It is well known that Japanese government debt stands at very high levels; according to one estimate debt was 161% of GDP as of March 2003. For purposes of comparison, here are some figures.

The little-known good news, if you can call it that, is that most of these debts are inter-governmental in nature. For instance the central bank holds a large quantity of Japanese governmental debt. After making the appropriate adjustments, the Japanese public sector owes net consolidated debts of 62% of GDP. This is lower than the OECD average.

An additional estimate suggests that Japan must increase its tax rates by three to nine percentage points, to make good on its obligations. Note that Japanese taxes are currently second lowest in the OECD, after South Korea. The worst case scenario is that Japan must increase its tax rates to Western European levels.

Here is the researcher’s home page. The page promises that the relevant paper will be available shortly. The 26 June to 2 July issue of The Economist offers a good summary of the paper; the author also argues that Japanese demographic problems are not as serious as is often believed.

My take: OK, it seems fair enough to cancel out inter-governmental debt: “they owe it to themselves.” But why stop there? Remember the old Keynesian line?: “We owe it to ourselves”. Why not cancel out debt altogether? The most important statistic is not the final debt level, rather the estimate of how big a tax increase will be needed to restore fiscal order. Note that Western Europe “gets away” with its current levels of taxation only because the rest of the world does not follow suit. So the worst case scenario is nothing to be complacent about.

But overall the cited result cheers my heart. I’ve been bullish on Japan for a long time. As catatastrophic economic problems go, a bad banking system is something you can fix, albeit slowly.

The Wall Street Journal and the American Spectator have sunk to an embarassing low with the publication of an Levine, Trainor and Zimmerman (1996), find just this. LTZ estimate that restrictions on Medicaid funding of abortions reduced the number of abortions but the number of pregnancies fell even further so the number of births actually went down not up.

Putting things the other way, compensating behavior means that abortion liberalization will reduce the number of births by less than the number of abortions. Five states legalized abortion in 1970, prior to Roe v. Wade (Alaska, California, Hawaii, New York, and Washington). Levine, Staiger, Kane and Zimmerman (1999) estimate that births in these states fell by 5% more than in states that had not legalized abortion. Applying this number to today’s rates they estimate “a complete recriminalization of abortion would result in 320,000 additional births per year.” Since there are about 1.3 million abortions a year, only about a quarter of all abortions represent a net reduction in births.

The reduction in births, even though considerably smaller than than the number of abortions, is not distributed randomly across the population so abortion policy can have an impact on things like crime and teenage pregnancy but the number of Democrats and Republicans has got to be one of the least interesting consequences.

Hat tip to MemeFirst for alerting me to the article.

I just had the pleasure of spending two days in the company of Milton and Rose Friedman. Milton remains jovial and sharp at the age of 91; Rose spoke less but beamed throughout.

I asked Milton the following two questions, he gave me permission to quote him:

1. TC: Is inflation coming back? MF: “Eventually, but not anytime soon.”

2. TC: Have low interest rates been a bubble? MF: “No.”

Milton’s best anecdote concerned opposition to the idea of a free society. He sees businessmen and academics as the two biggest problems, albeit for opposing reasons. Businessmen want freedom for all other people, only not for themselves. Then they want various subsidies, tariffs, privileges, etc. Academics want freedom for themselves, but not for other people.

While Germany struggles with inflexible labour laws and high taxation, Austria has pushed through tax reforms that will bring rates down close to east European levels, to run alongside already business-friendly employment measures.

The results have been dramatic. Since January this year, when the first phase of Austria’s two-step reforms kicked in with big income tax cuts and some relief for small and medium-size companies, the country has enjoyed a rash of high-profile investment.

Businesses have been enticed not just by the current reforms but by the prospect of corporate rates falling from 34 to 25 per cent, or less than 22 per cent including allowances, from January next year as part of the second stage.

However, Austria’s success has been at Germany’s expense, as companies relocate from the German border region of Bavaria.

Here is the full story.

