DEMOCRACY HIJACKED

In both countries, the bubble combined with the attitude of ‘irrational exuberance’ and hubris did more than create inequities. It acted as a decoy; a decoy which allowed democracy to be hijacked. As Americans, we like to think we live in a democracy-but we don’t!

Zaibatsu(syn wealthy family). Literally means ‘wealthy family’. The Zaibatsu were once a powerful force within Japan that many believe ‘hijacked’ the country and sent into World War II. One of the priorities of General MacArthur after WW II was a ‘Zaibatsu purge’(zaibatsu kaitai). Although MacArthur did purge the Zaibatsu, the kiretsu an informal amalgamation came about and replaced it. As was pointed out by Woronoff previously the wealthy got a lot wealthier during the Japanese bubble.

Does America have a Zaibatsu and have our policies been tilted in their favor? Kevin Hasset, a resident scholar at the American Enterprise institute tells us in ‘Hey, Mr. Greenspan: Wealth Creation Isn’t a Problem’, ‘Wall Street Journal’, June 26, 2000; ‘Most stock is owned by fairly wealthy individuals-the top 1% of equity owners hold about 50% of all corporate stock. The top 5% own about 80% of all stock’. And as was already noted the wealthiest 20% of Americans have received 91% of the financial gains of the great bull market, with the top 1-% getting 53% of the gains (Wolff).

The wealthy families (Zaibatsu), the asset owners were the prime beneficiaries of the bubbles in both Japan and the USA. This was because polices were biased towards them: From monetary policy to tax policy to corporate welfare. We get angry over corporations about corporate welfare, but fail to take the next step and realize that the real face behind it, those benefiting from it are the shareholders. The corporation we fume about is not a building or a logo. It is an extremely select group of people who are calling the shots, in their favor to the exclusion of others. And most of the country consists of these ‘others’. Ultimately it this select group to whom the spoils of America’s hijacked democracy ‘trickle up’ to. ‘Corporate Welfare, The Face, The Case: The Remedy’ ).

Bureaucrats- The ones running the financial show in both countries were non-elected often career bureaucrats. The primacy of Japan’s bureaucracy is well known. The Japan Culture Institute in’The Bureaucracy: Japan’s Pool of Leadership’ in Politics and Economics in Contemporary Japan, Kodansha International Ltd., 1983, says that; ‘(page 86)'…a career as a high-ranking bureaucrat continues to be the nations most prestigious occupation.’ In his book MITI And The Japanese Miracle Chalmers describes how one would begin constructing the Japanese model of success; (page 315)’The first element of the model is the existence of a small, inexpensive but elite bureaucracy staffed by the best managerial talent available in the system.’ What many American citizens fail to realize is that un-elected bureaucrats are similarly running the USA financial markets.

The chairmanship of the Federal Reserve is appointed, but it is accountable to no one, in theory to keep it from becoming politicized or influenced into printing money. But is the Federal Reserve showing independence when it continually bailouts out money loosing institutions and speculators and creates a moral hazard? Keynes was well aware of how bureaucrats, particularly economic ones could influence our lives:

‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt form any intellectual influences, are usually the slaves of some defunct economist.’ John M. Keynes, The GeneralTheory of Employment, Interest and Money (1936) pg.383

Bank of Japan, Ministry of Finance - (syn. Treasury, Fed.). These are the organizations that created and helped fuel the bull market. It was believed that these organizations produced the perfect environment that allowed Japan Inc. to flourish. During the height of the bubble in Japan mythic powers were attributed to these organizations. In hindsight, the blame for Japan’s economic malaise is placed on the policy decisions of these organizations. Click here to go to the Federal Reserve Links

Similarly, the success of today’s USA financial nirvana is attributed to the Federal Reserve and Treasury, and God-like status has been bestowed to their respective heads. In the preface to his book Maestro:Greenspan’s Fed and the American Boom (Simon and Schuster, 2000) Bob Woodward expresses the perspective of many Americans; ‘On January 20, 2001, a new president takes the oath of office. He assumes the presidency in a Greenspan era.’ Clearly Woodward is exalting praise for the chief and giving him his due. But Woodward’s statement carries a much greater truth that the presidency in some ways in subservient to the Chairman of the Federal Reserve. That our newly elected President George Bush is a mere elected government official in comparison to the regal czar like status Greenspan has assumed.

