 1973 international oil crunch, Western countries suffered a steep slowdown in economic expansion and revenue growth. Fiscal deficits kept rising steadily, forcing governments to cut expenditures. Most national governments had no option other than downscaling to cope with recurring fiscal deficits.

To deal with the worsening problem, advisers to Thatcher and Reagan came up with the idea of reversing Keynesian theory. Keynes said a big government was needed because the market was imperfect; therefore, to downsize a bloated government, efforts should be made to perfect the market. Thatcherism and Reaganomics in the 1980s were the antithesis of Keynesian economics.

As it turned out, Thatcherism and Reaganomics did not work. In the late 1990s, it became apparent that the more markets moved toward perfection, the more market forces were likely to run amok.

Income gaps widened, the quality of public medical care and education suffered, asset prices skyrocketed and then nosedived, developing countries plunged into currency crises due to increased transfers of short-term capital, and the possibility of a single company dominating a given market increased as a result of free competition. Faced with the serious side effects, British voters rejected Thatcherism in the 1997 general election.

The administration of Prime Minister Junichiro Koizumi, though, is pushing Thatcher-style reform more than 20 years after it was initiated. There is no denying that total market reform hurts the underprivileged. For example, the current policy of requiring patients with health insurance to pay 30 percent of their medical fees hits the poor hard.

The Koizumi administration justifies its reform agenda with the trickle-down theory that improved economic efficiency will increase growth rates and that benefits given to people at the top of the economic ladder will eventually be passed to those lower down. In reality, however, the rich monopolize the fruits of economic growth; only a tiny amount trickles down to the poorest.

The trickle-down theory proved beneficial in the United States during the 1990s. In general, the theory works in an industrial society, as it did during the high-growth era in Japan -- when most workers lived in concrete apartments and bought the "three sacred treasures" (television sets, refrigerators and washing machines). They felt they were becoming more affluent. With the government promoting policies of "balanced development nationwide," affluence spread even to rural areas.

The trickle-down theory does not work in a postindustrial society. Job cuts in information technology have led to increased unemployment, forcing many workers to take low-paying odd jobs in big cities.

In nonmanufacturing sectors such as financing, telecommunications, information, entertainment, medical care, legal service and consultancies -- the mainstay in the postindustrial society -- the richest monopolize the benefits of economic growth. Only a little trickles down to the poorest. Odd-job workers get meager pay while many nonmanufacturing industry workers draw sky-high salaries. Income gaps between the rich and the poor expand endlessly.

(This article appeared in the August 2, 2004 issue of The Japan Times)

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