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!

Saturday, February 05, 2011

On Growth Strategies

Takeo Hoshi of UC San Diego and Anil Kashyap of the University of Chicago give some remedies for the stagnating Japanese economy:

They say what cause the stagnation are (1) the aging of the workforce, (2) the natural limits to export-led growth, (3) the tolerance of a dysfunctional banking system that supports 'zombie firms', (4) bad fiscal and monetary policy.

They say the policies are needed to improve growth and to raise productivity.

They recommend the following policies:
(1) accepting high-skilled foreign workers to increase the labor force,
(2) promoting more research collaboration between universities, companies and government to help technological progress
(3) enhancing free trade areas to help the industries raise productivity
(4) eliminating the regulatory separation of kindergartens and nursery schools to improve child care services and to encourage more talented people.

These suggestions are very interesting, but these have been already accepted and tried(not enough now, but gradually) by some policymakers. I think these might work if more people vote for them and believe these will help the Japanese economy revive.
The resource: 26/01/2011, WSJ