William Greider in Secrets of the Temple , Simon and Schuster, 1987 describes the enormous power the Federal Reserve wields when talking about Federal Reserve Chairman Volcker’s attack on inflation: ; (page 46)

’…the Federal Reserve would prove to be more powerful, more effective than any element of the elected government in Washington, but the democratic anomaly remained unexamined. Millions of Americans would lose jobs, homes, farms and family savings in the tidal shift that followed. For others, the transformation would create new opportunity and fortune. Virtually every American, indeed the entire world, would share directly in the consequences. Only a few understood what was happening to them or why.’

As James Livingston argues in ‘Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913, (Cornell University Press, 1986) the creation of the Federal Reserve was part of an effort to create a new ruling class of ‘corporate-industrial business elite’. (page 232-233)

‘ Upper Classes that seek to rule their part of the modern world must therefor be able, above all, to specify the rules or methods that govern the designation of reality…the Federal Reserve System is an episode in, of evidence for, the emergence of a modern ruling class; neither historical event can be understood apart from the other. The business elite that organized the movement for banking and monetary reform was ultimately able to translate its particular view of the world into institutionalized political authority-not by holding office, buying votes, blackmailing elected officials, or otherwise seeking to obliterate the shifting boundary between civil society and the province of state power, but by establishing and enforcing the cultural or ideological consensus within which public debate on banking problems and solutions took place.’

Policy Bias. During both bubbles there was an implicit as well as explicit policy bias favoring the rich. The Float shifted power from the government to the private sector and the financial markets, which increased the relative power of the Federal Reserve, in theory a neutral party. In the mid-1980’s, when the nation’s agricultural sector was experiencing financial difficulty, legislators from these distressed areas met with Fed Chairman Volcker seeking relief. The meeting was described in the Wall Street Journal October 22, 1986, Warren T. Brookes, ‘Farm Blights: Volcker Freeze, Press Drought’;

‘In spring of 1985, a group of farm state legislators went to Paul Volcker at the Federal Reserve to complain about his excessively tight money, high-interest-rate policies that were driving the dollar ever higher and pricing American farmers out of the world market, deflating them out of their own farms.

'This meeting and Mr. Volcker’s reply were reported nowhere except in the op-ed piece in The Wall Street journal, where it was learned that Mr. Volcker had told the legislators what they were facing. He said, "Look, the fact is, your constituents are unhappy, and mine aren’t." (20)Notes (emphasis ours)

Mr. Brookes then writes;

‘His "constituents" are the biggest U.S. banks, which since 1981 have been holding tens of billions of dollars in bad paper from the Third World, lesser developed countries and some Eastern Bloc nations (21)Notes..It was a classic illustration of the power of very big money, through its proxy the Federal Reserve, which really runs the U. S. economy, sacrificing U. S. jobs and farms on the altar of Wall Street financial insolvency.’Click here for more information on the Federal Reserve

Monetary Policy (Moral Hazard) The ambulance stock mentality in both Japan and the USA was a policy bias towards the rich. During the Japanese bubble emphasis was placed on rescuing the biggest and best clients. Similarly the Federal Reserve has taken it upon itself to bail out big losers of all ilk.

Fiscal Policy- Fiscal policy in both Japan and the USA helped fuel the Kakusa during the bubble periods. Research on that time period in Japan reveals that its public policies built inequities. Toshiaki Tachibanaki in Public policies and the Japanese economy: savings, investments, unemployment, inequality, (New York ST. Martins Press, 1996) research found that public policies in Japan fuel inequality;(page 276)

‘I have argued that Japan is currently facing rising inequality in many areas including not only income, wage, and wealth distribution but also education and occupational achievement… (page 279)My own research has led me to believe that the recent trend toward inequality in Japan, induced both by market forces and by public policies with the consent of the majority of the Japan and public authorities…’

In the USA tax policy is slanted towards corporations and their wealthy shareholders. David R. Francis of the Christian Science Monitor noted in ‘ Bye-bye corporate tax revenues’, (November 3, 1999) ; ‘Corporate profits are sizzling. Wall Street is cheering. Stock prices are rising again. But Uncle Sam’s not getting his full cut. Corporate profits were up 8.9 percent in the fiscal year ended Sept. 30. Federal corporate tax revenues were down 2.5 percent.’

