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Domestic adjustment to international shocks in Japan and the United States

  • M. Stephen Weatherford (a1) and Haruhiro Fukui (a1)
Abstract

Economic interdependence complicates domestic policymaking by interposing the decisions of foreigners in the loop that links policy instrument settings to economic outcomes. Nowhere was this vulnerability to external decisions demonstrated more forcefully—even for the world's major economies—than by the energy supply shocks of 1973 and 1979. The oil shocks posed challenges that offer unusual insight into the way nations choose policies: their severity forced a policy response; their unpredictable timing and (at least in 1973) unprecedented nature ruled out conventional formulas and brought to the fore explicit policy trade-offs. This article seeks to explain how policymakers in the world's two major economies responded to these external shocks. The analysis successively employs three vantage points—system, society, and state—in tracing the sources of domestic adjustment policies. It focuses specifically on the extent to which policies accommodated or extinguished each shock's inflationary impulses and on the coherence and consistency with which the executive in each government formulated and pursued particular policy goals. A comparison of these four cases illustrates the strengths and weaknesses of increasingly detailed theoretical frameworks for explaining policy choice. Although the research does not contradict the depiction of the United States and Japan in terms of state strength, it does underscore the importance of looking beyond formal institutional arrangements to consider how elite policy preferences, ambitions, and capacities can define the way constraints influence policy.

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1. For an illuminating survey that contrasts the intellectual histories and reviews examples of each approach, see G. Ikenberry, John, “The Irony of State Strength: Comparative Responses to the Oil Shocks of the 1970s,” International Organization 40 (Winter 1986), pp. 105–37.

2. See United Nations, Department of Economic and Social Affairs, Statistical Office, Yearbook of International Trade Statistics, 1972–1973 (New York: United Nations, 1974); and United Nations, Statistical Office, World Trade Annual, 1972, vol. 2 (New York: Walker & Company, 1974), p. 11–8.

3. International Monetary Fund (IMF), International Trade Statistics (Washington, D.C.: IMF, 09 1978). Data are for 1973.

4. For a perceptive analysis of societal pressures on foreign economic policymaking from the perspective of the interplay between issue characteristics and the logic of collective action, see Gowa, Joanne, “Public Goods and Political Institutions: Trade and Monetary Policy Processes in the United States,” International Organization 42 (Winter 1988), pp. 1532.

5. See Skocpol, Theda, “Bringing the State Back In: Strategies of Analysis in Current Research,” in Evans, Peter, Rueschmeyer, Dietrich, and Skocpol, Theda, eds., Bringing the Stale Back In (New York: Cambridge University Press, 1985), pp. 337.

6. See March, James G. and Olson, Johan P., “The New Institutionalism: Organizational Factors in Political Life,” American Political Science Review 78 (09 1984), pp. 734–49; and Stinchcombe, Arthur, “Social Structure and Organizations,” in March, James G., ed., Handbook of Organizations (Chicago: Rand McNally, 1965), pp. 142–93.

7. In “The Irony of State Strength,” Ikenberry argues convincingly that the distinction is of little value in the analysis of historical cases within one country, where the institutional features that connote state strength or weakness are generally stable. In comparative research, its value in explaining any particular policy depends on the degree to which the immediate case matches the model cases that informed the construction of the typology. See also Theodore J. Lowi's comments on Gabriel A. Almond's review of state-centered studies in Lowi, Theodore, “Comment on Almond,” American Political Science Review 82 (09 1988), p. 891.

8. In comparing the economic resources of countries, it is important to distinguish resources whose pattern of distribution changes slowly (for example, as a function of trade dependence) from resources whose distribution is more amenable to short-run change (for example, as a function of the level of domestic demand). The first type of economic resource is largely independent of the policies of a particular government and in that sense works as an exogenous, “systemic” constraint on policy choice. But the second type is susceptible to influence via the government's policy instruments and therefore must be explained in part by endogenous (state and societal) causes that also change over time.

9. Formation of the International Energy Agency (IEA) might be offered as a counterexample, but the practical effect of the IEA during 1979 and 1980 and the failure of cooperative initiatives on energy policy at the 1979 Economic Summit suggest that little changed at the level of the international system during the late 1970s.

10. See Stobaugh, Robert S., “The Oil Companies in Crisis,” Daedalus 104 (Fall 1975), pp. 179202; and Krapels, Edward N., Oil Crisis Management (Baltimore, Md.: Johns Hopkins University Press, 1980).

