In response to:

The Great Japanese Misunderstanding from the November 8, 1990 issue

To the Editors:

I appreciate James Fallows calling me “an intelligent and honorable man” [“The Great Japanese Misunderstanding,” NYR, November 8]. However, I cannot fathom why he quotes discredited nonsense about Japanese support for me and the Institute for International Economics from William Holstein’s The Japanese Power Game: What It Means For America and why he repeats erroneous critiques of the effectiveness of our policy prescriptions for dealing with United States-Japan trade problems.

How can anyone seriously suggest that “Japan” (which Fallows rightly denounces as a crude oversimplification) has significantly “advanced the weight of our ideas” since it provides only 4 percent of all our funding? Contrary to Holstein’s suggestion, we received no Japanese funding for our recent study of Foreign Direct Investment in the United States. As I wrote in the preface, that volume was partially supported by the John M. Olin Foundation and the remaining costs were covered by our unrestricted revenues, of which 1 percent came from all Japanese sources.

To obviate such criticism, I now report in all Institute publications that 15 percent of our funding comes from foreign sources including 4 percent from Japan. Holstein and Fallows could have gotten these figures from me or from our publications but presumably did not because that would have undercut their arguments.

Moreover, instead of arguing that Japan “does not respond to market forces” (Holstein) and that “the years have not been kind to Bergsten’s projections” (Fallows), why don’t they note that Japan’s trade surplus and America’s trade deficit have dropped by more than 50 percent in dollar terms and by much more in volume terms? And that virtually all observers attribute the bulk of these corrections to currency changes? So that the Institute’s recommendations, which both authors regard as influential in promoting the dramatic rise of the yen, look quite good after all—and quite supportive of American interests?

The Japanese were decidedly unhappy when I told them in 1983, and hammered home in the succeeding years, that they would have to take major steps to slash their surplus and that the yen would need to strengthen enormously—sharply cutting their competitiveness—as part of the process. At the same time, no one has advocated reduction of global trade barriers—notably including Japanese barriers—more vigorously than the Institute. There is plenty of room for serious intellectual debate on US policy toward Japan, and on the relative impact of exchange rates and trade policies in influencing the trade imbalance, but I deeply regret that those who disagree with me find it necessary to resort to innuendos about “foreign influence” instead of confronting the substantive issues.

Perhaps the best evidence that the Institute and I bear no taint is the total absence of reference to us in the sweeping indictments in Pat Choate’s Agents of Influence, the other book reviewed by Fallows. Choate had in fact erroneously accused us in an article in 1988, from which Holstein cribs liberally, and his admission of error should settle the matter.

C. Fred Bergsten
Director, Institute for International Economics
Washington, DC

James Fallows replies:

As I said in my article, I like and respect Fred Bergsten. But I do not like or respect what he seems to be trying to do with this letter.

Bergsten says that “only 4 percent” of his institute’s funding is from Japan. This is true only if he fails to count some $150,000 per year, or an additional 4 to 5 percent, in grants from the “US-Japan Foundation.” As I pointed out in my review, this foundation is a source of controversy all by itself. It was created by Ryoichi Sasakawa, a fabulously wealthy Japanese man who was jailed as a war criminal and who made much of his money as a gambling impresario. Sasakawa’s foundations generally support good and highminded causes—indeed, in Japan Sasakawa is widely assumed to be trying to donate his way to the Nobel Peace Prize. Nonetheless, some people in both Japan and the United States refuse to have anything to do with the foundations or their grants, because of Sasakawa’s reputation. I am not so squeamish. As I took pains to disclose in the review, I went to Japan on a fellowship program that the US-Japan Foundation finances. But I would never dream of pretending, as Bergsten apparently does, that because the foundation is technically based in New York and has a mainly American board and staff it should not be considered “Japanese.”

With the Sasakawa money included, then, the Japanese contribution to Bergsten’s funding is closer to 10 percent than to 4. (Holstein emphasized in his book a significant German contribution as well.) This is hardly a controlling interest, but it is more consequential that it may seem on its face. Anyone raising money for international projects must hope to collect larger shares in the future from Japanese donors, since they’re the ones with the money. Ten percent today means the hope of 20 or 30 percent tomorrow—not just for Bergsten but for anyone raising funds.


Moreover, it is important to remember the context in which the funding question arises. The book whose comments about Bergsten I quoted, The Japanese Power Game by William Holstein, said that Bergsten’s institute presented reports and recommendations about trade policy without fully disclosing the extent of its foreign funding. Considering the specific nature of that complaint, and the general controversy surrounding Sasakawa, as well as the relative magnitude of the US-Japan Foundation grant (which is as large as all his other current Japanese funding combined), I find it strange that Bergsten would fail to disclose this grant.

