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through higher taxes. Given the problem of
inefficiency whenever the government gets involved,
the multiplier is surely less than 1. The same holds
for the other sectors that the Kan government has
identified in its growth strategy.
Correct growth strategy is deregulation
We have long been saying that the source of
sustainable growth is the freedom to discover and
innovate. Innovation leads to the goods and services
that people are willing to pay for. At the same time,
the value-added that is thereby created leads to
improved labour productivity and a sustainable
increase in income for the people involved.
The most effective way to encourage innovation is
free economic activity, not the expansion of the
government’s sphere of influence. While there are
areas where government involvement is needed to
address market failure, the authorities should
basically leave the private sector alone. Thus,
deregulation is the most effective growth strategy.
‘Policy failure’ can be more harmful than ‘market
failure’
History has shown that government intervention
aimed at fostering the development of a particular
industry will not only deprive other (growing)
industries of valuable economic resources but it will
also end up removing the ‘sheltered’ industry’s
potential to grow by undermining all incentives to
innovate. When government gives support to a
company, industry or geographical area, it usually
ends up depriving the recipient of its ability to stand
on its own feet. Thus, people who support
government involvement to address cases of market
failure should not forget that ‘policy failure’ can have
more damaging effects.
Kan’s fundamentally flawed assertion
To conclude, the Kan Government has lofty goals of
achieving a “strong economy, robust public finances
and strong social security system”. But if it deems tax
hikes and increased government spending to be the
way to boost economic growth, the nation’s potential
to grow could be further damaged and improving
Japan’s fiscal condition could be further delayed.
With the DPJ having lost an Upper House majority, it
now seems likely that the debate on tax hikes will
slow, making it difficult for discussions on new
spending to even begin (see accompanying article,
Post-Election Outlook for Tax Reform). In any event,
the Kan government should change this way of
thinking to prevent its policies being harshly judged
by history.
Ryutaro Kono 16 July 2010
Market Mover
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