11. Perry, George L., “Determinants of Wage Inflation Around the World,” Brookings Papers on Economic Activity, no. 2, 1975, pp. 403–48. See also Pierce, James L. and Enzler, Jared J., “The Effects of External Inflationary Shocks,” Brookings Papers on Economic Activity, no. 1, 1974, pp. 13–54; and Eckstein, Otto, The Great Recession (Amsterdam: North-Holland, 1978), chap. 9. A grain shortage produced an additional shock at the same time, causing unexpected increases in food prices in 1973 and 1974 (quarterly averages for 1972 through 1975 were 5.5, 16.3, 12.5, and 6.2 percent). Estimates of the effect on consumer prices between the fourth quarters of 1972 and 1974 vary from 4 to 5.7 percent. See Eckstein, The Great Recession, chap. 6; Blinder, Alan S., Economic Policy and the Great Stagflation (New York: Academic Press, 1979), chap. 4; and Hathaway, Dale E., “Food Prices and Inflation,” Brookings Papers on Economic Activity, no. 1, 1974, pp. 63116. Because the effects of these two supply shocks were essentially identical in kind, they can be treated together for our purposes.

12. On the inflationary effects of the wage and price control program, see Kosters, Marvin H., Controls and Inflation: The Economic Stabilization Program in Retrospect (Washington, D.C.: American Enterprise Institute, 1975); and Blinder, Economic Policy. On dollar devaluation, see Kenen, Peter B. et al. , A Model of the U.S. Balance of Payments (Lexington, Mass.: D. C. Heath, 1978); Clark, Peter B., “The Effects of Recent Exchange Rate Changes on the U.S. Trade Balance,” in Clark, Peter B., Logue, D. E., and Sweeney, R. J., eds., The Effects of Exchange Rate Adjustments (Washington, D.C.: U.S. Treasury, 1974), pp. 220–45; and Magee, Stephen P., “U.S. Import Prices in the Currency-Contract Period,” Brookings Papers on Economic Activity, no. 1, 1974, pp. 117–68. On discretionary fiscal and monetary policy, see Blinder, Alan S. and Goldfeld, Stephen M., “New Measures of Fiscal and Monetary Policy, 1958–73,” American Economic Review 66 (12 1976), pp. 780–96; and Tufte, Edward R., Political Control of the Economy (Princeton, N.J.: Princeton University Press, 1978).

13. See Stein, Herbert, “The Council of Economic Advisors Under Chairman Herbert Stein, 1972–1974,” in Hargrove, Erwin C. and Morley, Samuel A., eds., The President and the Council of Economic Advisors: Interviews with CEA Chairmen (Boulder, Colo.: Westview, 1984), pp. 363408; and Shultz, George P. and Dam, Kenneth W., Economic Policy Behind the Headlines (Stanford, Calif.: Stanford Alumni Association, 1977). See also Stein, Herbert, Presidential Economics (New York: Simon & Schuster, 1984); and Greenspan, Alan, “The Council of Economic Advisors Under Chairman Alan Greenspan, 1974–1977,” in Hargrove, and Morley, , The President and the Council of Economic Advisors, pp. 413–58.

14. See Stein, Presidential Economics; Stein, “The Council of Economic Advisors”; McCracken, Paul, “The Council of Economic Advisors Under Chairman Paul McCracken,” in Hargrove, and Morley, , The President and the Council of Economic Advisors, pp. 319–58; and Greenspan, “The Council of Economic Advisors.”

15. The contrast between the economies of Western European countries and the United States illustrates how the predominant wage-setting mechanism determines the extent and speed with which inflationary shocks produce economy-wide inflation. In the former, wage bargaining is centralized, contracts are negotiated for short periods, cost of living adjustments are frequent, and workers' purchasing power is thus maintained throughout the cycle (that is, real wages are fixed). The result is that the inflationary effects of a sectoral supply shock will be swiftly translated into widespread wage and price increases. In the United States, on the other hand, wage bargaining is decentralized, contracts typically run for several years, and cost of living adjustments are limited and infrequent (that is, nominal wages are fixed). Thus, the supply shock lowers output and employment, but inflationary pressure is transmitted only weakly to other sectors. See Sachs, Jeffrey D., “Wages, Profits, and Macroeconomic Adjustment: A Comparative Study,” Brookings Papers on Economic Activity, no. 2, 1979, pp. 269332. See also Perry, “Determinants of Wage Inflation”; Nordhaus, William D., “Oil and Economic Performance in Industrial Countries,” Brookings Papers on Economic Activity, no. 2, 1980, pp. 341400; Gordon, Robert J., “Alternative Responses of Policy to External Supply Shocks,” Brookings Papers on Economic Activity, no. 1, 1975, pp. 183206; Gordon, Robert J., “The Impact of Aggregate Demand on Prices,” Brookings Papers on Economic Activity, no. 3, 1975, pp. 613–62; Gordon, Robert J., “World Inflation and Monetary Accommodation in Eight Countries,” Brookings Papers on Economic Activity, no. 2, 1977, pp. 409–78; Wachter, Michael L., ”The Wage Process: An Analysis of the Early 1970s,” Brookings Papers on Economic Activity, no. 2, 1974, pp. 507–38; and Zysman, John, “Inflation and the Politics of Supply,” in Lindberg, Leon N. and Maier, Charles S., eds., The Politics of Inflation and Economic Stagnation (Washington, D.C.: Brookings Institute, 1985), pp. 140–72. Real wage flexibility in the United States gave American policymakers more options than their European counterparts, since it allowed the option of implementing mildly expansionary policy without risking large price increases. See Gordon, Robert J., “Output Fluctuations and Gradual Adjustment,” Journal of Economic Literature 19 (06 1981), pp. 493530; and Gordon, Robert J., “Price Inertia and Policy Ineffectiveness in the United States: 1890–1980,” Journal of Political Economy 90 (12 1982), pp. 1087–117. See also Sachs, “Wages, Profits, and Macroeconomic Adjustment”; and Gordon, “Alternative Responses.” In Japan, accommodative flexibility was further constrained by unusual labor militancy in 1972 and 1973.

