The Eight Countries, what we can learn from Japan

The following pieces of common wisdom that I hear in today's political debate bother me:

1. Debt kills economies. I can understand how a deficit that is really high could be a real drain on tax revenue eventually through the marvel of compound interest, but no country is to that point yet, there are other factors at play in Greece.
2. To have a developed nation you will have a high debt.
3. The Euro is a doomsday machine, countries need to maintain their own currencies to be viable, to merge countries in one currency is a terrible idea.

I have chosen seven different countries in very different and some very similar economic situations very deliberately to examine this point. When I have extended certain comparisons here I have found that the examples below are not anecdotes. The information here is mostly from the CIA, IMF, and World Bank via Wikipedia:

1. Australia is one of the most developed nations in the world, ranks second on the human development index, has the 17th highest GDP in the world (top 9%), has universal health care, a debt that is 20% of their GDP, and is currently increasing their domestic investment in mass transit. Their currency is one of the most traded in the world. Their Ease of Doing Business Ranking is 9th. They are a net importer of oil.
2. Japan is one of the most developed nations in the world, ranks 12th on the human development index (top 6%), has the third highest GDP in the world, has universal health care, a debt worth over 200% of their GDP, unemployment under 5%, and is currently increasing their domestic investment in mass transit. Their GDP Growth rate is -0.7%, and their population growth rate is -0.4%. Their currency is one of the most traded in the world. Their Ease of Doing Business Ranking is 13th. 70% of their energy is from fossil fuels, and are a net importer of oil.
3. Greece is one of the most developed nations in the world, ranks 29th on the human development index (top 15%), has universal health care, a debt worth 160% of their GDP, unemployment over 20%, and is currently divesting their domestic investment in mass transit. their GDP Growth rate is about -6%. Their Ease of Doing Business Ranking is 78th. They are a net importer of oil.
4. Germany is one of the most developed nations in the world, ranks 9th on the human development index (top 5%), has universal health care, a debt worth 81% of their GDP, unemployment around 5%, and they have one of the world's best transportation systems. Their GDP Growth rate is between 0% and 1%. Their Ease of Doing Business Ranking is 20th. They are a net importer of oil.
5. Brazil is one of the fastest growing economies in the world, ranks 85th on the human development index (top 45%), has a mixed health care system, a debt worth 54% of their GDP, unemployment around 5%, and are currently growing their transportation system. Their currency is growing in importance. Their GDP Growth rate is over 2%. Their Ease of Doing Business Ranking is 127th. They are a net exporter of oil.
6. Equatorial Guinea is one of the fastest growing economies in the world after the discovery of oil, ranks 136th on the human development index (bottom 27%), their health care system is undeveloped, a debt worth 3% of their GDP, and their transportation is aged. Their GDP Growth rate is 18.6%. Their Ease of Doing Business Ranking is 155th. They are a net exporter of oil. They use the CFA Franc with 5 other countries.
7. Chad is one of the most undeveloped countries in the world, rank 183rd on the Human Development Index (bottom 3%), their health care system is non-existant except for international aid, a debt worth 9% of their GDP, and their transportation is decrepit. Their GDP growth rate is 1.6%. Their Ease of Doing Business Ranking is 184/185. They are a net exporter of oil. They use the CFA Franc with 5 other countries.
8. Mauritania is another one of the most undeveloped countries in the world, rank 159th on the Human Development Index (bottom 15%), a debt worth over 90% of their GDP, and their transportation network is decrepit. Their GDP Growth rate is 1.5%. Their ease of doing business ranking is 159th. They are a net exporter of oil. They have their own currency.

What can we learn from the standings of these seven countries? First of all, the common beliefs about debt do not hold up to these samples, or any large collection of countries. Rich countries have high debt and poor countries have high debt. Rich countries have low debt and poor countries have low debt. Rich countries spend significant money on education and health care and poor countries don't. The belief that sharing a currency between different nations will harm countries holds no water. 

