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.