Wednesday, November 3, 2010
History doesn’t make mistakes; people do by not remembering the past.
In the Saturday, October 30, 2010 edition of the New York Times there was an article titled, “US Hears Echo of Japan’s Woes,” by Martin Fackler and Steve Lohr. The subtitle for the article was “The Great Deflation, Studying Past Blunders." The initial focus in the article was Hiroshi Kato who now is the President of Kaetsu University in Tokyo. In 1997 he was head of the government advisory committee that blundered in deciding that his country's economy had recovered enough that it could withstand an increase in taxes and continue to grow. He and his committee recommended an increase in the national consumption tax from 3% to 5%. This hike in taxes lead to an unprecedented period of no growth and deflation that still is affecting Japan today, thirteen years later.
In the article Mr. Kato says, “Our sins are large.” He goes on to say, “I hope the rest of the world can learn from this mistake.” Many times over the last few years I have been telling my clients and readers that I felt that the recovery in the United States when it came would look like the recovery in Japan. The Japanese central bank has had interest rates close to zero for almost 10 years. We have seen interest rates near zero for 2 years in the United States what if we have 8 more years at near zero interest rates and an under performing economy, with very high unemployment?
I don’t know what will happen in the lame duck session of Congress, but I hope they take seriously the words of the man who is credited with leading the biggest economic blunder in Japanese history about raising taxes. The mid-term election is only part of the history making process that our leaders will be facing over the next 6 to 12 months. The lines have been drawn over more government, more debt and higher taxes vs. the concept of smaller government, lower taxes and debt reduction.
The concern I have at both the federal and state levels is how you say to people we will have to cut your health care, your retirement benefits and reduce services in order to bring spending under control. The private sector has had to make these same decisions which affected millions of people. Will our government leaders have the courage to truly think about our children and grand children?