Austerity with Growth

Monday, June 25th, 2012

Europe’s leaders say they want austerity with growth, Nathan Lewis notes:

Governments find that they bounce back and forth between these “austerity” and “stimulus” strategies, discovering that they are both unsuccessful.

What tends to happen is that “stimulus” means more government spending. Soon, people discover that this “stimulus” spending tends to be directed to abject waste and crony capitalists, and the government’s debt burden explodes. Thus, the political system careens back toward “austerity.”

“Austerity” usually means less spending and higher taxes. The higher taxes are implemented, but it is soon discovered that nobody wants to reduce spending, especially when the economy is crumbling due to the higher taxes. What small reductions in spending there are tend to be directed toward genuinely beneficial services, while the waste, graft and crony capitalist payoffs continue unabated. The sagging economy leads to shortfalls in tax revenues, and the deficit may even expand.

The public soon complains that important services are being cut, while the excessive bureaucrat headcount and absurd benefits continue unchanged.  And the crony capitalists – today the banking and defense industries in particular – still receive a river of unearned largesse. Taxes, already too high to begin with, head higher – as if the problem was insufficient taxation! The economy crumbles, and the public begins to complain. The government immediately spins this into a story: “see, we can’t reduce spending one little bit!” And we lunge back into a cycle of “stimulus.”

The end result is: higher spending (from “stimulus”), and higher taxes (from “austerity”). This eventually leads to a moribund economy and sovereign default, as we have seen so clearly.

Lewis recommends lower taxes and less spending:

There’s nothing new about this strategy. It’s the same as Ronald Reagan and Margaret Thatcher tried to implement (with varying degrees of success) in the 1980s.

It’s the same strategy the Japanese leaders used soon after the Meiji Restoration in 1868. A tax code containing 1500 taxes was discarded and replaced with a minimalist system that derived almost all revenue from a simple property tax. Most of the remaining revenue was raised by a tax on alcoholic beverages.

The new Japanese leaders then eliminated their unneeded government bureaucrats in one mass purge.

The Japanese leaders also introduced a new, uniform national currency, the yen, which was linked to gold and originally worth the same as the U.S. dollar (1/20.67 of an ounce of gold.)

The result? The first great era of industrial expansion in Japan. Even today, almost 150 years later, Japan remains the only ethnically non-European country to be fully and completely considered a “developed economy.”


  1. L. C. Rees says:

    The first foreign celebrity to visit Japan gave entirely different advice based on how the United States built its economy. The Meiji Emperor and his ministers took copious notes and referred to them frequently over the next thirty years:

    An expression of gratification at the treaty between Japan and the United States, which gave Japan the right to manage her own commerce, led to a conversation about foreign policy in Asia. “Nothing,” said the General, “has been of more interest to me than the study of the growth of European and foreign influence in Asia. When I was in India I saw what England had done with that empire. I think the British rule is for the advantage of the Indian people. I do not see what could take the place of British power but anarchy. There were some things to regret, perhaps, but a great deal to admire in the manner in which India was governed. But since I left India I have seen things that made my blood boil, in the way the European powers attempt to degrade the Asiatic nations.

    “I would not believe such a policy possible. It seems to have no other aim than the extinction of the independence of the Asiatic nations. On that subject I feel strongly, and in all that I have written to friends at home I have spoken strongly. I feel so about Japan and China. It seems incredible that rights which at home we regard as essential to our independence and to our national existence, which no European nation, no matter how small, would surrender, are denied to China and Japan.

    “Among these rights there is none so important as the right to control commerce. A nation’s life may often depend upon her commerce, and she is entitled to all the profit that can come out of it. Japan especially seems to me in a position where the control of her commerce would enable her statesmen to relieve the people of one great burden — the land-tax.

    “The effect of so great a tax is to impoverish the people and limit agriculture. When the farmer must give a half of his crop for taxes he is not apt to raise more than will keep him alive. If the land-tax could be lessened, I have no doubt that agriculture would increase in Japan, and the increase would make the people richer, make them buy and consume more, and thus in the end benefit commerce as well. It seems to urge that if the commerce of Japan were made to yield its proportion of the revenue, as the commerce of England and France and the United States, this tax could be lessened. I am glad the American government made the treaty. I hope other powers will assent to it. But whether or not, I think I know the American people well enough to say that they have, without distinction of party, the warmest wishes for the independence of Japan, We have great interests in the Pacific, but we have none that are inconsistent with the independence of these nations.”

    Another subject which arose in the course of the conversation was national indebtedness. General Grant said that there was nothing which Japan should avoid more strenuously than incurring debts to European nations. So long as the government borrowed from its own people it was well. But loans from foreign powers were always attended with danger and humiliation. Japan could not go into a European money market and make a loan that would be of an advantage to her. The experience of Egypt was a lesson. Egypt was allowed to borrow right and left, to incur an enormous debt. The result is that Egypt has been made a dependency of her creditors. Turkey owed much of her trouble to the same cause. A country like Japan has all the money she wants for her own affairs, and any attempt to bring her into indebtedness to foreign powers would only be to lead her into the abyss into which Egypt has fallen.

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