Political Stocks (syn. Soft money, Pac’s, special interests) Payback for political favors where prominent features of both the Japanese and USA economic miracles. In Japan certain stocks, which prominent politicians owned would be ramped up (boosted) in price, in order to facilitate the practices, forcing various factions within the LDP(Japan’s ruling party) to compete with each other for funds. Oddly enough, this apparent self-centered behavior was a political necessity. Christopher Wood in The End of Japan Inc. notes; (page 34);

‘…there is a practical reason for Japanese politicians’ seeming willingness to engage in corrupt practices. That is the need to raise money. In other words Japanese politicians are corrupt because the political system breeds corruption, not because they are intrinsically evil people. Consider the following. There are two types of funding in Japan: omotegane (legal or up-front money) and uragane ((behind-the-scenes cash).

Omotegane is reported under the political funds control law but Uragane is not, though it is reckoned to be up to ten times larger. Politicians need this underground source of funding because their constituents demand it of them. Voters expect politicians to give their respects, literally, at important occasions such as funerals and weddings. And the greater the social rank of the giver the more money he is supposed to give,…’

The USA has also created a political apparatus with an insatiable appetite for money. The war to influence public opinion and the political process is fought at many levels. We have our Omotagane in the form of small contributions and matching funds by the government. But we have an even larger, parallel to Uregane: soft money, the funding of think tanks or organizations backing a particular special issue. Although the Uregane in the USA is not illegal it is ‘behind the scenes’ and highly subversive. Common Cause in its December 15, 2000 report title noted; ‘National Parties Raise Record $457 Million in Soft Money This Election Cycle Through November 27, 2000: Total Nearly Doubles Soft Money Receipts Of Previous Presidential Election Cycle,’ In its May 2, 2000 news alert ‘Ka-Ching’ Common Cause President, Scott Harshbarger said; ‘We have come a long way from the days when national parties represented their voters and acted as true grassroots organizations. The parties have become glorified mail-drops for special-interests.’ The New York Times Editorial page on August 6, 2000 ‘Soft -Money Conventions’, said; ’Soft money has been making a mockery of the post-Watergate Campaign finance laws…’

There are also subtle wars as well as subterfuge going on. Take ballot initiatives. Ballot initiatives were created by the populist movement of the late nineteenth century as a way for common people to put forth their own legislation. Unfortunately the high costs of meeting the requirement -- signature gathering, advertising and the like-- have thwarted this intent. But what is even more perverse is that ballot initiatives and other such methods intended to be empowering have been undermined by the rich and powerful. Moneyed interests force their less affluent opponents into battle, knowing they will have to spend large amounts of money just to maintain equal footing in the public’s attention. This, of course, depletes their reserves of financial ammo - and sometimes causes smaller groups to give up what might have been a worthy cause. Our folklore champions the idea of the little people who successfully square off against the conglomerates as evidence of our equal opportunity system, but actual instances in which this is possible are few and far between. It is what William Greider in Who will tell the People: The betrayal of American democracy calls democracy-for-hire; (page 39)'This is democracy and it costs a fortune. Democracy-for-hire smother the contemporary political debates and, while it does not always prevail, relatively few Americans have the resources to hire a voice for themselves.’

But the rewards can be enormous: Direct legislation to favor stockholders over workers, circumvent laws, win big government contracts, etc. Take corporate welfare, it runs into the billions if not trillions of dollars annually (22)Notes. The GAO for only one program, estimated sugar subsidies costs USA taxpayers $2 billion annually. ("Sugar Program: Supporting Sugar Prices Has increased Users’ Costs while Benefiting Producers", Letters Report 6/9/2000, GAO).

Amakudari- the Japanese term for the passage of elite bureaucrats to non-government jobs in the private sector (Chalmers Johnson). Once in their new positions the ex-bureaucrats maintain their old ties. It is the tradition of Amakudari that helps the bureaucracy wield so much power because their old colleagues within government can influence the alumnus.

In the USA the process is greased to go the other way, instead of taking influential jobs at corporations which will allow government to influence big business, they take jobs which will enhance the influence of corporations over government. After leaving the government bureaucrats and politicians become lobbyists or representatives of PAC’s and special interest. We have lost our political power by letting politics become a career in the USA!

Iron Triangle-Triad Rule- 'Those familiar with Japan are aware that the country’s power elite is a triad of conservative politicians, leading business men, and high ranking bureaucrats.’ The Japan Culture Institute in’The Bureaucracy: Japan’s Pool of Leadership’ in Politics and Economics in Contemporary Japan , Kodansha International Ltd., 1983, page 86.

