George Bernard Shaw once described the United States and Britain as two nations divided by a common language.1
But most ties bind. Like fiscal calamity. The United States and Japan are today united by a set of common and possibly intractable problems: rising debt, unsustainable spending commitments, and political dysfunction.
To some extent, those problems have set the two nations at odds, especially because Japan is one of America's largest creditors. But increasingly, fiscal experts in both countries are trying to share their miseries in a search for solutions. The effort has even penetrated the insular world of fiscal history, with Japanese and American scholars organizing a multiyear project to analyze and diagnose the roots of fiscal crisis in both nations.
In December Keio University in Tokyo held the second in a series of conferences on the comparative history of U.S. and Japanese fiscal policy. With papers ranging across time and place, it's hard to distill a single take-home message. But a joint paper by conference organizers W. Elliot Brownlee and Eisaku Ide (from the University of California, Santa Barbara and Keio University, respectively) comes pretty close.2 Both nations are tax slackers, they conclude.
Comparative history, like comparative policy analysis, is a dicey business. Every nation is unique, and fiscal policies can't be readily transplanted across borders. But even with those caveats in mind, there is much to be learned from comparing the fiscal trajectories of different nations. For the United States and Japan, economists have spent years trying to glean lessons from Japan's lost decade.
According to Brownlee and Ide, the United States and Japan share a key failure: inadequate taxation. Both nations face rising deficits and soaring debt levels. And to some degree, high spending has been at fault, especially in recent years when stimulus efforts have added to the red ink.
But overspending isn't the cause of either nation's fiscal crisis. In fact, Brownlee and Ide insist that spending has actually been too low, with both Japan and the United States facing a "structural deficiency" in public investment. The failure to spend enough on vital government functions -- including the provision of social services -- is just as dangerous over the long term as rising debt levels, they say.
Ultimately, the problem comes down to low taxes. "We would propose that the two key elements of the current fiscal crisis in each nation -- the deficit spending and the low levels of public investment -- are on one level mainly a consequence not of depressed economies or profligate spending and inefficiency but, rather, a failure to raise tax revenues adequate to cover expenditures," Brownlee and Ide conclude.
That taxes are low in both nations is beyond dispute. As Brownlee and Ide observe, "The United States and Japan make the lowest tax effort among the wealthy nations." In the United States, 24.1 percent of GDP goes to taxes, while Japan commits just a bit more at 26.9 percent. By contrast, major European nations raise anywhere between 34.3 percent (United Kingdom) and 46.7 percent (Sweden).
But low taxes are more symptom than cause of fiscal crisis. The real question is why Japanese and U.S. tax levels are so low, and in particular, why they are inadequate to the task of supporting government functions that voters in both nations clearly want. If people want government to be (reasonably) big, then why aren't they willing to pay for it?
The Politics of Self-Indulgence
The easy answer, of course, is simply to blame the citizen slackers: They want a lot of government (especially in the form of social services), but they want it on the cheap. As Franklin Roosevelt once said, in a nod to Oliver Wendell Holmes, they want their civilization at a discount.
There is much truth to that observation, but it's ultimately a calumny. After all, we don't fault consumers for seeking a good deal. If Best Buy offers to sell you a 60-inch flat screen on Black Friday for $100, do you insist on paying more, worried that you're shortchanging the store or its employees?
No. We take the best deal we can get -- maybe even argue for a better one. It's up to the providers of a good (whether electronic or social) to tell us what it costs. And in the world of fiscal politics, the providers have been lying about that cost for decades.
Brownlee and Ide trace the rise of tax resistance in both the United States and Japan, emphasizing the erosion of the value proposition that necessarily undergirds all government services. On the one hand, that proposition demands that taxpayers not get shortchanged -- that they actually get the services they're paying for.
But the value proposition also demands that taxpayers actually pay for the services they're getting. And in the United States and Japan, they don't. The reason for that apparent self-indulgence can be found in the fiscal history of each nation during the latter half of the 20th century. Both countries enjoyed a long era of easy finance (or "high growth," in Japanese parlance). The 1950s to the early 1970s were marked by rising revenues and growing government.
But revenue growth was not a result of tax increases. Rather, in the United States, easy finance was a function of sustained economic growth and moderate inflation, both of which served to keep tax revenues buoyant while making room for a series of major tax cuts (including the Kennedy-Johnson cuts of the 1960s). In Japan, surging economic growth served the same purpose, allowing several tax cuts in the postwar decades, and the mobilization of postal savings for expanding social infrastructure at the core of what is often called the Japanese “construction-state.”
All of which seems great, right? Who doesn't like easy finance? You get more government without higher taxes (or at least tax rates).
But easy finance has hidden costs, which Brownlee and Ide are careful to point out. "Under the conditions of 'easy finance,' politicians in both the United States and Japan rarely had to discuss how the growing expenditures for welfare-state functions and public works were financed," they say. "Partly as a lack of debate over tax increases, taxpayers in both nations lost consciousness of the connection between their taxes and public expenditures."
