Domestic adjustment to international shocks in Japan and the United States

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.