Thursday, November 01, 2012

On Dr Boskin's View on Debt and Deficit

Failing to rapidly begin bending the long-run debt-GDP curve down risks a growth
disaster, whose severity could be much worse even than the recent deep recession and
tragically anemic recovery. 

Left unchecked, it eventually risks a lost generation of growth, a long-run growth depression.

Boskin's recent report is quite to the point. It seems that large deficit and debt are closely related to lower economic growth rate.

See the Japanese economy: Sony, Sharp, Toshiba and Panasonic are all representative Japanese manufacturing giants and it has recently been reported that they all have a large deficit.

Hearing the news, I am wondering how the Japanese government's large deficit and debt caused the loss of these companies. Of course, yen appreciating is the major culprit and it may be one of the results of the deficit and debt.

I think that the yen appreciation is directly caused by the money supply increased by FRB(QE1&2) in the US. Can we think that it is also caused by the large deficit and debt?

 The prospect and then reality of higher tax rates, plus increased uncertainty about future fiscal policy, slows growth..., which might sharply raise interest rates.

Theoretically, higher interest rate could make the currency appreciate more. In this point the recent yen appreciation may imply the tax increase and spending decrease expected in the near future. Tax hike and spending cut should make the people spend less and less and save more and more. They should think that they should prepare for the tax increase and the future burden. It may be one of the reasons the Japanese economy has been stagnant for almost two decades.

Higher debt ratios eventually crowd out investment, as holdings of government debt replace capital in private portfolios.

I don't know if Dr Boskin implies, but reading his report I can't help wondering if the Japanese government knows what to do first to make the economy up. I might have heard of such a warning many times from many economists, but, as far as I can see, the Japanese government does nothing to do with the large deficit and debt.

Boskin's report:

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