Archive for August 2011


The inscrutable Japanese economy

I recall it’s an ethnic slur to call Asians inscrutable.  I hope that doesn’t apply to inanimate objects like economies.  This post was triggered by a recent Tyler Cowen post:

Let’s say the U.S. becomes another Japan or for that matter let’s say Japan has become Japan.

I’ve said similar things.  But that got me thinking about what it actually means to become “another Japan.”

1.  Does it mean we’ll have 4.6% unemployment?

2.  Does it mean we’ll have near zero NGDP growth?

3.  Does it mean we’ll have 1% RGDP growth?

4.  Does it mean we’ll have zero population growth?

What is actually the most distinctive feature of the Japanese economy?

To make things even more complicated, I don’t have a good sense about whether the Japanese unemployment numbers are accurate.  One sees films from Japan that suggest their job market is broken.  One reads heart-wrenching stories of salarymen who can find jobs, of a lost generation of young people.  Perhaps the unemployment numbers are misleading in some way.  There are two ways they might be misleading; simply missing a lot of unemployed, or treating many workers as employed who have lousy make-work jobs—say handing out flyers on a street corner to get by.

But the mysteries don’t stop there.  If you look at the Japanese unemployment rate you do see the normal ups and downs of the business cycle.  You also see no change since 2000.  There is no monetary model that I know of that suggests tight money could slow economic growth without raising unemployment.  Thus although Japanese tight money might have slowed growth in the 1990s (when the unemployment rate trended upward), the recent slow growth should  be due to non-monetary factors (unless the data is wrong.)  Just to be clear, it is quite possible (likely in my view) that Japan could get another 2% of RGDP by switching to a 3% NGDP target.  But it would be a one-time gain, as their labor market got less rigid.  Unemployment might fall to 2% or 3%, but trend growth shouldn’t change.

Here’s another mystery.  The tsunami/earthquake/ nuclear meltdown had no effect on Japanese unemployment.  None.  Industrial production did fall sharply in March (the disaster occurred on March 11th), but then rose sharply over the next three months.  The quarterly GDP numbers are fairly weak, but nothing very far outside the “noise” one typically observes during a Japanese recovery, when trend rates are quite low.  Certainly nothing like the 2009 contraction, which sharply reduced GDP.

The spring 2011 quarter was down only 0.3%, and it’s not unusual for Japan to have small RGDP declines during economic expansions.  The IP numbers suggest the disaster did hurt the Japanese economy, but the GDP and unemployment numbers both suggest that the damage was an order of magnitude less than the adverse nominal shock of 2009.  (Remember that Japan had no housing bubble in the 2000s.)

I get more pessimistic every day.  But even now I can’t imagine the Fed allowing trend NGDP growth to slow to zero percent, even in per capita terms.  So we won’t become another Japan in that respect.  But they just might allow it to slow to 3% to 4%, and recall that those numbers are from a very depressed level.  That could easily create a decade of Japan-like problems, especially when combined with the labor market rigidities like higher minimum wages and extended UI.

If you talk about how those labor market rigidities might have raised our natural rate of unemployment, progressives will sneer that there is no empirical evidence (there is), and that you are just a mean right-winger who thinks unemployed people are lazy bums.  Whenever you read those progressives you should always keep the following in mind:

1.  The progressives completely failed to predict that the natural rate of unemployment in welfare states like France would rise from about 3% prior to 1973 to about 10% after 1980, and then stay up there permanently.

2.  To this very day, the progressives have no plausible explanation for why this happened in many European countries (not all.)

I’m not saying it will happen here, but I’m also not assuming it won’t.  All I do know is that we should pay no attention to what progressives say on this subject, as they are so blinded by their romanticizing of “victims” that they’ve lost the ability to think clearly about labor market issues.  Ignore them.  But when they talk about the need for more aggregate demand, play close attention.  On that issue it’s the right that is increasing blind.  They’ve become so entranced by the supply-side that they’ve forgotten that the demand-side is also very important.

I also think it’s very possible that trend RGDP growth in the US slows to 1% per capita, for reasons Tyler Cowen outlined in The Great Stagnation.

A few weeks ago I speculated that interest rates might well remain quite low, and that would lead to relatively high stock prices.  I didn’t really intend that as a prediction, but I suppose it read that way.  It was meant as an explanation of the yield curve and stock market in July.  In any case, if it was a prediction then my low interest rate prediction looks very good, and my high stock price prediction looks very bad.  But unless I’m mistaken, doesn’t something have to give?  S&P500 companies are earning roughly $100/share (in total) this year and next, and the index is barely over 1100.  With even long term rates down to 2%, and zero in real terms, this P/E seems unsustainably low.  If things kept on this way wouldn’t stocks be a much better investment than bonds?  That tells me the market expects a recession that will reduce earnings well below $100/share for the S&P500. And we all know what happened to the Japanese stock market after 1991.  Bonds were the place to be.

