Japan Raising their Consumption Tax may not have Caused their 1997-98 Economic Slump but it sure didn’t Help

Posted by PITHOCRATES - November 20th, 2011

Week in Review

Poor Japan.  Always used as the example of what not to do (see Two things to remember about Japan posted 11/14/2011 on The Economist).

Between 1994 and 2008 American GDP grew 3% a year while Japan’s grew 1.1%… Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth.

This means that the Japanese population was aging more than the American population.  More people growing older and retiring.  Pulling out of the workforce.  And maintained by the taxes paid by the decreasing number of those still working.  Similar to the projections in the U.S. about Social Security going bankrupt for the same reasons.  Only Japan appears to be further down that road than America.  Which means things will only get worse in America.  If we keep doing what the Japanese are doing.

In April, 1997, the government raised Japan’s consumption tax. That is now routinely cited as a cautionary tale against premature fiscal tightening since it was followed by a steep recession.  But a closer examination suggests the tax increase alone cannot explain the length and depth of the 1997-98 slump… In July, Thailand devalued, touching off the Asian crisis, a major negative for Japanese exports. Then, in November, a series of banks and investment banks collapsed: Sanyo Securities, Hokkaido Takushoku Bank, Yamaichi Securities and Tokuyo City Bank.

This is what happens when you play by Keynesian economics.  First of all you’re in a tax and spend mentality.  And this tax and spend mentality is what destroys economies.

Raising taxes is the worst way to reduce your deficits.  Because your tax policy didn’t cause your deficit.  Your spending did.  If you want real fiscal tightening decrease your SPENDING.  Do that and you’ll see real deficit reduction.

As far as currency manipulation?  Well, if you want to play by Keynesian economics this is what’s going to happen.  For the Keynesian way to work requires the honor system.  To have responsible fiscal policy.  And not to cheat with monetary policy when you don’t.

If you want to prevent currency manipulation then make it harder to manipulate your currency.  Bring back the gold standard.  If you don’t want to do that than just quit bitching about currency manipulators.  Because this isn’t a perfect world.  And cheaters are going to cheat because the game rules make it easy to cheat.

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