16. Whitman, Marina N., “The Current and Future Role of the Dollar: How Much Symmetry?Brookings Papers on Economic Activity, no. 3, 1974, pp. 539–92.

17. Nixon, Richard M., Public Papers of the Presidents of the United States (Washington, D.C.: U.S. Government Printing Office, 1973).

18. Blinder and Goldfeld's analysis of output growth in the postwar period (“New Measures,” pp. 780–96) shows that the shift toward contraction during the first and second quarters of 1973 was the sharpest and deepest of the series: real growth was reduced to zero (from 3.1 percent) by tightening the discretionary fiscal budget. The President and his advisors were sensitive to the possibility of recession, but their primary concern was with price rises—that is, the tradeoff was an explicit and considered one. See the series of CEA memos to President Ford on economic trends from late summer to the end of 1974 (from Alan Greenspan on 17 and 24 September, from William Fellner on 10 and 11 October, from Greenspan on 26 November, and from Fellner on 14 December 1974) in the White House Central Files on the CEA, housed in the Ford Library, Ann Arbor, Mich.

19. Balbach, Anatol and Jordan, Jerry L., “The Federal Open Market Committee in 1973,” Federal Reserve Bank of St. Louis Review 56 (04 1974), pp. 217.

20. Blinder and Goldfeld, “New Measures.”

21. See Goldfeld, Stephen M., “The Case of the Missing Money,” Brookings Papers on Economic Activity, no. 3, 1976, pp. 683730; Porter, Richard D., Simpson, Thomas D., and Mauskopf, Eileen, “Financial Innovation and the Monetary Aggregates,” Brookings Papers on Economic Activity, no. 1, 1979, pp. 213–30; Jianakopolos, Nancy, “The FOMC in 1975: Announcing Monetary Targets,” Federal Reserve Bank of St. Louis Review 58 (03 1976), pp. 1024; and Lindsey, David E., “Recent Monetary Developments and Controversies,” Brookings Papers on Economic Activity, no. 1, 1982, pp. 245–72. See also Roesch, Susan, “The FOMC in 1974: Monetary Policy During Economic Uncertainty,” Federal Reserve Bank of St. Louis Review 57 (04 1975), pp. 213; Enzler, Jared, Johnson, Lewis, and Paulus, John, “Some Problems of Money Demand,” Brookings Papers on Economic Activity, no. 1, 1976, pp. 261–82; and Hamburger, Michael J., “Behavior of the Money Stock: Is There a Puzzle?Journal of Monetary Economics 3 (07 1977), pp. 265–88.

22. Blinder, , Economic Policy, p. 186.

23. Edward Gramlich estimates that welfare losses would be minimized by a policy that traded 1 percent more unemployment for 2.4 percent more inflation, and Stanley Fischer draws a similar conclusion from a comparison of welfare losses associated with price variability and those associated with declining real output. See Gramlich, Edward M., “Macro Policy Responses to Price Shocks,” Brookings Papers on Economic Activity, no. 1, 1979, pp. 125–66; and Fischer, Stanley, “Relative Shocks, Relative Price Variability, and Inflation,” Brookings Papers on Economic Activity, no. 2, 1981, pp. 315–80. By early fall of 1974, indicators of recession were clear (the GNP had declined for three successive quarters), and the public's perception of the nation's primary economic problem had shifted sharply from inflation to recession. See Hibbs, D. A. Jr, “The Mass Public and Macroeconomic Policy: The Dynamics of Public Opinion Toward Unemployment and Inflation,” American Journal of Political Science 23 (08 1979), pp. 705–31.

