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Kan government struggles to raise reconstruction funds

by Philip Brasor

John Maynard Keynes (1883-1946), the British economist who advocated government intervention to regulate financial health, has lately been cited in the Japanese press in reference to the current administration’s plan to raise the consumption tax (CT). When he held the post of finance minister for five months right before becoming prime minister in June of last year, Naoto Kan famously remarked that he didn’t understand Keynes, who believed in the multiplying effect of stimulus: If you inject money into the economy, either through subsidies or tax cuts, people will spend that money and the economy will expand in various ways.

Before the March 11 earthquake and tsunami, the CT argument was centered on public welfare — more exactly, how to take care of Japan’s rapidly aging society. Now the argument is doubly urgent, since funds are desperately needed for reconstruction. Kan has already proposed issuing new bonds and raising the consumption tax from 5 percent to 8 percent for three years. The bond proposal has received mixed reactions since it would increase Japanese debt, which is already the highest in the world, thus further undermining international confidence in Japan. But the main discussion in the media is about taxes. Would an increase do more harm than good?

On a recent edition of the TV Asahi talk show “Morning Bird,” several economists discussed the wisdom of a hypothetical ¥10 trillion tax cut. Based on the Keynesian model, such a reduction could be expected to grow the economy by ¥1.2 trillion, which would be great. However, a tax cut means the government takes in less money and the debt would also grow. Moreover, the Japanese public has been skittish about spending, especially when the general psychological mood tends toward uncertainty about the future, a situation exacerbated by the disaster. There’s no guarantee that people wouldn’t just take the tax cut and stash it away.

Consequently, many economists say a tax increase is the only answer. Surveys indicate that the public was accepting of a consumption tax boost immediately following the disaster, but has since cooled to the idea. What everybody insists on, however, is that if there is to be a tax it should somehow be “fair.”

The CT is supposed to be the fairest, since everyone pays an equal percentage across the entire range of incomes, but the main problem is that traditionally an increase in the CT leads to a check on consumption, and Japan’s consumption is sluggish enough as it is, what with the lingering recession and further disincentives to spend such as the jishuku (self-restraint) trend that prevailed in the aftermath of the disaster. Kan’s three-year period may make the matter even worse. Though some commentators believe that the nonpermanent condition of the proposal is nothing more than a Trojan Horse to sneak in a series of permanent CT increases, even if consumers believe it won’t they may put off large-scale purchases for the next three years.

Some economists prefer a tax on savings. The guests on the TV Asahi show talked about a one-time 1-percent levy on certain bank accounts. It’s estimated that the money socked away in such accounts amounts to ¥700 trillion, which would mean the government could collect ¥7 trillion in one fell swoop and have an instant fund with which to implement reconstruction. It would take much longer to collect that much money through a consumption tax.

Another advantage of a savings tax is that it is less burdensome on lower-income families, who usually don’t have much in the way of savings. It’s also easier to carry out: Just get the banks to hand over the money rather than trusting merchants and other businesses to collect consumption tax, a notoriously fallible system. Richer people might opt to spend more of their savings, which is OK, or move it into securities, which is even more OK since it would boost stock prices. The biggest danger is people shipping their money overseas or simply taking it out of the bank and sticking it in their mattresses — or tansu (wardrobes), as the Japanese idiom has it.

Nevertheless, the savings tax is still a tax, which means it could potentially suppress economic activity. Moreover, as a lesser-of-two-evils construct it lulls the public into thinking that taxes are the only solution to the problem, but there are other sources of money available.

One is maizokin, the fabled “hidden money” that government ministries and agencies keep on hand for their own purposes. The small Your Party (Minna no To) has been wanting to tap this treasure chest for years, and the party’s secretary-general, Kenji Eda, told TV Asahi that reconstruction could at least be partially subsidized by the ¥6.5 trillion currently sitting unused in the unemployment insurance savings account. For whatever reason, the labor ministry habitually collects much more for unemployment benefits than they give out. The remainder they invest in public works projects that have no other purpose than to provide something to do for their own bureaucrats and related agencies.

Eda implied that the Democratic Party of Japan could scrape together up to ¥15 trillion from various maizokin sources, but that would require a considerable measure of political will since the bureaucracy isn’t going to relinquish the money without a fight. At bottom, political will is what the debate is all about. The last time Kan talked about raising the CT his party lost big in a general election, not so much because he suggested an increase, but rather because he changed his mind. The same lack of resolve characterizes the discussion about reconstruction. The ruling DPJ talks about securing money before they even know how much they’ll need and what they’re going to spend it on. You don’t need to understand Keynes to realize that’s going about the whole matter backwards.