Free Preview of Members-Only Content

Two of the world’s biggest economies will demonstrate what to do -- and what not to do -- in dealing with the global recession.

On Oct. 30, new Japanese Prime Minister Taro Aso unveiled his second economic stimulus package in two months, worth 5 trillion yen (US$50.7 billion) and aimed at cutting taxes and boosting domestic confidence. In recent days, Germany has announced a raft of similar measures worth a total of 30 billion euro (US$38.8 billion). Two of the world’s biggest economies have resorted to deficit spending to mitigate the global recession.

There are many ways to try to reinvigorate a wilting economy. One is to cut taxes, which can be highly effective. Both the Japanese and the German proposals contain tax breaks. But easing taxation does not tend to produce immediate results, because consumers must tally what they have saved before they can go out and spend it.

Another method is to lower interest rates and reduce restrictions on lending to make credit more available to consumers. But here a number of problems arise. For Japan, whose interest rates are already as low as 0.5 percent, cutting rates will not have a noticeable effect; the economy is saturated with liquidity, credit is already cheap and available, and domestic demand has reached a plateau.