24. Theoretical and empirical work suggests that the potential gains from coordination are larger following an unexpected international economic event than in ordinary times. See Oudiz, Gilles and Sachs, Jeffrey, “Macroeconomic Policy Coordination Among the Industrial Economies,” Brookings Papers on Economic Activity, no. 1, 1984, pp. 164; and Stewart, Michael, The Age of Interdependence (Cambridge, Mass.: MIT Press, 1984).

25. See The Economist, 1 December 1973, 12 January 1974, 26 January 1974, 1 June 1974, and 29 June 1974; and The New York Times, 25 August 1974.

26. The administration was not unaware of these arguments: the weighing of domestic claims against international claims was a considered one. See, for example, Fellner's memo to President Ford, “International Financial Conditions,” 4 October 1974, White House Central Files on Business and Economics, housed in the Ford Library.

27. Mann, Michael, “The Autonomous Power of the State: Its Origins, Mechanisms, and Results,” Archives Européenes de Sociologie 25 (03 1984), pp. 185213; and Skocpol, “Bringing the State Back In.”

28. See Fellner, William, Towards a Reconstruction of Macroeconomics: Problems of Theory and Policy (Washington, D.C.: American Enterprise Institute, 1976).

29. For a detailed analysis of the Japanese energy policy response, see Margaret A. McKean, “Energy Conservation Policy Through the Oil Shocks of the 1970s,” in Haruhiro Fukui, ed., Resource Policymaking in Japan, in preparation.

30. Of such consequences, policymakers were particularly concerned about the impact on small businesses, which in 1971 accounted for only about half of the total manufacturing output but accounted for over 99 percent of the total number of enterprises and nearly 70 percent of the total number of employees in the manufacturing sector. See Keizai Kikakuchō Chōsakyoku (Economic Planning Agency, Research Bureau), Keizai yōran: Shōwa 61-nen ban (Economic handbook, 1975 edition) (Tokyo: Ōkurashō Insatsukyoku, 1975), p. 208; and Sasaki Takeo, “Infure to shotoku seisaku” (Inflation and income policy), report presented at a Monday meeting of the Kenkyūkai, Kokumin Seiji (National Association for the Study of Politics), Getsuyōkai Repōto, no. 653, 8 10 1973, p. 34.

31. Kinyū Zaisei Jijō Kenkyūkai (Monetary and Fiscal Policy Research Society), Sengo kinyū zaisei rimenshi (A behind-the-scenes history of postwar banking and finance) (Tokyo: Kinyū Zaisei Jijō Kenkyūkai, 1980).

32. See Yoshikazu, Miyazaki, Nihon keizai no kōzō to kōdō: Sengo 40-nen no kiseki (The structure and behavior of the Japanese economy: The record of forty postwar years) (Tokyo: Chikuma Shobō, 1985), pp. 3132; and Masaru, Yoshitomi, Nihon keizai: Sekai keizai no arata na kiki to nihon (The Japanese economy: The new crisis of the world economy and Japan) (Tōkyō: Toyo Keizai Shimpōsha, 1981), p. 250.

33. Geppōsha, Shimbun, Nempō 73-nen (Annual report, 1973) (Tokyo: Shimbun Geppōsha, 1974), pp. 1213.

34. Yōichi, Shinkai, Kokusai kyōchō to nihon keizai (International cooperation and the Japanese economy) (Tokyo: Nihon Keizai Shimbunsha, 1974), pp. 100102.

35. Some 660 billion yen ($2.2 billion) was held by six major trading companies alone at the end of September 1972, according to MITI Minister Nakasone Yasuhiro.

36. See Asahi Shimbun, 2 January 1973; Nihon Keizai Shimbun, 13 April 1973; Miyazaki, , Nihon keizai, p. 46; and Sasaki, , “Infure to shotoku seisaku,” p. 29.

37. Ōkurashō Daijin Kambō Chōsa Kikakushitsu (Ministry of Finance, Minister's Secretariat, Office of Research and Planning), Shōwa 30-nendai ikō no zaisei kinyū seisaku no ashidori (The record of fiscal and monetary policies since the mid-1950s) (Tokyo: Zaisei Shōhōsha, 1982).

38. Yoshitomi, , Nihon keizai, pp. 5859.

39. Tadao, Uchida, “Shigen jōhō keizai taisei” (Resources, information, and the economic system), Chūkōron 91 (03 1974), pp. 111–13.