The trend between these different countries shows that investment from a government can make or break an economy. Chad has almost no economy to speak of after years of war and bad government. Japan has the #1 highest debt in the world measured relative to GDP yet still is seen as a good investment. It is easy to do business in Germany, Japan, and Australia, and they have three of the most vibrant economies in the world and are quick to recover. Australia didn't even have a measurable effect from the recession that occurred outside of Australia. Greece, Chad, and many other African nations have had bad government for a long time, and their economies are suffering. This correlation is very strong. The correlation with debt is non-existent, no matter how large the sample is.

Then why is Japan in so much debt and seeing their economy decrease? First of all, their economy for the majority of the last decade has grown, they have been slower to pull out of this current recession but are on the upward slope at this point, in two or three years the Japanese economy will probably be growing again with or without government intervention, alongside a population that will inevitably continue to shrink. Japan also has one of the lowest tax rates in the world as opposed to Australia which taxes Capital Gains at a very progressive rate. The Japanese stock index fell 50% in 2008, and the people who withdrew those funds have seen very low taxes, which means there is no short-term incentive for keeping your money invested during the hard times because you won't have to pay a lot of taxes, compared to Australia where withdrawing all of your funds in one calendar year will mean you will pay a very high rate of taxation. This means that over the past 4 years Japanese companies have not had the financial resources they need to grow and hire more people, which has caused their economy to slow down, as opposed to Australia's which is still growing. Every other major factor is equal in this situation.

The difference between Germany and Japan is that the German stock index has not plummeted nearly as much as the Japanese stock index, and had a shorter distance to grow back after the collapse. German companies still have capital to grow with, while Japanese companies are strapped for cash. The American market is more like the German market, because the stock markets here in America have rebounded already since 2008 while Japan has yet to finish their recovery.

The root of the matter between the Japanese, Greek, Australian, and German government debts is linked very closely to taxation. All of these countries have very solid safety nets, and the countries whose economies are struggling have very low taxes for capital gains. Risky and dangerous group mentality in these two countries have left businesses with little cash. In Australia, the higher taxes for large withdrawals within a single calendar year have made a very stable stock market where no one would even consider withdrawing their entire stock accounts because of the taxes that would come into place. German banks still have a lot of confidence in them and have capital to work with which means that Germany hasn't collapsed. If there was a panic in the Frankfurt stock exchange like the Tokyo stock exchange (which we haven't seen yet) it would be disastrous to the German economy. That hasn't happened yet which is why German companies are still growing and the German GDP is still rising.

There are a few major points I want to make that follow this data:

1. Good government matters! Having a good government with responsible policies is good for the economy and makes a tremendous difference.
2. If you have a debt, the answer is really simple, you are spending more than you take in, and you need to either cut spending or raise revenue. The answer will usually include raising revenue since most government services go to things that must be done and are public goods in developed countries. This means taxes might rise, but on who will always be a matter of contention between greed and economic efficiency.
3. Progressive capital gains taxes make a huge difference in the way people act in the stock market.
4. Most economic collapses are due mainly to CONFIDENCE which is why Germany hasn't gone to the dogs but Greece has.
5. Low barriers of entry to the market are important, as can be seen in this selection (and once again, any large selection) where countries with high barriers to small businesses forming have routinely depressed economies, as opposed to developed countries. When Georgia moved from high barriers of entry to low barriers their economy boomed, and have been seeing GDP growth around 10%.

Paul Krugman alluded to this in one of his posts last month, and didn't have as much data as I have done... it seems the house of cards that is laissez-faire/Reaganomics/austerity is falling down in data. He also reported that austerity apparantly hurts the economy. It feels good to be validated.

Update on 13 December 2013: I claimed Australia is one of the few countries that taxes capital gains as regular income and their economy didn't collapse, but on closer examination while their economy didn't see a recession, their stock market did collapse, making me doubt the accuracy of my previous statement, so it has been retracted. Apologies.