HEADLINE: 'G.I. Bill' needed for corporate Japan

BYLINE: Leonard Schoppa

BODY:
Japan's new prime minister, Junichiro Koizumi, continues to enjoy public approval ratings above 80 percent and is on track to help his Liberal Democratic Party win big in upper house elections to be held July 29. Nevertheless, the prime minister's own party is likely to reward him for his aid in winning this victory by immediately pressuring him to abandon much of his reform agenda. What Koizumi needs to fend off this challenge is a bold new proposal to throw his opponents off guard: a "G.I. Bill" for Japan's corporate warriors.

Koizumi is likely to face opposition from within the LDP, first, because much of his reform agenda has been targeted directly at special-interest groups supporting members of the LDP old guard, especially the public works contractors who back the Hashimoto faction. Key planks in the prime minister's structural reform plans--his promise to limit new public debt to 30 trillion yen in the 2002 budget and his efforts to free road-tax revenues for use in funding government projects other than roads--promise to cut off the flow of public funds to these contractors. Hashimoto faction members, who backed former Prime Minister Ryutaro Hashimoto in the LDP leadership race this spring but lost, worry that these steps will push them permanently into the margins of Japanese politics after years of being at the very center of the power structure.

Powerful forces also oppose the other important plank in Koizumi's platform: his plan to force Japanese banks to write off all of their bad loans within the next three years. A serious effort to follow through on this promise would push numerous Japanese firms into bankruptcy and increase the number of unemployed workers by an estimated 1 million to 3 million workers. The businesses facing a cutoff in financial support naturally are eager to see this plan watered down.

While Koizumi enjoys strong support from the public in his bid to clean up the banking mess and cut off the flow of pork to public contractors, the huge stakes involved in these policy moves virtually guarantee his opponents will try to sabotage his reform plans once the upper house election is safely behind them. Already Hashimoto faction members have modified the party's platform language dealing with the road-tax issue in an effort to make it easier for them to backtrack after the election.

If this battle were taking place in better economic times, Koizumi likely would prevail against intraparty rivals who have been badly tarnished by scandal and their association with old-fashioned money politics, but the fact that Japan is suffering from deflation and recession has thrown his opponents a lifeline. Instead of having to defend their demands for backtracking on selfish grounds, they can call for delay and moderation on the grounds that carrying out these reforms now risks sending the nation into a deflationary decline worse than anything any industrialized nation has seen since the Great Depression.

Economists ranging from Paul Krugman to Stanley Fischer (of the International Monetary Fund) have lately been giving Koizumi's opponents the economic arguments they need to back up their campaign to delay and water down structural reforms: Japan's immediate problems are not about inadequate supply (the target of structural reforms), but about inadequate demand. The nation should not be pulling the fiscal rug out from under the economy by carrying out Koizumi's reform plans at this time.

These arguments need to be taken seriously, but they are not grounds for delaying structural reform once again. If Koizumi's opponents succeed in using them to put off bad-loan disposal and public works cutbacks, they will merely dig Japan deeper into the hole without doing anything to fix the fundamental structural problems that have prevented its economic recovery over a decade after the collapse of the bubble economy.

What Koizumi needs to blunt the "we have to put off reforms" arguments of his opponents is a bold new plank in his reform platform that promises to facilitate structural reform while putting a fiscal floor under the economy.

Others, mostly Western economists, have proposed tax cuts as a means to support domestic demand without giving up Koizumi's plans to cut public works spending. This proposal faces major opposition in Japan, however, because it is too closely associated with the repeated demands for macroeconomic stimulus that Japan has been listening to for years.

U.S. Treasury Secretary Paul O'Neill, for example, recently called for Japan and Europe to serve as "locomotives" for the world economy--apparently he was unaware that many in Japan still remember how former U.S. President Carter's demands for Japan to serve as a "locomotive" ushered in a period of surging budget deficits that did little to help the Japanese economy. Ever since, even in the face of persistent demands for tax cuts during the long recessions of the 1990s, Japanese government officials have resisted what they see as foreign meddling designed to support the global economy at the cost of destroying Japanese government finances.