40. Kurogane Yasumi, “Sekiyu kiki no gen dankai” (The current stage of the oil crisis), Getsuyōkai Repōto, no. 661, 3 12 1973, p. 21. The best estimate was a 10–20 percent reduction in oil supply for an indefinite period after January 1974. See also Naomi, Nishimura, ”Nankyoku ni dou taisho suru ka” (How we might cope with the emergency), Getsuyōkai Repōto, no. 663, 24 12 1973, pp. 1617.

41. See Shigeru, Hayashi and Kiyoaki, Tsuji, eds., Nihon naikakushi roku (The records of Japanese cabinets), vol. 6 (Tokyo: Daiichi Hōki Shuppan, 1981), pp. 345–57; and Miyazaki, , Nihon keizai, pp. 101–68.

42. Kikakuchō, Keizai (Economic Planning Agency), Keizai hakusho (Economic white paper) (Tokyo: Ōkurashō Insatsukyoku, 1974), p. 18.

43. Sasaki, , “Infure to shotoku seisaku,” pp. 3839. The majority of Japanese labor unions were affiliated with either of the two national federations, the pro-Socialist General Council of Japanese Trade Unions (Sōhyō) and the pro-Democratic Socialist Confederation of Labor (Dōmei). As of June 1970, the former claimed about 48 percent of the nation's organized workers and the latter 23 percent. See Shimbunsha, Asahi, Asahi nenkan (Asahi yearbook) (Tokyo: Asahi Shimbunsha, 1971), p. 475.

44. See Yoshio, Kaneko, “Chingin, bukka, shotoku seisaku” (Wages, prices, and incomes policy), Getsuyōkai Repōto, no. 688, 1 07 1974, p. 13; and Yoshitomi, , Nihon keizai, pp. 4 and 52–53.

45. Kaoru, Murakami, Tsūsanshō no chōsen (Challenge by the Ministry of International Trade and Industry) (Tokyo: Tōyō Keizai Shimpōsha, 1985), pp. 8789. The oil trade group, the Oil Federation, estimated that implementation of the OPEC plan would reduce Japanese oil imports in the four months from 1 December 1973 to 31 March 1974 by 36 percent and the shipment arriving in January 1974 by as much as 50–70 percent. See Asahi Shimbun, 22 November 1973.

46. Nihon Keizai Shimbun, 24 November 1973.

47. The two bills were the Law on Fair Demand and Supply Balance in the Oil Market and the Emergency Law for the Stabilization of People's Livelihood. See Murakami, , Tsūsanshō no chōsen, pp. 8789; and Nishimura, , “Nankyoku ni dou taisho sura ka,” pp. 2933.

48. Throughout this article, Japanese names are given in the Japanese style with the family name listed first.

49. See Nihon Keizai Shimbun, 20 October 1973; and Kurogane, , “Sekiyu kiki no gen dankai,” pp. 2526.

50. ōkurashō, , Shōwa 30-nendai, pp. 5 and 209–25. Ministry of Trade bureaucrats differed over instruments, however, preferring price control by informal administrative guidance and voluntary price agreements among firms, an approach strongly opposed by the Fair Trade Commission as a violation of the Anti-Monopoly Law. See Miyazaki, , Nihon keizai, pp. 150–51.

51. See Ōkurashō, , Shōwa 30-nendai, p. 215; and Hisao, Kanamori and Osamu, Shimomura, “Jōshiki hazure no yosoku to keikoku” (The forecasts and warnings that defy common sense), Chūōkōron 99 (03 1974), pp. 118–25.

52. Kazuo, Shioya, “Kiki no naka de no hansei to zakkan” (Reflection and some random thoughts in the midst of a crisis), Getsuyōkai Repōto, no. 659, 19 11 1973, pp. 23.

53. The LDP lost seven seats, the Communists gained nine, and the Socialists gained three. See Masao, Soma, ed., 1976-nen nihon no sōsenkyo: Lockheed senkyo to kyōsantō no haiboku (The 1976 general election in Japan: The Lockheed election and the defeat of the Communist party) (Tokyo: Kokumin Seiji Kenkyū Sentā, 1979), pp. 115–19; and Ōkurashō, , Shōwn 30-nendai, pp. 215 and 221.

54. See Miyazaki, , Nihon keizai, pp. 8889 and 94; and Yoshitomi, , Nihon keizai, p. 4.

55. Miyazaki, , Nihon keizai, p. 182.

56. Seizaburō, Sato and Tetsuhisa, Matsuzaki, Jimintō seiken (The Liberal Democratic government) (Tokyo: Chūōkōronsha, 1986).