Similarly, many in America feel that Big Business, Special Interests and Government (politicians and bureaucrats) rule the USA. But as in Japan one party is stronger than the others; in Japan it was the bureaucracy in the USA it is corporate America. Greider notes (page 23) Who Will Tell the People ;'...in the 1960’s, survey’s found that 28 percent of the public was convinced that "the government is pretty much run by a few big interests looking out for themselves." A generation later, this resigned view of politics was held by two thirds of the people.’

David C. Korten in When Corporations Rule the World, Kumarian Press,1995 contends that: (page 54) ‘ Corporations have emerged as the dominant governance institutions on the planet, with the largest among them reaching into virtually every country of the world and exceeding most governments in size and power.’

State Led Capitalism The title of Chalmers Johnson’s book Japan Who Governs: THE RISE OF THE DEVELOPMENTAL STATE says it all (23)Notes. 'More than any other single policy area, economic policy is at the core of Japanese politics';(page 46); so says T. J. Pempel in Policy and Politics in Japan: Creative Conservatism . He goes on to say (page 58);

'The Agenda of economic policy in Japan was the conservative agenda of big business and the central economic ministries. In ‘"Japan, Inc.": Reality or Façade?", Namiki Nobuyoshi, (Politics and Economic in Contemporary Japan) says; ‘(page 112) "Japan Inc." is usually used to referred to the close relationship which government and business developed after the Second World War in the drive for national reconstruction and economic growth. Admittedly, the phrase has its derogatory overtones. But it should not be forgotten that it was precisely this combined effort by the public and private sector which enabled Japan to catch up with, and in some areas even surpass, the advanced industrial nations of the west.’

As we have already noted there is a special brand of American capitalism under which we live, in some ways similar to Japan’s industrial policy. There is no stated goal or

We like the Japanese, with their state-led capitalism, have sacrificed all to the market. Karl Polyani in The Great Transformation , Rhinehart & Co, 1944 (page 75) notes that in the pursuit of the market system, ‘...human society had become an accessory of the economic system.’. We have turned the market and economy into what Polyani calls a ‘utopia’ and bordering on what Harvey Cox would call a ‘God’ (‘The Market as God, Living in the new dispensation’, Harpers, March 1999). Neither is far from the truth. Holding vigil over the stock market has become the new national past time for many of us. Look at the news and see how each event or policy decision is measured: not according to how it will affect humanity, but according to how will it affect the stock market.

We are living in a mutant form of the culture of America as business. It is all very reminiscent of the 1920’s - the age that preceded the ‘Great Stock Market Crash’ of 1929:

‘Never before, here or anywhere else,’ added the Wall Street Journal, ‘has a government been so completely fused with business’. From his side, Calvin Coolidge confirmed the allegiance. ‘This is a business country,’ he said,’…and it wants a business government.’ (page 61) The Crisis of the Old Order , Arthur M. Schlesinger, 1957, Houghton Mifflin Company.

Cutting Social Welfare All was sacrificed in the pursuit of state led capitalism. Because social welfare went against the tenets of capitalism it was either reduced or a path not taken in both bubbles. T’J Pempel in Policy and Politics in Japan points out the historical precedence of social welfare in Japan ;(page 132)’What is most striking in the case of Japan is the historical importance of private rather than public efforts to cope with most problems of social welfare.’ Pempel notes that Japan late start at industrialization

‘Low public expenditure for social welfare meant a comparatively low tax burden for both Japanese citizens and business. It also benefited the government’s economic pollicies by allowing a low and balanced budget, which encouraged investment and employment. Low expenditure for social welfare reduced the drain of resources away from the support of economic growth, the main government concern.’

Similarly in the USA we have seen a continual effort to reduce social welfare programs. President Clinton in his speech to the Democratic National convention (August 15, 2000) noted that welfare rolls had been cut in have during his administration.

Just think back to the financial market reaction each time some social welfare program was reduced or cut. (It improved). The irony is that in the face of such massive cutbacks in social welfare programs assisting in the pursuit of basic life and liberty for the struggling and disadvantaged of the country, we have had massive bailouts of money-loosing organizations, countries and speculators who are primarily wealthy. This tinkering with the system has not only affected the well being of the nation as a whole, but has skewed the system to such a degree that the Wall Street Journal has called the 1990’s ‘the decade of Moral Hazard.’