No real answers here, just some puzzles I’ve been thinking about.  Comments are welcome.

PS.  Japan and Italy are the two countries that slowed the most from the booming 1950s and 60s, to the sluggish 1990s and 2000s.  They both have big public debts.  I vaguely recall that years ago The Economist pointed to a number of surprising similarities between these two seemingly dissimilar countries.  One is that unlike other western nations, they tend to keep re-electing the same government, even when the economy is in lousy shape.  There’s a strange fatalism in their politics.  I can’t help thinking that this partly explains the sluggish pace of economic reform in the two countries.  Japan’s certainly not poor, but given their legendary work ethic, social cohesion, and high educational levels, it’s surprising that it’s not richer.  I wonder if that Economist article is online somewhere . . .

PPS.  Many people worry that the Fed could become impotent, just like the BOJ.  But the real danger is that the Fed will become content with 3% NGDP growth, just as the BOJ is content with near-zero NGDP growth.

Monetary debates have always produced strange bedfellows

Matt Yglesias notes that the financial community was strongly opposed to dollar devaluation in 1933, despite the fact that most businesses benefited from the policy. 

Economic recovery would be good for business, but businessmen who may be good at running businesses are extremely bad judges of macroeconomic policy. Consider, for example, the Great Depression, and the monetary stimulus that economists from Milton Friedman on the right to Christina Romer on the left now agree ended it.

The Depression was not good for big business. Nor was it good for banks and large financial institutions. Ending the Depression required stepping on some toes, but fundamentally the Depression was a negative-sum experience and everyone was better off when growth returned. But here’s a couple New York Times articles from June of 1933 “” “Plea” from June 2, “Return to Gold” from June 4 “” showing the business community’s intense hostility to the expansionary monetary policy that eventually saved all their skins:

I agree with the implication Matt draws from this example; businessmen can’t be trusted to know what’s in their own best interest.  But it was actually a bit more complicated—and in an interesting way.  The dollar devaluation policy was strongly supported by stock investors, and also some manufacturers.  It was opposed by the American Federation of Labor.  Keynes initially supported the policy, but later turned against it went he felt FDR had gone too far.  Irving Fisher, who’s now often seen as being to the right of Keynes, supported it throughout 1933.  Right wing populist Father Coughlin was a strong supporter of FDR’s policy, whereas a number of FDR’s advisers resigned in protest. 

I’m sure one can come up with reasons for all these splits.  The policy helped stockholders but hurt holders of Treasury bonds.  It helped unemployed workers but raised the cost of living for those with steady jobs.  But I also think many people simply misjudged the effects of the policy.  Unfortunately, we’ll never know for sure how effective it could have been, as an explosive recovery was aborted in July 1933 by the NIRA.  But until that time, industrial production had risen 57% in 4 months, an annual rate of nearly 300%.

How about today?  One difference is that in 1933 there really wasn’t much doubt that dollar devaluation would have some effect, at least on prices.  Today many on the left discount the possibility of monetary stimulus.  Those that don’t generally support it.  However I recall Joe Stiglitz and Robert Reich complaining about the effect of QE2 on the value of the dollar.   And where are the unions demanding easier money?  I don’t recall a single utterance from them on the subject.  Might they have the same concerns as the AFL had in 1933?

On the right you have splits all over the place.  Quasi-monetarists vs. old monetarists.  Stock investors vs. bond investors.  Perry criticizes monetary stimulus while Romney refuses to criticize monetary stimulus.  There’s even a split within the National Review.  Undoubtedly the right is much more hostile than the left, but it’s hardly monolithic.  And in Britain there are press reports that the Cameron government favors monetary stimulus.

There are good reasons for this.  Monetary stimulus has (greatly overrated) implications for the distribution of income.  But it also has non-zero sum effects that reasonable people can interpret differently.  In my view the non-zero-sum effects of monetary stimulus right now are so large and positive that even savers would benefit as a class (albeit not in every single case.)

Some recent links

Here’s a piece I wrote for The Economist, By Invitation.

A nice article on NGDP targeting by Ramesh Ponnuru (mentions Beckworth.)

Michael Darda mentions David Beckworth and I.

A mention at FrumForum

David Wessel of the Wall Street Journal.  (A ten year old quotation, which sounds clumsy.)

And a nice comment at FreethinkingEconomist (who advises the UK government):

The US blogosphere – in particular Scott Sumner – was a major influence in getting my thick head around the advantages of Nominal Growth Targeting as an answer to the world’s problems.    Hey, if I had not started on Sumner’s blog I would never have written Credit Where It’s Due.