What Japan needs instead is a targeted program of government expenditures that works in favor of structural adjustment instead of against it. The model for this plan should be the U.S. G.I. Bill.

Following World War II, the United States faced a situation similar to the one Japan is facing today. An economy pumped up on wartime demand faced the threat of a postwar recession as the government wound down defense spending. At the same time, the nation found itself with millions of soldiers whose employment in that line of work was no longer needed.

Similarly, Japan now finds itself with an economy that has for many years been pumped up with public works spending and excessive private investment in plants and equipment--spending that was once justified on the grounds that it was necessary to help Japan catch up with the most advanced industrialized nations. This "economic war" ended 10 years ago, however, and Japan has been stuck in a "postwar" recession ever since--unable to establish a new source of domestic demand to substitute for declining public and private investment.

The obvious counterparts to the United States' surplus soldiers, of course, are Japan's army of surplus corporate "window-gazers" and no-longer-needed construction workers. Koizumi should recognize, though, that Japan's 10 million full-time homemakers who have made it possible for their "warrior-husbands" to devote their lives to their companies--many of them underemployed in an era when Japan needs all of its working-age citizens in the tax-paying workforce because of the aging of society--should also be included in this program. These citizens built Japan up into the modern industrial power it is today, accomplishing a feat every bit as valuable as the World War II victory won by U.S. soldiers. Just as the latter were no longer needed once the war was over, however, Japan's "corporate warriors" need to be de- (or rather re-) mobilized.

The United States accomplished this feat by granting all returning soldiers the right to a subsidized further education. By the time the initial intake of World War II soldiers had been processed, 16 million soldiers had received technical or college educations that made it possible for most to find work in the civilian economy, buy homes, and achieve the economic security that came with membership in the U.S. middle class. The federal dollars spent on this program also helped stimulate the U.S. economy at a time when Keynesian demand-management was still too controversial to win support on its own merits. Finally, the G.I Bill transformed the U.S. education system as colleges were forced to absorb a cadre of older students who sought practical skills and knowledge they could use in well-paying jobs.

Japan needs to establish a similar system to provide demobilized corporate warriors, construction workers, and full-time homemakers the right to a subsidized period of education and training--not just hastily thrown together special courses at job-training centers, but newly designed courses for mature students at universities and technical colleges. Such a program would put a fiscal floor under the economy as otherwise unemployed workers spend their education vouchers and receive income supports to replace their lost wages.

It would also accelerate structural reform rather than retarding it in the way old-fashioned pork-barrel spending has done. Structural reform that is merely pushed through bad-loan disposal and bankruptcy is likely to proceed much more slowly and unevenly than a process that is also pulled by the opportunity workers have to reinvent themselves through further education and retraining. Koizumi is going to have to sell the public on how a sharp rise in unemployment is a necessary phase in Japan's road to recovery, and that will be much easier to do if he can show the public that workers can use the period in which they are without a job to secure new skills relevant to the new economy.

An influx of mature students will certainly challenge Japanese universities, long accustomed to serving a constituency almost exclusively composed of 18 to 22 year olds. The fact that these students are likely to demand that colleges to provide them with practical skills and knowledge will also challenge a system that has often contributed little more than the credential these students used to land jobs. One of the greatest advantages of a G.I. Bill for the cause of structural reform may therefore flow from the demands demobilized mature workers place on universities, forcing them to reinvent themselves for an era in which rapid technological and economic change demands that the education system provide citizens with a lifelong educational system.

If Koizumi can implement the kind of program envisioned here, he will be able to do more than just defeat the Hashimoto faction. He will justly be able to claim that his is the latest in a line of reinventions Japan has embraced dating back to the Meiji Restoration in 1868.

(Schoppa, Associate Professor in the Department of Government and Foreign Affairs at the University of Virginia, is author of "Bargaining with Japan" [Columbia University Press, 1997] and "Education Reform in Japan" [Routledge, 1991]. He is now writing a book about structural reform in Japan.)