Democracy has been hijacked: It’s a reality worth stating again. During the height of the Japanese bubble (1988) 74% of the Japanese people thought that the Japanese system was unfair. (Woronoff, The Japanese Economic Crisis, page 196) Similarly many Americans feel as though they have no say or influence on the democratic process. This loss of helplessness and control showed up in the polls taken by the New York Times during the presidential primary season in the spring of 2000. ‘Poll Finds voters Skeptical About Role in Nominations, Most say Party leaders and donors Decide’, Adam Clymer, New York Times, May 8, 2000

' …64 percent of those surveyed said that people like themselves had "not much" to say about what government does….The dismay came through in some follow-up interviews. Jane Marawar a homemaker in Austin Texas, said,"It’s important to vote, but money seems to be running the elections process.’

In talking about the ‘Japanese Development State’, Chalmers Johnson (Who Governs Japan) tells how the state circumvented democracy and justified it by its results: (page 67)

‘Contrary to American political science theory, the power of the Japanese state has not been delegated to it by elected representatives of the people; the state has instead imposed its economic achievements on the people and won their allegiance in doing so. The American state is legitimated by its processes, whereas the Japanese state is legitimated by its achievements.’

CAN WE REMAIN AN OASIS OF PROSPERITY?

In his speeches and testimony before congress in the summer of 1998 Federal Reserve, Chairman Alan Greenspan began questioning whether the USA could remain an ‘Oasis of Prosperity’.in a world experiencing increased financial stress. Was the Federal Reserve Chairman voicing a real concern or was he justifying his bailout of Long-Term capital management? It’s been almost three years and the USA continues to be an oasis, although signs of a slowing economy began appearing in early 2001.

The bubble in Japan burst when Bank of Japan President Meino began raising interest rates. Federal Reserve Chairman Greenspan began raising interest rates in the summer of 1999. So far, the NASDAQ appears to be the only casualty. On a literal level it appears that Greenspan was able to take some of the fluff out of the market and the economy. In early January, in between Fed meetings, he aggressively cut rates (24)Notes. Most prognosticators felt that he may have been a little slow in taking this action, but still would be able to reinvigorate the economy. The raising of interest rates in the USA, however, has been a more symbolic rather than substantiate measure for the financial markets. The Japanese bubble was driven by the trade surplus and the Bank of Japan-So when the BOJ raised rates it was an important measure. The USA bubble has been to a great extent been driven by inflows of foreign capital, with the Federal Reserve acting more like tuning mechanism (25)Notes. So when the Fed began raising rates it tempered rather than deflated the market.

Whether we can continue to remain an ‘oasis of prosperity’ is the right question as well as the appropriate image. We, the United States are an oasis, surrounded by a desert--a desert we helped create. The 1993 / 1994 jawboning of the dollar/ yen exchange rate by the Clinton administration led to the dollar crisis of 1994/95 that led to massive dollar and Treasury bond purchases by the Bank of Japan. The central bank policy for a stronger dollar in 1996/1997 contributed to the Asian contagion as many emerging market countries had linked to the dollar.

‘By linking to the dollar they were de facto linking to U. S. monetary policy. So when the Fed tightened last March, many countries besides the U. S. felt the consequences…a stronger dollar has led to a contagion of competitive devaluation’s…’ (‘The Buck Must Stop Here’, Madis Senner, Barrons, October 6, 1997).

Several observers have begun questioning the ability of the United States to continue running a large current account deficit. Referring to the projected estimate that the current account deficit would measure 4.2% of the overall economy (GDP) Michael Phillips in "The Outlook" column of the Wall Street Journal (August 14, 2000) noted;

‘A high percentage that would scare the green eyeshades right off analysts in many industrialized nations.’ In Is the U. S. trade deficit sustainable? (Institute for International economics, 1999) Catherine L. Mann points out; (page 149) ‘Whenever a country’s current account deficit grows large, questions arise as to how large it can get, how long it can persist, and what forces might stabilize it or cause it to shrink. The history of financial crises from Latin America in the 1890’s to Asia in the 1990’s, and plenty of industrialized countries in between, clearly shows that too much external borrowing and / or accumulated international obligations can precipitate financial and, subsequently, economic disasters’.

Can we remain an ‘Oasis of Prosperity’? and continue a record breaking consumption binge financed with foreign money? Yes we can, or at least policy makers can continue to try to. Most certainly we are vulnerable to exogenous shocks, anything from a change in investors’ tendencies to hold dollar assets or from some freak event in nature. But unequivocally, as long as we continue to let special interests hijack democracy to suit their own needs, the game may continue; the desert can get larger and the oasis smaller.

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