57. See Pempel, T. J., ed., Policymaking in Contemporary Japan (Ithaca, N.Y.: Cornell University Press, 1977); and Fukui, Haruhiro, “Okinawa henkan kōshō: Nihon seifu ni okeru kettei katei” (Okinawa reversion: Decision-making in the Japanese government), Kokusai Seiji 52 (1974), pp. 97124. See also Hermann, Charles F., ed., International Crises (New York: Free Press, 1972); and Robinson, James A., “Crisis Decision-Making: An Inventory and Appraisal of Concepts, Theories, Hypotheses, and Techniques of Analysis,” in Robinson, James A., ed., Political Science Annual: An International Review, vol. 2 (New York: Bobbs-Merrill, 1969), pp. 111–48.

58. In a December 1971 Asahi Shimbun poll, 12 percent of the respondents mentioned rising prices as the most frequent topic of conversation at home and at work, but by July 1972 a Japan broadcasting corporation (NHK) poll showed that 63.5 percent wanted the Tanaka cabinet to give priority to price stabilization. An August 1972 Asahi Shimbun poll showed a similar distribution. Public support for the Tanaka cabinet fell precipitously in the first nine months of Tanaka's administration, and the LDP suffered substantial losses in the December 1972 House of Representatives general election. See Kōhōshitsu, Naikaku Sōridaijin Kambō (Office of the Prime Minister, Department of Public Information), Seron chosa nenkan (Yearbook of public opinion surveys) (Tokyo: Okurasho Insatsukyoku, 1972 and 1973), p. 579 in 1972 and pp. 403 and 416 in 1973.

59. Johnson, Chalmers, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, Calif.: Stanford University Press, 1982).

60. Tanaka published a book on the subject with great fanfare while campaigning for the prime ministership in the summer of 1972, and the book proved a best seller. Moreover, in at least one prefecture-level public opinion poll conducted in November of that year, an overwhelming majority (74.2 percent) of the respondents approved of Tanaka's plan, although nearly two-thirds of them did so with some reservations. See Kakuei, Tanaka, Nihon rettō kaizo ron (Remodeling the Japanese archipelago) (Tokyo: Nikkan Kōgyō Shimbun, 1972); and Sōridaijin, Naikaku, Seron chōsa nenkan, 1973, p. 410.

61. In the May 1974 Kyodo Press poll in which respondents were asked to name the most important issue, 67.7 percent named inflation and 13.9 percent named improvement of the social security system. These two issues remained the greatest concerns of respondents in the June 1974 Yomiuri Shimbun poll (with 61 and 13 percent, respectively, naming them) and in the Mainichi Shimbun poll (with 52 and 13 percent, respectively, naming them). Moreover, the salience of inflation continued to rise after the election until Miki Takeo replaced Tanaka as the new prime minister. See Sōridaijin, Naikaku, Seron chōsa nenkan, 1975, pp. 457, 459–60, 463, 477, and 483.

62. Yomiuri Shimbun, 5 July 1973.

63. During 1978, the rate of increase of major inflation indexes rose about 2 percent: the GNP deflator rose from 6.1 percent in 1977 to 8.3 percent in 1978, and the consumer price index (CPI) rose from 6.8 to 9.7 percent during the same period. Productivity (private nonfarm output per hour) grew barely 1 percent.

64. See Kantowicz, Edward R., “The Limits of Incrementalism: Carter's Efforts at Tax Reform,” Journal of Policy Analysis and Management 4 (Winter 1985), pp. 217–33.

65. Corrected by the CPI with a rental cost index substituted for mortgage rates, the real wage drop was about 2.5 percent.

66. The CPI excluding energy and food increased 7.2 percent during the year ending November 1979, but it increased more than 10 percent during the year ending November 1980.

67. Economic Report of the President, Together with the Annual Report of the Council of Economic Advisors (Washington, D.C.: U.S. Government Printing Office, 1980), p. 49.

68. Viscusi, W. Kip, “The Political Economy of Wage and Price Regulation: The Case of the Carter Pay-Price Standards,” in Zeckhauser, Richard J. and Leebaert, Derek, eds., What Role for Government? (Durham, N.C.: Duke University Press, 1986), pp. 155–74. The guidelines were apparently important in convincing Chrysler workers to accept a wage rollback as part of the highly publicized bailout.

69. The adoption of a money growth rule (in place of interest rates as the indicator of monetary stringency) in October 1979 was partly a response to the apparent inability to approach monetary targets by means of traditional instruments. The CEA's survey of 1979 admitted that “it is difficult to assess the degree of restraint exercised by monetary policy in the first three quarters” (Economic Report of the President, 1980, p. 54). The objectives of the Federal Reserve Board were for Ml growth of 1.5–4.5 percent and M2 growth of 5–8 percent for the year. (Ml consists of currency, checkable deposits, and travelers’ checks. M2 consists of Ml plus savings and small time deposits, overnight repurchase contracts, Eurodollars, money market mutual funds, and money market deposit accounts.) During the first quarter. Ml actually declined and M2 increased only 2 percent; but for the next two quarters, the growth rates of both were well above 10 percent. Control improved in the fourth quarter, when Ml growth fell to 3.1 percent.

