Japan's Fiscal Problem Calls for a New Political Philosophy

Faculty Fellow, RIETI

The government is set to present a fiscal reform plan at the end of June 2015. In order to organize thoughts before evaluating the specifics of the fiscal reform plan, I would like to consider the significance of fiscal problems in terms of political thinking.

Problems that must be addressed by politics and those that are dealt with by economics are often different in nature. The conflicts of interest that have to be resolved by politics are typically those that can be defined as a lifeboat dilemma, which refers to the following situation.

A group of people float adrift on a sinking lifeboat. If one person leaves the lifeboat (i.e., sacrifices his/her life), the lifeboat would stop sinking and all of the others would survive. However, if no one leaves, the lifeboat would sink and all of them would die.

In more generalized terms, this situation can be described as one in which a certain group (e.g., town, company, country) is facing a crisis, and an act of self-sacrifice by a small number of individuals to voluntarily accept disadvantages will benefit the remaining majority. A situation where some members of a group must be sacrificed for the survival of the entire group is a frequent occurrence in politics and, despite this, cannot be properly addressed by economic policies.

For instance, in the case of a prisoner's dilemma which is typically dealt with by economic policies, there exists an equilibrium at which all players can gain, and therefore, it would be possible to induce optimal behavior from all of the players with the promise of economic benefits, such as introducing long-term transactions. However, it is impossible to induce people in a lifeboat dilemma situation to self-sacrifice by promising economic benefits. Being in a state where there is no compensating for losses suffered by self-sacrificing people is the very definition of a lifeboat dilemma.

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The challenge of how Japan can restore fiscal stability and sustain the social security system into the future represents a lifeboat dilemma of an enormous scale, involving multiple generations including those yet to be born.

If left unaddressed, Japan's deteriorating fiscal conditions would trigger, at some point in the future, a sharp rise in prices, inevitably causing a plunge in the market value of Japanese government bonds (JGBs), i.e., an effective default on debt. The credibility of the yen would be lost, people's assets would erode in value due to a drastic depreciation of the yen, and the inflation rate and interest rates would be highly volatile, throwing people's lives into utter chaos. In order to restore the confidence of the markets, the government would have to implement severe austerity measures and cut back drastically on the social security program. With its credibility ruined, the Japanese government would perpetually face difficulties in borrowing and its governance function would deteriorate, resulting in stagnant economic growth over a prolonged period of time.

Should this become reality, all of the future generations would continue to be penalized.

Meanwhile, if those in one generation (the current generation) bring out their self-sacrificing spirit and restore fiscal stability by accepting tax hikes and cutbacks in social security expenditures, the future of the Japanese economy and society would be stable and people's lives would continue to improve for generations to come. In other words, sacrifice made by today's generation would enable future generations to gain. If we consider that generations of Japanese people--including the current, next, and many future generations--are in the same lifeboat, the fiscal problem that we face today has the structure of a lifeboat dilemma.

A simple way to resolve a lifeboat dilemma in an ordinary political decision-making setting is to take a vote (i.e., a decision by a majority vote). Under a democratic system, while measures to protect minority rights would be implemented to the maximum extent possible through parliamentary debate, the burden resulting from resolving the dilemma ultimately would be allocated to a certain segment of the population as determined by a majority vote. Political decision-making on most matters--i.e., except for extraordinary matters--takes place with the participation of all parties concerned and is based on their prior consensus that the decision would be made by a majority vote and the outcome of the vote would be binding.

However, when it comes to the question of how to distribute burdens resulting from fiscal reconstruction, decision-making by a majority vote with the participation of all parties concerned cannot take place because of the nature of the problem. Future generations--those who would be affected by the decision to be made--cannot participate in this political decision-making because they have not yet reached adulthood or have not been born at all. This is a question posed to us in the current generation, and we have only two possible paths to choose from, i.e., voluntarily carrying out self-sacrificing reform to solve the problem or doing nothing and forcing future generations to pay our bills.

In order to decide and carry out self-sacrificing reform voluntarily, we need to have a political philosophy that places greater value on the sustainable development of society beyond our own generation than on the comfort of our own personal lives. However, individualistic liberalism, a political philosophy that exists in developed countries including Japan, cannot offer any political value that supersedes personal interests and must be protected even at the cost of comfortable lives enjoyed by the current generation.

Meanwhile, unless such a political value is shared by a large majority of people, there is no carrying out fiscal consolidation in a sufficient scale and in a timely manner. Thus, once a disruptive fiscal adjustment occurs, the country as a whole could go into a decline in the long run. What is illustrated by Japan's fiscal problem is an intrinsic defect that is present in all democratic countries.

Whether individual rights and lives should be compromised for public values that supersede those of individuals is a popular theme in political science.

Harvard University Professor Michael J. Sandel criticizes individualistic liberalism, which acknowledges the primacy of individual liberty. He insists that when making decisions for a community, civic obligations often take priority over individual liberty because individuals are encumbered selves, already claimed by duties to the community (Democracy's Discontent: America in Search of a Public Philosophy, 1996). Although his perspective is often called communitarianism, a modern version of the classical republicanism of ancient Greece and Rome is how Professor Sandel defines his ideas.

According to J. G. A. Pocock, a historian of political philosophy and a professor emeritus at Johns Hopkins University, classical republicanism was revived during the Renaissance in Europe by Niccolò Machiavelli, a Florentine philosopher (The Machiavellian Moment: Florentine Political Thought and the Atlantic Republican Tradition, 1975). Machiavelli advocated a political philosophy based on "virtù," the term he used to refer to the will of a population or leader to pass on their state to the next generation and their spirit of not hesitating to make self-sacrifice for that sake.

Pocock argues that this line of thought was transmitted to early modern England and then to revolutionary America, and he calls it civic liberalism. Professor Sandel's philosophy can be defined as being descended from this line of thought.

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Japan's fiscal problem, which presents the defect of individualistic liberalism as a real problem, could provide an important momentum to the development of new political philosophies in advanced democratic countries. If we are to ensure long-term sustainability and development as a democratic country, we need to strengthen our political philosophy by incorporating, in some form, the essence of republicanism or civic liberalism. This is what the fiscal problem points to.

A new political philosophy would inspire new ideas for institutional reform. More specifically, it would justify certain adjustments to democracy, such as establishing a new agency responsible for preparing a long-term fiscal forecast, which is assured central bank-like independence from politics and given authority to impose fiscal discipline on the parliament and government.

>> Original text in Japanese

* Translated by RIETI.

June 12, 2015 Nihon Keizai Shimbun

August 11, 2015

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