Monday, February 07, 2011

Rebuild the Economy

Japan is in a government-financial problem: the government tax revenue is less than the expenditure and issues a lot of bonds to meet the deficit. Japan is in a serious debt. How to solve it?

Just only three ways to have in mind:
(1) raise the tax
(2) cut the spending
(3) boost the economy as a whole

Should try all of these? Should try two of the above? Should try one of the three? Say, if you boost up the economy and raise the tax at the same time, you should spend less and the whole economy goes bad and the tax revenue decreases. So should the economy do if you cut the spending and boost the economy. We seem to have such a trilemma.

Regarding this old and new problem, Alberto Alesina of Harvard University and Roberto Perotti of IGIER might have the hint:

fiscal adjustments

(1) which rely primarily on spending cuts and cuts in government wage bill have a better chance of being successful and expansionary.

(2) which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary.

The above research is empirically derived not theoretically, but (which I think Kan's advisors know) Prime Minister Kan has to know this because he tries the latter to increase the consumption tax and to cut the public spending. Pls don't miss the coming social experiment!

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