Government economic policymakers have been trying to solve a problem of too much government spending, taxing and regulation by inappropriately using monetary policy, which has not and cannot solve the fundamental problems (it is like using a hammer rather than a shovel to dig a hole). The major central banks have been holding down interest rates, which is actually a massive indirect tax levied on the world’s savers. Historically, savers would receive about 3 percent interest above the rate of inflation on their safest investments, but now interest rates often do not cover even the low inflation that is occurring in the developed countries. In effect, responsible people (those who save for retirement or emergencies) have been giving the government interest-free loans.
Many economists expected savers to save less and consume more as a result of low or even negative interest rates, which they believed would stimulate the economy. Instead what is happening, particularly in Japan, is that many citizens and businesses are increasing their saving and even hoarding cash. Why are they doing this? Global uncertainty has risen. All can see that most big governments are increasing their debt to such levels that it is unlikely they will be able to pay it back without inflating the currency. Among the large economies, only China, India and Germany are likely not to increase their debt-to-GDP ratio this year. When businesses and individuals look at the world debt situation and the increased chances of another financial collapse, their rational response is to increase “precautionary” savings, even though they are not receiving interest on them. As the Japanese situation illustrates, the deeper the government goes into debt the more individuals and businesses save out of fear, thus reducing consumption and further slowing economic growth. It can become an almost endless downward spiral.
Many politicians and officials of organizations like the IMF call for tax increases to reduce the level of debt. The problem is that most of the world’s people are taxed out, and higher tax rates or more tax enforcement will only discourage productive work, saving and investment, most often leading to less growth — with its higher demands on government — rather than more growth. Greece is Exhibit No. 1 at the moment.
The debt burden will continue to suck the vitality out of the global economy. The only solution is to revive growth, and that can only be done by tax rate reductions, not tax increases, getting rid of non-productive government regulations, and radically cutting government spending. There is no other non-destructive way out. Yet, the Organization for Economic Cooperation and Development and its big-government allies (e.g., the Obama administration) continue to try to jack up world tax rates and add increasingly destructive global financial regulations, which impede capital flows, reduce individual liberty, and increase the global stock of misery.
Or maybe the political class could just make it illegal to be unemployed and poor, as President Alexander Lukashenko of Belarus did last week, to prevent “social parasitism,” meaning those who do not pay income taxes.