So our views are gaining increasing acceptance among the movers and shakers.  But we still have our work cut out for us.  This morning I woke up to NPR announcing that falling interest rates should help the economy.  Now if only we could top it off by generating deflation, to boost consumer spending.

I’ll be travelling in late August and early September, but I plan to come back with guns blazing after Labor Day (not much to celebrate this year.)  I should have a long piece on NGDP targeting coming out in September, and I’m working on some other interesting possibilities–I’ll let you know.  Obviously with the Jackson Hole meetings coming up there may be movement on the policy front and/or a decisive turn in the business cycle.  But please, for the sake of  God, don’t do “Operation Twist.”  We need higher long term rates, much higher.  The Fed needs an explicit target, even a QE3 is like to disappoint.  Buying 2 year T-notes yielding 0.19% with reserves yielding 0.25% might trigger a brief rally, but only because it signals a change in Fed intentions.  It would peter out quite rapidly.

Nick Rowe comments on an (unspecified) trendy new cult

Here’s Nick:

Fourth. A lot of economists wasted an awful lot of time and ink getting this stuff straight 50 years ago. If you start your theory with I=S as an accounting identity, it really is your responsibility to try to explain to anyone reading the difference between I=S as an accounting identity, and Id=Sd as some sort of equilibrium condition, and why that difference matters. Because, as I said at the beginning, there’s an awful lot of poor lost souls wandering around the internet who have just discovered the marvellous truth of I=S as an accounting identity, and think they have found some magical philosopher’s stone that “mainstream” economists have never heard about, and that this blinding flash of divine truth will lead them to the Promised Land. It’s a bit like being accosted at airport terminals by people with a glow in their eyes repeating “apples sold equals apples bought”. Because that’s exactly what they are saying.

Ideas matter

Britmouse sent me some interesting articles from the UK.  Here’s support for NGDP targeting from the left-wing Guardian:

This is the truth that cannot speak its name: as a senior financial policy official told me, even to raise it at home or abroad merely as an issue for debate is to invite universal disapproval. But truth must be faced. Britain should provide a lead – both for its own economic fortunes and to set the new international standard. As a minimum it should announce a new programme of quantitative easing, in effect printing money; insist the Bank of England uses the money it prints to buy the broadest range of private debt; and immediately replace the 2% inflation target with a target for the growth of money GDP – so getting Britain off the hook of its unpayable private debts.

And here’s support from the right wing Telegraph:

The Bank of England denies it, of course, but for a long time now it has been obvious that what the Bank is targeting is not inflation as such, but nominal GDP. Further evidence of this comes from the latest letter the Governor of the Bank of England, Sir Mervyn King, has been forced to write to the UK Chancellor, George Osborne, explaining why UK inflation is so much above target.

In the letter, he laboriously goes through the old arguments about how above target inflation is not really the Bank’s fault – it’s all down to higher commodity and import prices in combination with January’s hike in VAT. But for those factors, he reiterates, inflation would in fact be somewhat below target. But hold on. What’s this?

“There is, however, a limit to what monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months. But it can ensure that the adjustment takes place against a backdrop of low inflation in the medium term. In so doing, monetary policy will make the best contribution it can to high and stable levels
of growth and employment.”

This is as clear a statement as I’ve yet come across that the Bank is prioritising growth over inflation. If the purpose is to erode the real value of the debt overhang, then plainly the policy is working. Growth is by convention usually expressed in terms of real increases in output – that is adjusted for inflation. For the UK, this has been pretty much flat over the last nine months.

Yet thanks to inflation, the nominal value of output has infact been growing quite sharply at approaching 5pc. Our nominal GDP growth is high by comparison with most other advanced economies, which helps explain why the downturn’s impact on employment hasn’t been so bad, considering the depth of the downturn.

Why can’t we have such enlightened right-wingers?   Because unlike in Britain, they aren’t in power in the US.   You just wait, as soon as Perry is president the treasonous WSJ will start beating the drums for monetary stimulus, just as they did in 1984 when Reagan was President and inflation was 4%.  (Inflation has averaged 1% over the past three years.)

It took the US 18 months to figure out what to do after Britain left the gold standard and Sweden began price level targeting in 1931.  Look for sensible policies to begin in late 2012—right after election day.

To get serious for a moment, it’s gratifying to see the quasi-monetarist NGDP targeting proposal really starting to attract attention.  When the FT asks:

Anyone for Fed targeting of nominal GDP futures?

. . . with the implicit understanding that readers will get the reference, you know we’ve arrived.