Sick economies of US and Japan need the elixir of public spending

WHEN Governor Bill Clinton takes to the US airwaves today in the first of three presidential election debates, his message will be one of economic stimulus, not austerity. On the same panel, independent candidate Ross Perot will demand several harsh years of national belt-tightening to bring the dollars 330bn federal deficit under control. President George Bush will fall somewhere in between.

The candidates are not alone in presenting conflicting views on how to cure the ailing economy: US economists are equally divided in their pleasure/pain schemes. However, stimulus seems to be triumphing over austerity even in very respectable quarters - among them Pulitzer-prize-winning economists and other heavyweights, such as Robert Eisner, past president of the American Economic Association.

The stimulus message is also being voiced in Europe, although it is still pitched as a whisper as more economies slip into recession. Nevertheless, this is a sharp reversal of the inflation-fighting zeal of the 1980s which even the Bundesbank has tempered slightly, by holding its money market rates below 9 per cent.

However, until very recently, no one had presented the dreaded 'inflation' word as a near-term cure-all. Then along came Tadashi Nakamae with the advice that Japan must inflate its way out of the sharp downturn to preserve its own growth and ultimately world growth.

Mr Nakamae, president of Nakamae International Economic Research in Tokyo, was the only economist to foresee the severity of the Japanese recession. For this reason alone, his words carry weight in Tokyo. But now he is making waves internationally by predicting that no matter who wins the election in November, the US will still be the unchallenged leader in world growth in the 1990s. This is based on the assumptions that Japan's recession, without dramatic government intervention, will get worse and that Germany's downturn will drag down the whole of Europe.

This presents the US economy, leaner and more productive after two years of recession- spawned restructuring, as the haven for world capital investment. The result will be an appreciating dollar, declining long-term bond rates, falling unemployment and an improving US budget deficit. In other words, Mr Nakamae visualises a dramatically improved US economy without any quick fixes. His one cautionary note is that the Group of Seven industrialised nations must not oppose the dollar's appreciation: to do so would risk a prolonged world recession.

However, a growing number of US economists disagree with Mr Nakamae's assessment that no fixes are needed. They support a short-term programme of government stimulus, in the form of education/training, defence conversion and public works programmes, before getting back to the serious business of deficit reduction. Mr Eisner goes a step further. He believes the deficit has achieved such mythic proportions that it is misunderstood.

He says the 'real' size of the deficit, when judged against corporate budgets which separate expenditure on capital assets from operating expenses, is actually about dollars 210-220bn. This would leave the US budget not far out of balance, or with a deficit characterised by debt that does not grow faster than income.

Mr Eisner calculates that the US national debt owed to the public is dollars 3,000bn (another dollars 1,000bn in debt is held by social security and other government trust funds.) Since US GNP is now at dollars 6,000bn and growing at an annual rate of 7 per cent (in money terms), Mr Eisner would allow US debt to grow by the same annual amount - 7 per cent of dollars 3,000bn (dollars 210bn) annually. This would maintain a one-to- two ratio of debt to equity. Anything less, in his opinion, would propel the economy into another nosedive. He therefore argues for more 'responsible' deficit spending to promote growth.

The cure prescribed by Mr Nakamae for Japan's ailing economy is even more radical. He says more, not less, inflation is the only answer and that the government should double the current inflation rate with a huge programme of spending - primarily to buy an estimated 4 million units of vacant housing.

Before Japan's bubble burst, people were investing heavily in rental housing. As a result, there is now an excess of stock that threatens to exacerbate the dismal condition of Japanese banks. Mr Nakamae wants the government to buy up the excess capacity, demolish older stock and finance new housing. In addition, he argues for a programme of dramatically lower internal interest rates and a depreciation of the yen by at least 30 per cent. In effect, by inviting the government into the property market, he is attempting to create what could be described as target zones for asset management.

Without such radical action, he foresees two consecutive years of negative growth, followed by very weak growth in the second half of the 1990s. Japan's system of lifetime employment would almost certainly collapse under these conditions, given Mr Nakamae's assessment that corporate return on capital has fallen below 5 per cent, or too low to sustain investment, and that the book value of equity has virtually been wiped out over the past two years.

So the pressure is on in the world's two largest economies for more stimulus and/or inflation, depending on your view. Don't tell me that Mr Keynes is back in fashion.