Bergsten wants to defend his position on currency-exchange rates, saying that his recommendations now “look quite good.” I have neither the desire nor the technical standing to settle scores about who has been right or wrong in economic forecasting. But as with the funding question, Bergsten is not being straightforward.

Through the early- and mid-1980s, Bergsten was (along with Martin Feldstein) the most prominent and influential advocate of the view that the strong dollar was the root of America’s trade problems. No one who heard his speeches in those days, as I did several times, or saw him quoted in newspaper articles, or read his writings could have missed his point: the high dollar mattered more than any other problem, and when it fell, most of the Japan-America trade imbalance would melt away. In 1985, Bergsten and William R. Cline wrote: “To achieve equilibrium in the countries’ [Japan and America’s] global current accounts, the yen would have to strengthen to a range of at least 190 to 200 yen per dollar.” At the time, the dollar was worth about 250 yen. Therefore, Bergsten and Cline were saying that if the dollar lost 20 to 25 percent of its value against the yen, Japan and the United States would reach “equilibrium” in their current accounts, which were then more than $150 billion per year out of balance.

Over the next two years, the dollar lost more than 50 percent of its value against the yen, as it fell into the 120s. It rose to the 150s in early 1990 before hitting the 120s again. Throughout this process, in which the dollar fell twice as far as Bergsten had anticipated but the payments imbalance shrank by only half as much as he foresaw, Bergsten kept insisting on the correctness of his policy. Month in and month out he said that the dollar was still the problem, and that adjustment was just around the corner.

Bergsten is now left in more or less the position of the supply-side economic theorists, who argued in 1980 that tax cuts would bring the federal budget into balance within a few years. Confronted with today’s enormous deficits, they now explain that the tax cuts weren’t deep enough, and that the Federal Reserve messed up their plans, and that the deficit would have been even larger without their policies, and so on. Still: the policy that they advocated with great self-certainty and played a very large role in shaping had almost the opposite of the advertised results. Similarly, Bergsten now argues that the dollar has not fallen far enough, and that the payments imbalance would be vastly larger without endaka (“high yen”), and that when the dollar hits 100 or even 80 yen the economies will come into equilibrium. Anyone would agree that exchange rates have a significant effect on international trade. Still: there is very little resemblance between the results we observe in 1990 and the predictions Bergsten made with such certitude over the previous half dozen years.

No one can be blamed for lack of perfect foresight, and the technical soundness of Bergsten’s views is not the issue here. The question that William Holstein addressed was, instead, one of nuance and of political context. Bergsten may be correct in saying that the Japanese resisted his high-yen recommendations in the early 1980s. But after 1985, exactly as Holstein said in his book, Bergsten’s argument was “especially useful” to the Japanese government. Virtually every speech on economics by a Japanese government official or Keidanren (big-business alliance) representative quoted Bergsten or Cline. The purpose of the quotation was to show that the strong dollar was the real cause of US-Japan economic problems, so Americans shouldn’t waste their breath talking about other issues, such as trade barriers or deep structural differences between the US and Japanese versions of capitalism. Anyone who has met Japanese economic officials in the last five years has heard Bergsten’s work referred to in this way. It is very hard for me to believe that Bergsten is not aware of the use to which his views are put in Japan. Therefore, I find it odd that he stresses the “unhappy” reaction in the early 1980s but does not mention the quite happy Japanese response of the late 1980s.


As I made clear in my review, Holstein was NOT saying (nor am I) that Bergsten altered his views to attract funding, from Japan or anywhere else. Holstein’s logic, instead, took this form: Japanese donors provide more and more support to American researchers; these donors selectively support those whose views coincide with Japanese corporate and government policy; and the result is to distort America’s internal debate.

Bergsten’s final allusion to Pat Choate’s book is peculiar and deceptive. In any other circumstance I cannot imagine that Bergsten would praise this book. But he uses his absence from its pages as proof that “I bear no taint,” and he claims that Choate has retracted previous criticism of his institute. This is not true.

In an article published in The Washington Post in 1988, Choate made points about Bergsten’s institute that were quite similar to what Holstein said in his book. Specifically, he said that Bergsten’s emphasis on the dollar was useful to the Japanese government, and that Japanese (and German) interests were enthusiastic about supporting his work. Because this issue is so important, let me reemphasize it: although both Choate and Holstein challenged the accuracy of Bergsten’s predictions, neither of them has in any way questioned the integrity of his motives or work. Choate says that he did not write about Bergsten in his book because, having discussed him in the Post article two years earlier, he considered it redundant and “piling on” to mention Bergsten again. But Choate says he has made no “admission of error” whatsoever, and that Bergsten has no basis for claiming that he has done so.

Every claim that Bergsten makes in his letter—“only 4 percent,” “decidedly unhappy,” “admission of error”—would probably look convincing to readers who did not know anything else about the stories. Every one looks disingenuous when the background is filled in. I wish I could think of a charitable explanation.

This Issue

January 17, 1991