70. These behavioral changes in the private sector—the acceleration of purchases by consumers and economizing on cash balances by corporations—should not be conceptualized as purely economic phenomena, since the process of forming economic expectations integrates assumptions about probable government policy and its anticipated success. Thus, the behavioral changes are especially important from the perspective of a study of policy making, because both sprang from declining public confidence in Carter's ability to manage the economy. Personal savings rates rise (or remain unaltered) in the face of inflation if consumers expect that the government will soon succeed in moderating price rises; dissaving implies that consumers are pessimistic about the prospects for success in stopping inflation. Similarly, firms continue to produce in the face of declining sales if they think that demand will soon be restored; as their pessimism grows about the government's ability to return aggregate demand to its prior growth path, it makes sense to cut production more quickly and fully when sales fall.

71. Inflation exceeded 13 percent in the fourth quarter of 1979 and rose as high as 18 percent in January and February 1980, and the growth rate of retail sales rose from 13 to 43 percent in January. The producer price index (PPI) excluding energy rose at an annual rate of 16.5 percent, and demand for business loans grew at an annual rate of 24 percent in spite of the fact that the prime rate approached 18 percent.

72. For the whole year, real GNP declined; however, the entire fall was concentrated in a dramatic, policy-induced drop of nearly 10 percent during the second quarter.

73. Data available soon after the program began showed that activity was beginning to slow before the imposition of controls. See Economic Report of the President, 1981, pp. 136 and 160. The strictly temporary impact of controls was shown by the prompt resumption of activity after the program was removed (for example, by September 1980, retail sales were up 28 percent and housing sales up 70 percent from their May lows). Private economic actors postponed but did not scale back plans for borrowing and spending.

74. The supply shock politicized oil and energy policy and, to a lesser extent, economic policymaking in general. But it is not at all clear that this effect alone should have changed the likelihood of successful policy leadership. One interpretation exonerates the administration, noting that the supply shock's widespread impacts made the issue so electorally volatile that members of Congress could not afford to go along with the President's call for either oilconserving or inflation-fighting self-sacrifice. Another interpretation argues that national emergencies typically evoke rallying effects which strengthen leaders’ support.

75. Carter, Jimmy, Keeping Faith (New York: Simon & Schuster, 1978).

76. Examples of the President's ambiguous operational goals for economic policy include the wage and price guidelines, the 1977 proposal for a tax rebate (withdrawn at the last moment), the dramatic shift in policy direction of the Federal Reserve Board when Paul Volker succeeded William Miller, the 1980 budget (altered significantly between its first and second versions), and the wrangle with Democrats in Congress over the balance between corporate and personal tax cuts in the 1978 bill.

77. See Stein, Presidential Economics.

78. These advisors included Stuart Eizenstat, Jody Powell, and Hamilton Jordan. On the structures of influence in the Carter White House, see Kessel, John, “The Structures of the Carter White House,” American Journal of Political Science 27 (05 1983), pp. 431–63.

79. Interview with Charles Schultze, 1 September 1986. See also Silk, Leonard, Economics in the Real World (New York: Simon & Schuster, 1984), chap. 9; and Viscusi, “The Political Economy.”

80. Yoshitomi, , Nilwn keizai, pp. 7 and 18.

81. See Zaisei, Kinyū, Sengo kinyū,pp. 5960; Yoshitomi, , Nihon keizai, p. 253; Ōkurashō, , Shōwa 30-nendai, p. 6; and Hiroyasu, Toda, “Shin keizai shakai shichikanen keikaku ni tsuite” (The new seven-year social and economic plan), Getsuyōkai Repōto, no. 944, 3 09 1979, pp. 89.

82. See Yoshitomi, , Nihon keizai, pp. 198–99 and 270–71; and Ōkurashō, , Shōwa 30-nendai, p. 6.

83. See Yoshitomi, , Nihon keizai, p. 273; and Okurashō, , Shōwa 30-nendai, pp. 266–74.

84. See Chōsakyoku, Keizai Kikakuchō (Economic Planning Agency, Research Bureau), Nihon keizai no genkyo: Shōwa 55-nenban (The current state of the Japanese economy, 1980 edition) (Tokyo: Ōkurashō Insatsukyoku, 1980), pp. 161–63; Nihon Keizai Shimbun, 18 February 1980; and Ōkurashō, , Shōwa 30-nendai, pp. 67.