Iceland also has been defecting from the high-tax cartel:

After years of economic stagnation, unemployment and fiscal disarray, an Icelandic government led by Prime Minister David Oddsson implemented a series of Reaganesque reforms that have turned the economy around. In the 1990s, he reformed the income tax moving it towards a simpler and flatter structure. He also lowered the corporate marginal tax rate from 48 percent to 30 percent. And he also managed to contain spending, got rid of inflation, privatized large public companies and got the government out of the banking industry.

The results were astonishing. Unemployment dropped, the deficit disappeared, as did inflation, and Iceland is now one of the fastest growing countries in Europe–5 percent a year on average for the last 10 years. According to Mr. Oddsson, “This success has been achieved not in spite of extensive tax cuts but, to a great degree, because of them.”

In 2002, the corporate rate was cut again, from 30 percent to 18 percent. Today, Iceland has the third lowest corporate income tax rates of all the OECD countries behind Ireland 12.5 percent and Hungary 16 percent. And according to the Prime Minister, personal income tax will be reduced again this year by four percentage points, the income tax surcharge on the highest incomes will be removed and plans are formed to cut the corporate income tax rate further down to 15 percent.

Here is a previous MR post on the EU as a tax cartel.

Peter Gordon looks at a 1902 Sears Roebuck catalog and asks whether money was worth more back then.

Of course it depends how much you are given. $5.00 back then goes a longer way, but I would rather earn $100,000 a year today, and yes that is not adjusting for inflation. For Peter modern pharmaceuticals are the clincher:

Would you want their best 1902 camera for $7.90? Probably not. High-end cutlery for 6 for $1.79? Why not? A great western saddle for $8.95? Sure.

It’s the Sears “Drug Department” that is the real eye opener. “Fat Folks, Take Rose’s Obesity Powders and Watch the Result … $4.20 per dozen boxes.” Herb laxative teas for 16 cents a box may be OK. Dr. Rose’s Arsenic Complexion Wafers 35 cents a box may have few takers today. Vin Vitae for 69 cents (“Not a Medicine … Not Merely a Tonic”). The “White Ribbon Secret Liquor Cure” went for $2.50 a box. The list goes on and does focus the mind.

My question for today: Does this mean that we should adjust the gdp deflator series to show ongoing deflation for the 20th century?

Here is a general plug for Peter’s excellent blog. Here is Virginia Postrel on how we underestimate the benefits from new products.

As China and India continue to grow, we must ask whether the earth could support several billion more people at European levels of wealth. Michael Lind says yes:

…there seems to be no insuperable physical or ecological reason why 9bn people should not achieve something like the lifestyle of today’s rich, with technology only slightly more advanced than that which we now possess.

Here is part of the argument:

As machines get ever cheaper, more people will be able to afford more of them. Today the combined mass of all machines, at more than a gigaton (Gt), exceeds the combined mass of human beings, about 1 megaton. The total amount of carbon, 5Gt, required to power and construct machines and electric utilities greatly exceeds the 1.3Gt global consumption of carbon by human beings, mostly in the form of food. As affluence grows, the amount of energy and raw materials “consumed” by machinery will escalate even more rapidly than human consumption. But this need not mean an end to the machine age. If manufacturing processes were to imitate the recycling that takes place in the biosphere, then most machine materials might be recycled to make new machines, rather than thrown away. And long before all fossil fuels were exhausted, their rising prices would compel industrial society not only to become more energy efficient but also to find alternative energy sources sufficient for the demands of an advanced technological civilisation – nuclear fission, nuclear fusion, solar energy, chemical photosynthesis, geothermal, biomass or some yet unknown source of energy.

Here is more:

…agriculture, including logging, accounts for about 21m square miles, or ten times as much land as that occupied by urban areas and reservoirs.

Cutting urban land use by half would free only 1m square miles or 2 per cent of the ice-free land surface, while cutting agricultural land use by half would free ten times as much land – 10.6m square miles, or 21 per cent of the earth’s non-glaciated surface.

In Lind’s view, producing enough meat for nine billion wealthy people is likely to be the biggest problem. In my view, the biggest problems are ones of transition, rather than the end-state. China could get much richer before it moves close to environmental “best practices”; right now per capita income is just approaching that of Guatemala.

A fun tidbit:

Lind quotes Paul Romer: “[if America continues growing] in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.”

Addendum: Here is the working link.