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Stagnant for Decades, Japan Needs Supply-Side Tax Cuts

July 7, 2014 in Economics

By Alan Reynolds


Alan Reynolds

The Japanese economy grew by 4.7% a year from 1983 to 1991, but by less than 1% ever since.

Despite all the media buzz about Prime Minister Shinzo Abe’s effort to boost the economy, the first two arrows of Abenomics missed their target.

Some observers appeared deceived by the fact that consumers rushed to stockpile goods before April, when the consumption tax was increased.

That created an illusory spike in first-quarter GDP, and in inflation, that some mistook as progress. Yet household spending collapsed once the consumption tax went up — by 4.6% in April and by 8% in May.

Revenues can’t grow unless the economy does, and the economy can’t grow with the current tax system.”

In January 2013, the first arrow of Abenomics consisted of spending an extra $110 billion, pushing government spending above 43% of GDP — up from 35.8% in 2007. The budget deficit rose to 9.3% of GDP, but deficits were already well above 8% from 2009 to 2012.

An endless series of failed “fiscal stimulus” schemes have nearly quadrupled the taxpayers’ national debt from 64% of GDP in 1991 to 240% today.

If gargantuan budget deficits stimulated economic growth, then Japan, Greece, Egypt and Venezuela would now be the fastest-growing economies in the world.

The second arrow, launched in April 2013, consisted of quantitative easing — monetizing more government IOUs and stuffing the banks with excess reserves.

One ironic effect was to raise the yield on 10-year Treasury bonds from 0.5% in March 2013 to 0.9% in May.

Quantitative easing might have contributed to a greater devaluation of the yen, but most of the yen’s tumble had already happened since October 2011.

The weaker yen may have helped raise inflation (and thus lower real wages), but it also had the very harmful effect of inflating the cost of production for Japanese industry — notably, the cost of oil, metals and other imported raw materials priced in dollars.

The third arrow is really a bunch of darts — 249 regulatory reforms, some potentially useful yet scarcely decisive. An April report from the Organization for Economic Cooperation and Development makes the “Third Arrow for a Resilient Economy” sound promising, even though “the tax and social security systems … create work disincentives for secondary earners.”

The OECD’s forecast of GDP growth “around 1.25%” through 2015 seems a weak endorsement, depending as it does on stronger foreign growth to “support the (modest) expansion.”

Small ideas …read more

Source: OP-EDS

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