In other words, the value proposition of modern government began to collapse, which set the stage for a broader failure, as voters lost faith in government itself. In particular, as finance became less easy in the 1970s, voters focused their attention on tax policies that had long escaped careful scrutiny, at least on the level of retail politics. And what they found made them angry. In both nations, horizontal inequities in the tax system -- what we like to call loopholes -- began to erode the legitimacy of the tax system itself.
The Hard Years
During the latter decades of the 20th century, Japan and the United States followed different paths through the dawning era of fiscal austerity. Under President Reagan, the United States enjoyed a major tax cut and then a series of tax increases, extending well into the presidential terms of Presidents George H.W. Bush and Clinton. "What followed the passage of [the Economic Recovery Tax Act] in 1981, and continued until 1993, was perhaps the most significant string of peacetime tax increases in American history outside of the New Deal era," Brownlee and Ide say.
Later, under President George W. Bush, the United States resumed a program of tax reduction. But as the Great Recession opened a huge hole in the federal budget, the long-term viability of those tax cuts grew ever more uncertain, even as political opposition to tax increases grew more intractable. Fiscal paralysis has ensued.
Japan, too, has struggled with the fiscal stringencies that emerged in the 1970s. In the face of rising deficits, the country debated and eventually adopted a new VAT to raise much-needed revenue. But after the Japanese asset bubble burst in the early 1990s, political leaders began a sustained effort to stimulate a sluggish economy with government spending and tax cuts. The Japanese government shifted its "construction-state" machine, financed by postal savings, into high gear.
Those expansionary efforts, while perhaps only moderately successful, ultimately proved unsustainable, too. In the face of rising debt levels, Japanese political leaders were forced to end their program of regular tax cuts, while reducing spending on key social programs and public construction. Together, those changes left political leaders even more constrained in their policy options, as public cynicism precluded any attempt to raise taxes as part of the austerity problem. Japan was left with inadequate government and inadequate taxes.
Faint Cause for Hope
The Great Recession exposed the tax weakness of both the U.S. and Japanese governments. Neither nation had a clear path to revenue reform, at least to the extent that it might raise money.
Brownlee and Ide end their article with some hopeful thoughts, at least for the United States. They question the power of antitax ideology in American politics, pointing out that we were willing to tolerate major tax increases even after the beginning of the Republican ascendancy in the 1980s.
Brownlee and Ide note that the United States has a long history of "soak the rich" taxation, with calls for increasing the progressivity of personal income taxation garnering repeated (if not consistent) support from voters. The accelerating concentration of wealth and income in the United States seems likely to fuel that type of reform in the not-so-distant future, they conclude. And if coupled with more sweeping tax reform, high-end tax increases might actually help correct the nation's fiscal imbalance.
"The adoption of new progressive taxes could have important psychological effects, helping to restore a lost sense of economic justice within middle-America, and they might prod more of the wealthiest Americans to act according to an enlightened self-interest, just as they have at other times, most notably during and after the two world wars," according to Brownlee and Ide.
I wish I could muster that sort of optimism for the American fiscal future. But in the United States, the Brownlee-Ide program depends on the Democratic Party, since Republicans are almost certain to oppose any major tax increase, whether used to finance investment or to pay down debt.
And so far, Democrats have shown scant inclination to make the case for activist government. Indeed, Brownlee and Ide say as much themselves:
To fund adequately the programs required for the economic and social health of the United States and Japan, their governments face a major strategic and intellectual challenge. They will have to state more persuasively the case for embracing modern government and, at the same time, moving significantly closer to European levels of tax capacity. The arguments on behalf of both revenue and the public sector must be made simultaneously, in an integrated fashion -- something that no federal government in the United States has done since the 1930s, and no Japanese federal government has ever done.
Exactly. In the United States, Republicans have consistently and effectively undermined the value proposition of modern government, and Democrats have just as consistently failed to defend it. During the happy decades of easy finance, they didn't have to, because tax revenues rose automatically to support a growing government.
But since the 1970s, American liberals have shrunk from the task of defending big government -- not to mention the taxes necessary to pay for it. Fiscal crisis has been the inevitable result. American voters, like their Japanese counterparts, still want the government programs they've come to depend on. But the political failure to talk candidly about the costs of those programs has sapped the tax morale of both nations.
Maybe that will change. Maybe liberals in the United States, at least, are ready to make the case -- the whole case, including taxes -- for progressive government. But I'm not holding my breath.
1 Or maybe he didn't. The attribution is fairly dubious. We may owe the quip to Oscar Wilde.
2 I am indebted to Profs. Ide and Brownlee for permission to quote from their unpublished paper, "The Fiscal Crises in Japan and the United States: Toward a Comparative Perspective." To learn more about the paper, the authors may be contacted at firstname.lastname@example.org and email@example.com.
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