The following is an excerpt from the author’s new book.
The Nordic economies, the United States, and Japan have been trying to deal with the issues related to inequality and growth (particularly, globalization and innovation) and the choice of the functions of the government they have made. They have showed different preferences in making decisions in this respect.
Facing the pressure of rising inequality, Nordic economies have given priority to resisting wider inequality and maintaining an egalitarian society. On the other hand, the United States is relatively tolerant of wider inequality, and Japan is placed in the middle.
In terms of promoting growth by globalization and innovation, Nordic economies and the United States have been aggressive. In comparison, Japan has been slow and limited in achievement in both respects.
Finally, with respect to the functions of the government, the US has limited its functions and relied more on market mechanisms. In contrast, the Nordic economies extended the functions of the government to deal with the issues that emerged.
The functions of the government in Japan are somewhat in between the two.
Achieving an egalitarian society by suppressing inequality, realizing high growth by promoting globalization and innovation and allowing market mechanisms to work by limiting the functions of the government – all three are attractive objectives for a society.
If it were possible, the government should strive to achieve all three. However, none of the economies we have been looking at has achieved all three. The best that each of them has managed to do is to achieve two of them and give up the remaining one.
The above observation leads us to realize that it is impossible to achieve all three important policy objectives at the same time. It may be desirable to achieve all three policy objectives, if possible, but the reality is that an economy can achieve, at best, only two of them and that the remaining one has to be surrendered.
We will name this the “growth-equity-small government impossible triangle” that exists between growth (promoting globalization and innovation), equity (realizing an egalitarian society) and small government (allowing only minimum functions of the government).
The idea of the impossible triangle is already familiar in economics. In international finance, there is the “impossible trinity” between free international capital mobility, stable exchange rate and independent monetary policy.
In political economy, Dani Rodrik has pointed out the existence of an “inescapable trilemma” between hyper globalization, national sovereignty and democratic policies.
The impossible triangle presented here has been inspired by these precedents but is hoped to offer additional insights into understanding the situation that economies facing the risk of wider inequality are in.
From the point of view of the “impossible triangle,” the United States chose to achieve globalization/innovation and small government. As a result, the United States is able to have a dynamic and flexible economy with a low tax burden so that it can enjoy a relatively high growth compared with other developed economies. Inequality is rising fast, however, and that has implications on the political scene.
The Nordic economies chose to achieve globalization/innovation and to maintain egalitarian societies. As a result, the Nordic economies are maintaining societies that witness only a limited widening of inequality (even before redistribution) while enjoying relatively high growth.
The cost of this choice is to have a large government (the “welfare state”) with the government commanding a large share of the economy’s resources and intervening in the labor market in a significant way.
In the case of Japan, it chose to maintain an egalitarian society while retaining a small government. As a result, inequality has not widened as much as in the United States and the functions of the government have not expanded as much as in the Nordic economies.
However, the two objectives were achieved by limiting globalization and innovation and containing upward pressure on inequality that results from the two. The cost of this choice has been the low growth that the Japanese economy had to endure.
The impossible triangle provides a framework that clearly shows the choices faced by the governments. It should be useful in understanding the current situation that is faced by the economies. It should also be useful in thinking about the future options available to economies when they have to make changes to the policies that have been pursued.
Jun Saito is a senior research fellow at the Japan Center for Economic Research. He studied economics at the University of Tokyo and obtained an MPhil in economics from Oxford. He was a government economist at the Economic Planning Agency and the Cabinet Office, where he served as the director-general of the Economic Research Bureau from 2007-12. During that time, he also worked as an economist at the International Monetary Fund and at the Japan Center for Economic Research.
This article is excerpted from Chapter Seven of Japan and the Growth-Equity-Small Government Impossible Triangle by Jun Saito, copyright 2024 by Routledge. It is reproduced by permission of Taylor and Francis Group.
