Lessons From Japan

All this talk about inflation and the likes, the topic of my last two blogs, reminds me of a situation in Japan in the early '90s. I was not in Japan at the time of course, but have read about it since, and the parallels in nonsense are worthy of note.

In 1993, after experiencing high growth rates for over a decade, the Japanese were less than impressed when their GDP increased by only 0.4%. The next year proved dismally better, growth increasing to only 1.1%. On the assumption that tax cuts would result in a massive increase in spending - adding to inflationary pressures but also stimulating demand for Japanese goods and services - the Japanese government substancially reduced its tax rates.

The problem however, is that the whole idea that tax cuts are inflationary or dis-proportionately increase spending is absolute nonsense. The reduction in taxes in fact saw a sharp increase in savings, dis-proportionate to the increase in spending.By 1999, after a state spending binge to get themselves out of the poo, Japan was facing not inflation but deflation (The woes of deflation I will not go into here, but as a problem it can potentially be far worse than inflation).

The point is, that the whole dominant Keynesian idea of inflation on which the Labour government has based its policy is wrong. Milton Friedman realised this some time ago, but economists and politicians have been a little slow to catch on. As a case in point Japan shows that, far from the beliefs of Dr. Cullen, decreases in taxation are not at all inflationary. Considerably less so if the money taken in by taxation is spent ineffectively by central government - as we can almost guarantee it will be.

Don't Buy Inflation Bollocks

With the reserve bank raising interest rates again yesterday to a level now of 8.25%, it is simply amazing that some people seem to be buying into Dr. Cullen's argument that tax cuts are inflationary. After eight years of Labour government, seeing minimal wage growth and little improvement in our economic prospects, alongside continued growth in state expenditure, how can we expect that the current high tax/high central expenditure road will fix the problems of inflation and the dollar.

On the contrary to our beloved finance minister's belief in the inflationary qualities of tax cuts, high taxation and government expenditure are by far the biggest pressures on inflation. This is for several key reasons:

1. We now have 190 000 civil servants in a labour force of around 2 million, earning an average of $28 an hour. These public sector workers are largely unproductive economically - driving down the productivity of our labour force while putting pressure on a tight labour market - a key ingredient for major inflation.

2. With middle income earners shouldering a tax burden which can only be considered irresponsible and inconsiderate on the part of the current policy makers, its never been harder to save. With morgages also reaching new heights, it is entirely safe to assume that tax relief on middle income earners would see a sharp increase in both savings and debt repayment, dampening the over-heated debt market and giving much needed relief to the exchange rate.

3. The rapid expansion of the welfare state over the past eight years has also driven inflation and our exchange rates over the edge. Lower and middle income earners relishing in government payouts have pushed consumer spending and imports through the roof, driving inflation and our current accounts deficit.

4. A heavy tax burden on high income earners, that can be matched off against mortage repayments, has also made investing in property increasingly attractrive. The increased demand, combined with a general upward trend and heavy regulation preventing the construction of new homes, has pushed housing prices skyward. The result of the housing boom has been an increased reliance on foreign investment capital, flooding the economy with cash and again forcing inflation and the dollars value sky high.

The only viable long term solutions to New Zealand's inflation and currency problems are: a steady decrese in middle and high incomes tax, seeing savings increase, debt decrease, a decreased reliance on foreign investment, and a dampening of the propery market; a relief of labour market pressures by steadily reducing the size of the public service; and a decreased regulatory burden allowing for increased productivity and real wage growth.

This being my first blog on the new sight, and readers of my old blog expecting something a little right of centre, I thought I'd start out - in the spirit of fairness - by conceding a topic to the left. The problem was of course finding a workable left-wing argument. It wasn't easy, but after reading about Fox New's latest coverage of Michael Moore's new documentary 'Sicko', I knew I'd hit the jackpot.

I might start by assuring you all that - despite the best of intentions - Michael Moore has the brain capacity of a 14 year old suffering from chronic alcoholism. However, Fox New's response to his call for a fully funded public health system in the US certainly gives him a run for his money. Fox's Jerry Bowyer has responded to Moore by identifying public health as - you guessed it - a terrorism risk. Yes, don't re-read that sentence, you got it right the first time. A terrorism risk.

As evidence, well, Bowyer didn't seem to have much. All I can ask is for you to please not consider him - or the Republican Party for that matter - as representative of the right.

This one I dedicate to all you trendy lefties out their about to submit yourself to two hours of contempuous dribble when you watch Sicko. But don't let it go to your head - watching Michael Moore causes cancer.