Economics and the AP

The backdrop is this: last spring, Japan enacted a tax hike in an effort to start covering its public debt and bring that under control for the benefit of the Japanese economy and the Japanese citizen. The country promptly fell into recession as even more money was taken out of the citizens’ hands, removed from the private sector of the economy. As a result of this, Prime Minister “Shinzo Abe called a snap election for December and put off a sales tax hike planned for next year until 2017.”

Here’s the AP’s lack of understanding of basic economics, as demonstrated on the other side of the link above.

Japan needs more tax hikes to get its swollen government debt under control, but the April tax increase, to 8% from 5%, crushed consumer and business spending.

Their own statement ignores both the nature of debt and reason the current Japanese national debt is so far out of hand (an error the present American administration has been making for these last six years). Debt is created by borrowing, which is the result of spending more than income. Certainly one way to address that is by increasing income: in (the Japanese) government’s case, by raising taxes. That well, though, can only be gone to so much, as the AP illustrates without understanding. Raising taxes takes money away from the employers and employees—the folks who power any economy by buying stuff and so creating demand for producers of stuff, who produce more stuff, and so hire more folks, and so…. After a point, too much money is taken out of the economy through taxes, and the thing stalls—as Japan’s economy has just done, from last spring’s tax bump.

The other way to address national debt, though, is to stop borrowing by stopping spending so much. This is the step the AP has demonstrated, via that quote above, that it does not understand.

If Japan wants to get its government under control, if Abe and his Liberal Democrats want to break Japan out of its new recession and its decades-long stagnation, they need to reduce spending below current revenues, not attempt to raise revenues above current spending. This is necessary for two reasons. One is that the latter is open-ended: there is no incentive to cap spending; spending always will rise, necessitating ever increasing taxes.

The other reason is one I keep harping on. Taking money out of the private sector, out of the hands of the drivers of economies, stunts the economy. Taking money out of the private sector and using government to spend it creates a vicious circle: it crowds out the private economy and, keeping the money out of the private economy, government spending shrinks the private economy even further.

And this claim by the AP:

Eventually, Japan must boost taxes to cover rising costs for health and elder care in this aging society.

No. Japan must reduce taxes and reduce spending even further, thereby letting the resulting robust and growing economy generate the money to cover those costs.

One last bit of understanding lack, this time by Abe, but a thing about which the AP writes approvingly is this:

Abe reportedly plans to announce tens of billions of dollars in new stimulus….

This is just more spending and borrowing, though. Look for it to fail as completely as have the repeated spendulus episodes our own administration has inflicted on us these last six years.

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