How To Create Jobs and Income

10/21/07 revised

The world economy has been in crisis and here in Japan some policymakers and economic policy nerds have some ideas of how to boost up the weak demand of the economy.

In my opinion (and I think many people interested in economic issues will agree with it), there're generally two kinds of the problems the economy has: the structural one and short-run business-cyclical one.

As a structural problem, the older people get, the more money they need to make a living. Thus the government should pay them as a medical insurance and national pension plan, which consequently puts the budget into deficit and thus a long-term debt. So we need much more tax revenue as resources to pay them.

On the other hand, and as a short-run problem, many young people now have difficulties in finding a good job in such a weakened economy and many (how many? ...good question, but it doesn't matter at present) of them should put up with low-paid and insecure jobs.

The Prime Minister, Kan, and his economic team seem to want to solve the above two kinds of them at the same time: raise the tax to create jobs and income. It sounds weird in a traditional economic thinking, but they are so serious that they think they can. The government raises the tax and gets the revenue, which it can use to employ the unemployed and to boost up the income and consumption in a whole economy. Now the Kan administration can solve the two problems: it can get more tax revenue to employ the unemployed (it can solve the short-run problem), and thus it can get more and more tax revenue to finance the budget deficit and to shrink the long-term debt because more people can earn income and pay the tax on it in a whole economy(it can solve the structural problem).

Yes of course, there's always a lot of jobs that need young people in the economy from the viewpoint of a whole society, but I mean these jobs may not necessarily keep them on and what's more, we are more likely to have ability-oriented or region-oriented gap: some people can complete the work they are offered, but others can't. Or, in some cities there're many jobs to take but in other cities not many. Always there're jobs that need us as long as we live on, but some of them may not make them eat enough food to live on. (Why are there some job ads that we can always see in the newspaper?)

Although the economic policy the Kan Administration sounds logically coherent, unfortunately I am not sure how successful the solution Mr. Kan proposed is in solving the two problems, and I am wondering what happens to the economy if the government tries to do it.