J.D. Foster of the The Corner warns that if America doesn’t stop its big government ways there will be hell to pay.

More spending, more regulations, more rules, and, soon, the Obama tax hikes all contribute to a loss of individual freedoms and, collectively, to an economy bearing a much closer resemblance to floundering Japan than rising China.

This is a prime example of conflating largely microeconomic issues like taxes and regulation with macroeconomic effects. I’m going to ignore the obvious issues surrounding China’s growth and the still enormous role the state plays in the economy. Instead, I am going to throw up this cluttered but informative graph

Ok, see the thick red line. That’s the United States. There is a dark blue line that’s just below the US in the year 2000, that’s Japan. Indeed, in 2005 the two lines converge as the Bush tax cuts took us down to about the level of taxes as a percentage of GDP as Japan.

You can see going back to the 1970s that the two lines crisscross. We’ve had roughly the same share of revenue taken by the government as Japan. They were a little higher than us in the 80s and a little lower in the 90s.

What’s the lesson? That slightly higher taxes during the 90s lead to prosperity in the US and slightly lower taxes in Japan to ruination? I doubt it.

On the other hand here is inflation and GDP in Japan during the 90s

Here is US over the same period

image

The collapse towards deflation in Japan was concurrent with the collapse of the economy. On the other hand, the stabilization on inflation in the US was concurrent with robust economic growth. Correlation is, of course, not causation and this set of graphs is not  a substitute for a complete monetary argument.

However, I hope it at least shows how much stronger the relationship is between monetary variables, like inflation, and growth, than between growth and supply-side tax policy.

This is not to say that taxes aren’t important. Its certainly not to say that regulation is not important. Its just that they have a different kind of importance than monetary policy. We are not going to revolutionize the United States by moving taxes as a fraction of GDP by a few percentage points. We could, however, crush the US economy for a decade or more by pursuing a contractionary monetary policy.

When we think about taxes and regulation we should think about them in terms of how they affect the lives of everyday citizens. Will it make harder or easier for them to achieve their goals? Will it make harder or easier for them to raise a family? And, we should think about them that way because we care whether it is easy for our citizens to reach their goals or raise a family. We shouldn’t think about them as if our decisions are likely to alter the growth trajectory of the United States of America.

On the other hand, when we think about monetary policy we should realize that we are explicitly choosing whether the US economy will grow or contract. Even economists tend to think of monetary effects as short lived, but bad monetary policy year-after-year can produce major macroeconomic effects year-after-year.