85. See Isamu, Miyazaki, “Tokyo samitto to kongo no keizai dōkō” (The Tokyo summit meeting and future economic developments), Getsuyōkai Repōtō, no. 937, 16 07 1979, pp. 3031; and Katsuhisa, Yamada, “80-nendai no tsūsan seisaku no arikata” (What trade and industrial policies should be followed in the 1980s), Getsuyōkai Repōtō, no. 945, 10 09 1979, p. 24.

86. Chōsakyoku, Keizai Kikakuchō, Nihon keizai, pp. 170–72.

87. See Asahi Shimbun, 4 July 1979; and Nihon Keizai Shimbun, 12 February 1980.

88. In the House of Representatives general elections of 1976 and 1979, the LDP won 48.7 and 48.6 percent of the seats, respectively, as compared to 59.2 percent in 1969, 55.2 percent in 1972, and 55.6 percent in 1980. See Stockwin, J. A. A., Japan: Divided Politics in a Growth Economy, 2d ed. (London: Weinfeld & Nicolson, 1982), pp. 112–13.

89. These are the results of polls conducted by Kyodo Press, Jiji Press, and Asahi Shimbun, respectively. See Sōridaijin, Naikaku, Sewn chosa nenkan, 1979, pp. 510 and 522; 1980, p. 511.

90. Miyazaki, , Nihon keizai, pp. 172–73.

91. The term “macroeconomic power” is adapted from Henning, C. Randall, Macroeconomic Diplomacy in the 1980s (New York: Croom Helm, 1987).

92. American trade performance during the second oil crisis was one of the Carter administration's few bright spots: exports rose rapidly as the economic recovery in other nations Domestic adjustment 619 gained momentum in 1978 and 1979, and U.S. imports fell as domestic growth slowed, so that the trade account moved from a deficit in 1978 to a balance in 1979. During 1980, increasing oil prices were matched by rising revenues from “invisibles” (for example, financial services), producing a small current account surplus. In Japan, the current account shifted from a surplus to a deficit between 1978 and 1980, but this was due in large measure to price factors, since trade volumes remained robust. Overall, the volume of world trade was sustained much more successfully in 1979 than in 1974.

93. See Bruno, Michael and Sachs, Jeffrey D., Economics of Worldwide Stagflation (Cambridge, Mass.: Harvard University Press, 1985).

94. Economists writing about this period have noted similar limitations on a purely economic approach to explaining national economic performance. See Bruno and Sachs, Economics of Worldwide Stagflation; and Blinder, Economic Policy.

95. See Ikenberry, “The Irony of State Strength”; and Putnam, Robert D., “Diplomacy and Domestic Politics: The Logic of Two-Level Games,” International Organization 43 (Summer 1988), pp. 427460.

96. The following are representative of this body of literature: John Creighton Campbell, “Fragmentation and Power: Politicians and Bureaucrats in the Japanese Decision-Making System,” paper presented at the Midwest Seminar on Japanese Studies, Ann Arbor, Mich., 24 October 1987; Hideo, Ōtake, Gendai nihon no seiji kenryoku keizai kenryoku (Political power and economic power in contemporary Japan) (Tokyo: San'ichi Shobō, 1979); Michio, Muramatsu, Gendai nihon no kanryōsei (The contemporary Japanese bureaucracy) (Tokyo: Toyo Keizai Shimposha, 1981); Takashi, Inoguchi, Gendai nihon seiji keizai no kōzu: Seifu to shijō (The design of contemporary Japanese political economy: Markets and government) (Tokyo: Nihon Keizai Shimbunsha, 1983); and Sato and Matsuzaki, Jimintō seiken.

97. See Oudiz and Sachs, “Macroeconomic Policy Coordination”; and Stewart, The Age of Interdependence.

98. See Weatherford, M. Stephen, “The International Economy as a Constraint on U.S. Macroeconomic Policymaking,” International Organization 42 (Autumn 1988), pp. 605–37.

99. See Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, N.J.: Princeton University Press, 1984); and Putnam, Robert D. and Bayne, Nicholas, Hanging Together: The Seven Power Summits (Cambridge, Mass.: Harvard University Press, 1984).

100. The impact of these efforts in several European countries is more apparent than it is in the United States and Japan, where it is less clear that the efforts actually changed the behavior of private actors and enhanced the ability of market processes to promote adjustment. Although the Carter administration did pass the windfall profits tax, its proposal was unsuccessful in protecting from inflation the real incomes of workers who accepted wage increases below the government's guidelines, and the voluntary wage and price guidelines were not supported by a consistent package of other policies. Since Japan's cyclical position when the second oil shock hit ensured that pressures to raise wages would have been relatively weak in any event, attempts at “moral suasion” probably should not be attributed the bulk of causal influence.

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International Organization
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