Even as Japan and the United States need deficit-funded stimulus now to stay on the recovery path, sustained large budget deficits will be a long-term problem that undermines their future growth prospects and must be addressed. But how?

Tax hikes might be one inevitable solution, given that the two countries are near the bottom of the list of advanced economies around the world in terms of tax-to-gross domestic product ratio. U.S. data meanwhile suggest that tax reduction is a much more effective tool than increases in government spending as a tool to turn the economy around.

These were among the views expressed by American experts who took part in the Feb. 19 symposium in Tokyo, organized by Keizai Koho Center under the theme “Revitalization of the Japanese economy — views from U.S. think tank researchers.” Tetsuro Sugiura, chief economist at Mizuho Research Institute, served as moderator of discussions.

Over the short term, the huge budget deficits incurred by the U.S. and Japanese governments are “appropriate,” said Michael Ettlinger, vice president for economic policy at the Center for American Progress.

“The problem is not this year or not even the next year. We should be running large deficits. We’ve needed large stimulus to get our economies growing. In fact, for our long-term deficits to come down, we need economic growth, so deficits now to promote economic growth are actually important to achieving the lower deficits that we need in the future,” he said.

It is widely believed that the large stimulus introduced by the government in response to the financial crisis “has had a positive impact” in the U.S., Ettlinger said. However, he added, he is not sure yet that the U.S. economy has changed its momentum.

“I view the U.S. economy as teetering and it could still slip back,” and this is a concern that is shared by many in Japan about its own economy, he said. “So in my view, it is not the right time to take our foot off the gas pedal. In the U.S., only about a third of the stimulus money went out in 2009 so there is still more to come in 2010, and we will have a very large budget deficit in 2010. But if anything in the U.S., I think we need more deficit-funded stimulus — not less — to ensure that we break out of the downward spiral. (And) it may be called for (in Japan) as well.”

The real problem about the fiscal situations in both the U.S. and Japan, he said, is the long-term prospect of running large budget deficits.

“Unless there is a change of course, both of our countries are in a situation where we’re going to be running deficits of pretty substantial size for a pretty long period, and these are deficits that are higher than what is widely agreed on as acceptable,” he noted.

Running high, sustained budget deficits leads to the risk of sharply higher interest rates, which would increase the debt-servicing expenses and thereby divert resources from government investments necessary to boost the economy, he said. And debt payment “simply dampens future economic growth” in the sense that “we’re borrowing from our future,” he added.

Ettlinger pointed to similarities and differences between the Japanese and U.S. situations as both countries try to tackle their long-term fiscal problems.

In addition to aging populations and rising health care costs, “we both face political barriers where raising taxes and cutting spending are very difficult,” he said. The Democratic Party of Japan-led government has said no to a hike in the consumption tax in the near future, while U.S. President Barack Obama has said there will be no tax increases on those earning less than $250,000 a year, he noted.

“Another similarity is that in both countries the public is likely to blame the deficits on wasteful government spending, even though eliminating waste — although it is an important obligation to taxpayers and politically necessary — is not enough to solve the problem,” he said.

Among key differences between the two economies is that Japan’s population is set to fall while that of the U.S. is growing; Japan has larger overall debt than the U.S. but much of the debt is owed to its own people while the U.S. relies on funds from abroad; and that Japan’s projected economic growth in the coming years is weaker than that of the U.S., he noted.

But one key common factor is that the U.S. and Japan are still rich countries and both are near the bottom of the list of advanced economies in terms of the share of tax revenue in their GDP, Ettlinger said.

Therefore, he said, the difficulty that U.S. and Japanese governments face in trying to raise taxes to address their budget deficits will be “not economic but political” in nature, and it will ultimately be a “question of political will” if they are going to do it.

The 1990s saw a turnaround from a U.S. budget deficit when Bill Clinton became president in 1993 to a surplus later in the decade following robust economic growth. Strong economic growth makes it easier for governments to resolve deficits, “but I think we need a plan that would succeed in reducing the deficits even if we don’t get extraordinary economic growth” like the one in the 1990s, Ettlinger said.

Effective policy approaches should be similar for both the U.S. and Japan even though their economies differ in important respects, said Benjamin Zycher, a senior fellow of the Pacific Research Institute. Analysis of U.S. economic data and recent studies by economists show that tax cuts will be a much more effective tool than government spending in stimulating economic growth, he said.

Of the four key components of GDP — consumption, investment, net exports and government spending — U.S. data from 2007 to 2009 indicate that ups and downs in investment account for much of the recession and the recent rebound in GDP growth, Zycher said.

While the fluctuation of personal consumption also moves closely with GDP changes, ups and downs in net U.S. exports appears to have almost no correlation with the GDP growth trend, he noted.

