Let's Dream a Dream for Greece
February 3, 2012
(This item originally appeared at Forbes.com on February 3, 2012.)
In 1949, Japan was a wreck. Four years had passed since the end of
World War II, but the economy was still moribund. The major cities,
flattened and burned during the war, remained mostly
unreconstructed. Only two trains a day ran on the most important
rail line, between Tokyo and Osaka. Hyperinflation made normal
commerce impossible. What industrial assets remained after the war,
such as electricity generation plants and factories, were being
stripped by the occupying army as “reparations,” and shipped
overseas. The previous government was disbanded, and a new
constitution, and a new government, were established. People were on
the brink of starvation.
This was the beginning of one of the greatest economic advances of
the twentieth century.
In comparison, Greece’s problems are trivial. Banks are insolvent?
That is nothing but paper accounting. Try having your major cities
bombed to rubble, and a generation of young men slaughtered on
islands in the Pacific. Government default? So what. Hyperinflation?
Nowhere to be seen. Starvation? Hardly. Occupation by a hostile
foreign military? Not on anyone’s list of worst fears.
Nothing particularly bad has happened in Greece. Default and
insolvency is nothing but a bookkeeping adjustment. So why can’t the
country begin twenty years of outstanding expansion, as Japan did in
the 1950s and 1960s?
Many people accept the notion that the outcome of these relatively
minor developments must be a generation of stagnation and decline.
In fact, this is quite common. We often see once-promising countries
stumble and fall, and they never seem able to fully recover.
Argentina used to be one of the wealthiest countries in the world –
the name itself means “moneyland” – but today it struggles to be
considered an “emerging market.”
Or perhaps the United States today?
I often say that the Magic Formula for economic success is Low Taxes
and Stable Money. Today, Greece is headed the opposite way. People
are clamoring for the introduction of a new drachma, whose sole
purpose seems to be devaluation. I say the only reason to introduce
a new currency is if it is even more stable and reliable than the
euro. What about low taxes? Greece’s government just keeps raising
its tax rates, and finding that the only result is more economic
deterioration and greater tax evasion. Not only does this reduce tax
revenues, it makes even more people dependent on state welfare and
state employment, which makes cutting expenditures politically
Today, Greece is on the well-worn path to twenty years of
deterioration, just as many fear.
However, it could be different. Japan’s recovery started with a
dream, among politicians and business leaders. In their imagination,
Japan would rise from the ashes – actual, real-life ashes – and
become again a great and prosperous nation.
This clear vision quickly led to a plan of action. The situation in
1949, of hyperinflation and crushing taxes, was plainly not in
accordance with the goal of a prosperous Japan, so the leaders set
about fixing the problem.
They had virtually no resources to do so. The economy consisted
mostly of black-market subsistence, tax revenues were negligible,
and issuing debt was impossible. Since tax revenue was far less than
the government’s needs, the government subsisted mostly by printing
money, with the usual consequences.
One of the first things they did was to make government debt
issuance illegal. It remained so until 1965. Then they refused any
more economic aid.
In 1949, they pegged the yen to gold, immediately ending the
Then, they eliminated the consumption tax (national sales tax).
In 1950, the income tax schedule was revised. The top rate fell to
55% from 85%. But more importantly, the income at which that rate
(and others) applied was raised dramatically. This rate
originally applied to income of 500,000 yen. By 1957, the 55% tax
bracket applied to income of 10 million yen, twenty times higher.
In 1951, interest and dividend income were taxed at a separate,
lower rate. In 1953, capital gains were exempted from taxation
completely. Interest income was taxed at only 10 percent. Businesses
received a truckload of favorable treatments, in the form of
accelerated depreciation, deductions, and exemptions. In 1955,
interest income was made tax-free.
Throughout the 1950s and 1960s, the government had a specific goal:
to keep tax revenues, and the size of the government, below 20% of
GDP. They reasoned that this would be best for the brisk growth of
the private sector. It worked.
The Japanese people, as we know, became wealthy in those years.
Wealthy people are able to pay more in taxes than poor people.
Between 1950 and 1970, tax revenues of the central government
increased by sixteen times, all in non-inflationary gold-linked yen.
As the country became wealthier, and GDP grew, then the services
that the government could provide on a budget of 20% of GDP grew as
well. Welfare and national healthcare plans were added. Dirt roads
were paved. Sewage systems were built. There was no conflict between
government services and the private sector. Both became prosperous
This story is well known to those who follow such things. If someone
asks the question – how do we produce fantastic economic
advancement? – and they persist with it, soon enough they find the
answer. It’s not particularly complicated, or obscure.
The real question is: why is it that some people find this path, and
others seem to be completely disinterested? Why do some groups have
the dream of advancement, and act upon it, as the Japanese leaders
did in 1949, and others drift into generations of deterioration?
Greece could adopt such a plan today. You simply start with a goal:
to become radically prosperous. Then you make a plan. You might
adopt something like the flat tax reforms that have been successful
in neighboring Albania and Bulgaria. You would have some solution to
create “stable money” – either to keep the euro, or, possibly, to
introduce an even more stable and reliable alternative. Germany is
doing this right now, with preparations for a “Nordic euro” in case
the European Central Bank’s mismanagement of the existing euro
You would have a plan for the size of government, perhaps 20% of GDP
as in the Japanese example, or even less, such as the 14% of GDP of
Singapore. You would adjust the compensation and headcount of
government employees to provide the necessary services efficiently
You might even dispose of the existing 23% VAT tax. In one go. Pow.
Gone. Why not? Japan’s government did it, while simultaneously
outlawing debt issuance!
Do you see the difference between greatness and mediocrity?
That’s how it works. First you dream. Then you plan. Then you make
it happen. Alas, even Japan has forgotten how to do this today. By
all appearances, they are primed for many more years of hardship.
If Greece adopted a plan like this, while the rest of Western Europe
continues down its present self-destructive path, we might find
twenty years from now that today’s predictions are entirely wrong.
We might find, in the year 2032, that Greece has become the
wealthiest country in Europe.