From Mr Steven E. Connell.

Sir, In “Explain the disease, then US citizens will feel better” (November 5), Richard Koo, very influential in Japan, is unfortunately giving the US the same advice he has given to the Japanese government for the past 20 years with disastrous results.

Mr Koo argues that in a balance-sheet recession of the type the US entered in 2008, deficit spending by governments is necessary to compensate for the diversion of private sector spending to paying down excess debt incurred from the popping of a real estate bubble. So far so good. However, he fails to realise that there are two ways governments can run deficits. One is by the government itself spending the money up front and later raising tax rates to pay for it, as Mr Koo assumes. The other, however, is by lowering the tax rate first, letting the private sector decide what to spend the extra funds on.

While both cause deficits initially, Mr Koo’s solution inevitably results in less productive spending and therefore less growth, necessitating a subsequent increase in the tax rate which then impinges on growth, contrary to the intent of the spending. Japan’s economy has been declining for the past 20 years under this “spend and then raise tax rates” regime. A friend of mine who is a Japanese senator from Nagasaki notes that every time Japan’s economy declines, government “stimulus” brings another bridge to nowhere to his island-rich region. The Noda government has just approved an increase in value added tax from 5 per cent to 10 per cent to pay for such wasteful spending, an unmitigated disaster for Japan if it is enacted. Japan now suffers from the worst debt/gross domestic product ratio in the world – Greece included. After 20 years of Mr Koo’s “spend and tax” regime, the Japanese people feel much worse.

In contrast, cutting taxes up front puts money into the hands of the private sector, which leads to productive allocation of scarce resources and therefore economic growth, boosting tax revenues without an increase in the tax rate. This programme is effective when accompanied by the elimination of tax loopholes and deductions, as Mitt Romney advocated during his unsuccessful presidential campaign. The effect is to create a bigger pie for everyone rather than Mr Koo’s shrinking pie. Growth-friendly tax rate reductions were the basis of Reaganomics referred to as “supply side economics”. Mr Koo seems to suffer from amnesia, as if Ronald Reagan had never existed. Unfortunately, Barack Obama suffers from the same malady.

Steven E. Connell, Honolulu, HI, US

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