Out of Control Policy Blog

It's Gonna be Japan All Over Again

Matt Yglesias suggests that Obama is going to have to tax the middle class to pay for all his spending:

"The flaw in the budget is that the taxes it proposes are too low. Obama would stabilize revenue at about 18.8 percent of gross domestic product, somewhat lower than it was in the final years of Bill Clinton's presidency. That was enough revenue to fund the programs that existed in 1999, but it's not enough to implement a transformative domestic agenda that goes beyond our ambitions of 10 years ago."

Of course the administration isn't going to accept this or pull a H.W. until at least the 2011 budget cycle or a second term politically. But eventually the administration is going to realize that the only two options for cutting back on the deficit and debt problem will be to cut services (trim spending) or raise taxes. Guess which a progressive administration and Congress are more likely to do.

The unfortunate thing is that, within two years the economy will probably be back on the road to recovery and will start to look stable (thus taxable). And when taxes are increased, whatever recovery is in process will get crushed. And that's pretty much the story with the Japanese Lost Decade. By 1995 their asset bubble created recession was looking like it might be on an upswing, especially due to a 1994 tax cut. So to cover the massive public debt created by stimulus projects and zombie business bailouts, the government increased individual taxes by the equivalent of $70 billion. The economy nose dived. Two years later, with a hint of recession in the air. The consumption tax was increased from 3 percent to 5 percent, which slowed the economy again.

The result has been debt twice the GDP in Japan. The Lost Decade also suffered from high (in relative terms) unemployment. And we're headed in the same direction. Now is the time to slow the train down, cause brakes at the last minute aren't gonna work.

Anthony Randazzo is Director of Economic Research


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