How Hiking Taxes Is Working Out for Japan (Hint: Not Great)

Stephen Moore /

Photo: Natsuki Sakai/AFLO/Newscom

Commentary By

Stephen Moore @StephenMoore

Stephen Moore, who formerly wrote on the economy and public policy for The Wall Street Journal, is chief economist at The Heritage Foundation. Read his research.

Japan is suffering another economic free fall. Following a second quarter GDP decline of an annualized 7.3 percent, this last quarter the economy in Tokyo sank again by another 1.6 percent.  The land of the rising sun is looking a lot like the land of the setting sun.  There are lessons here for U.S. policymakers if they are paying attention.
Japan’s economic plunge coincides with the disastrous blunder by Prime Minister Shinzo Abe’s government to raise the nation’s sales tax from 5 percent to 8 percent starting in April.
To offset the negative effects of the tax hike, the Japanese central bank has flooded the nation with paper money; the yen has subsequently fallen in value relative to the dollar. In Tokyo, the attitude is two wrongs make a recovery. It hasn’t worked.

Think about the grand foolishness of the Japan economic strategy. The nation has massively increased government “infrastructure” spending to try to bump up demand. This was urged on by the Keynesians here and there. But the spending only exploded net government debt as a share of GDP, which is now above 140 percent. So to lower the debt, the Abe government enacted the tax hike on consumers, which has had the predictable effect of reducing family spending. Japan can’t seem to figure out whether it wants more consumer demand or less.
It wasn’t so long ago that American intellectuals were fawning all over Japan as the planet’s new economic superpower. After three decades of post-World War II ascension, Japan’s economy peaked in the early 1990s. But then it cratered, and for the last 23 years the economy has floundered because it’s leaders fell under the Keynesian curse. Central economic control, which became known as “industrial planning,” aided by government stimulus spending led to massive mal-investment.
The collapse of Japan’s stock market tells the whole story. In December 1989, the Nikkei 225 index stood at a lofty 38,900. This year, almost a quarter-century later, the index fell to under 16,000. In 25 years Japan has experienced a nearly 3/5 liquidation of its financial wealth.
The government spending of tens of billions of dollars into public works projects — “investments,” as President Obama calls them–caused the Japanese debt burden to catapult from 19 percent of GDP, among the lowest in the industrialized world, to over 142 percent, among the highest.
Meanwhile Japan keeps printing money, as if it can devalue its way out of the crisis.  From the late 1980s through 2000, the central bank’s balance sheet more than doubled — a precursor to the “quantitative easing” carried out by the U.S. Federal Reserve. And since 2000, the balance sheet has doubled once again.
But where is the promised recovery?
The expected Keynesian “multiplier effect” from spending and a flood of yen into the market never arrived.
Housing starts in Japan are still lower than the level nearly 25 years ago. Unemployment is still low by international standards, but wages have been flat.
It’s all a tragic story of economic playmaking that has gone all wrong.  But don’t tell that to Paul Krugman of the New York Times, who predicted Japan “may end up showing the rest of us the way out” of stagnation.
Joseph Stiglitz, a fellow Nobel laureate of the Keynesian variety, advised American politicians to use the same strategy: “What we really need in the U.S. is expansionary policies that Abenomics is bringing into Japan.”
Uh huh. That’s the ticket.
In reality Japan needs to cut taxes, cut debt, cut spending. Oh, and the Japanese need to start having more children to reverse the demographic slide.  If anything good can come out of this calamity it is that other nations learn the lesson that Keynesianism is a fraud.  So why does Washington keep trying it?