And the U.S. government’s non-defense spending has “effectively no effect on GDP growth” during the period, Zycher said. This may not be surprising, given that increases in government spending on some sectors have to be financed with reduced spending on others, and it is “extremely difficult” for the government to target the spending effectively on the shrinking sectors in a timely manner, given that large parts of a stimulus package are actually spent after a substantial time lag, he noted.

These data and other recent studies show that “increased government spending appears to be a very weak tool with which to increase economic growth . . . and that tax reduction is a more powerful tool. Strengthened incentives for investments may be particularly effective,” Zycher said.

And tax reduction “allows the market to allocate resources much more efficiently and quickly than government spending programs are able to do,” he added.

In the October-December period, Japan’s economy grew by an annualized 4.6 percent from the previous quarter partly due to a recovery in exports, prompting government officials to say that the fears of a double-dip recession have become smaller.

However, Marc Levinson, a senior fellow for international business at the Council on Foreign Relations, warned that Japan’s reliance on increases in net exports for GDP growth may not be sustainable as a long-term strategy because various new factors in cross-border trade, including non-macroeconomic ones, could change today’s patterns of international trade.

The global boom in international trade over the past several decades has been supported by sharp declines in freight costs and cheap oil for much of the 30 years after the oil crises of the 1970s, Levinson noted. These made it practical for manufacturers to have “very long supply chains with very timely delivery,” including the many Japanese firms that launched operations in the U.S. while relying on supplies from home, he said.

Environmental regulations in the transport sector have long been quite weak and border controls on cargo remained lax, which also contributed to the low freight cost and timely delivery, he noted.

The problem today, Levinson said, is that many of these factors “no longer continue to exist.”

He pointed to emerging signs of “diseconomies of scale” in the maritime transport sector, where shipping lines are ordering “extremely large” cargo vessels that will be more efficient at sea but will take much longer to unload at ports. Serious congestion at ports caused by the arrival of vessels carrying 7,000 to 8,000 containers will raise the costs of international cargo shipping, he said.

The age of cheap oil is now over, which would increase shipping costs over the long term that will be quickly passed on to shippers, Levinson said.

Increased environmental pressures on the carriers in all transport sectors, more stringent controls on aircraft noise and greater difficulty involved in the construction of new airport runways will all add up to higher freight costs, he noted.

And the increased security concerns — fears of terrorism, drug smuggling, illegal immigrants and so forth — are driving border authorities to inspect more cargo shipments, Levinson pointed out.

Increases in cargo transport costs will likely raise the price of imported goods relative to domestic products, Levinson said. But the more important impact would be that reliability of imports would diminish because guaranteed delivery time would become hard to achieve, requiring the importers to have larger inventories, he noted.

“Transport costs and transport reliability will become more important in manufacturers’ and retailers’ decisions about what to produce where,” he said. This may lead to some revival of manufacturing of high-value products in the U.S. and Europe because it would make more sense to produce where the goods are used given the higher cost and reduced reliability of transport — and to the relocation of the production of low-value goods closer to the the end-user markets, he noted.

“This throws into question the strategy of reliance on an export-driven economic model, which will be increasingly difficult to sustain over a long period of time,” Levinson noted. “I do not believe the volume of trade is going to decline, but I think that in the years ahead we are going to see trade expand at a much slower rate than has been the case in the past.”

The political focus in the U.S. and Japan this year will likely be on domestic issues given that both the Obama administration and Japan’s ruling coalition, led by Prime Minister Yukio Hatoyama, face crucial elections in the months ahead.

Still, Japan’s position as host to this year’s Asia-Pacific Economic Cooperation forum meetings and that of the U.S. as APEC chair next year give them good opportunities to work together on the regional and global trade agenda, said Nicholas Szechenyi, deputy director of the Office of the Japan Chair at the Center for Strategic and International Studies.

In Washington, there is an “overwhelming emphasis on the need to recover from the economic crisis, and economic stimulus is certainly the priority,” Szechenyi said. “There is also the midterm election this year, and therefore much of the rhetoric on economy that we hear is about boosting the economy and increasing government spending, and not very much on trade.”

But while trade is apparently not at the top of the list of the administration’s agenda, Obama, in his Asian tour last November, spoke of the need for the United States to be an active participant in Asia as a trading nation, and in his State of the Union address in January, Obama mentioned an initiative to double U.S. exports in five years, Szechenyi noted.

It was probably not a clearly defined initiative, “but I think it’s a signal of a shift in the approach and understanding that for the U.S. to have credibility as an economic partner in this region it is going to have to show a lot more detailed ideas and more concrete vision for the future, and I think the U.S.-Japan alliance is a key tool in that process,” Szechenyi said.