The global media seems endlessly fascinated by the question of whether monetary policy in the US is too easy or too tight, even as the Fed comes amazingly close to hitting its targets.  I suppose this interest can be partly justified by the size and influence of the US, which David Beckworth calls a “monetary superpower”.  Nonetheless, there should be more discussion of the fact that monetary policy in the Eurozone and Japan is way off course, and that these policy mistakes are a danger to the global economy.

Core inflation in the Eurozone is 1.0%, far below the ECB’s roughly 1.9% target:

And growth in the Eurozone is slowing as we go into 2019.

Core inflation in Japan is even further below the BOJ’s 2% target:

And growth in Japan is also slowing.

My suggestion is that both central banks consider switching to level targeting and adopt a “whatever it takes” approach to hit their targets.  These changes might require legislation, and I’m not expert on the political barriers to getting this done, which I presume are formidable.  Fortunately, these two changes might well be enough; I doubt they’d need to take any additional “concrete steps”.

PS.  Commenter LK Beland constructed a monthly series of wage income for the US, by multiplying average hourly earnings, average hours per week and payroll employment.  In some respects, this data is superior to NGDP as an indicator of the appropriateness of monetary policy. Interestingly, the graph shows even greater stability than NGDP growth, mostly hovering around 4% to 5%:

This is what I’ve been advocating as a long run policy ever since I started blogging in early 2009.  However I would have liked to have seen faster “catch-up” growth in the early years of the recovery.  Even so, this is a good sign.  If they can keep roughly 4% growth going forward then . . . . we win.

The Financial Times is hardly alone in misdiagnosing Japan’s problems, but I can’t resist commenting on this misguided advice from the Editorial Board:

Yet it is still puzzling that such an extreme monetary policy, which has seen the assets of the BoJ rise to an extraordinary level of 100 per cent of gross domestic product, has had so limited an effect on inflation. One reason is that it has not led to overheating of the economy. Another is that the exchange rate against the US dollar has actually appreciated since 2015. A still more important reason must be that inflation expectations became so stubbornly anchored at close to zero. . . .

At the same time, it [the BOJ] will probably need more help from the government. The proposed increase in the consumption tax in October of next year needs to be abandoned until the inflation target is reached. Indeed, the idea that the best target for increased taxation is consumption makes no sense in a country with such exceptionally low shares of consumption in GDP. It would be far better to tax something else, such as undistributed and uninvested profits. It is also possible that explicit resort to “helicopter money” will be required. The aim now should not just be for the BoJ to keep carrying on, but for the government to co-operate fully with it, to lift Japan out of its deflation trap.

“Extreme monetary policies” are exactly what you get when a contractionary monetary policy drives NGDP growth over several decades to the lowest rate ever seen in any country in modern history.  It’s not “puzzling” that this policy is associated with low inflation.

The proposed solutions are exactly backwards.  Japan should increase its consumption tax next year because it needs the revenue and this is one of the most efficient of all taxes.  Or perhaps I should say the least bad tax.  Of course if they wish to cut spending instead, that would be fine.  But there’s almost no chance of that occurring, and a tax increase is less bad than an exploding debt.  A helicopter drop is just more fiscal stimulus, piled onto a public debt that is already roughly 250% of GDP.  Taxes on capital income are much less efficient that consumption taxes, and Japan’s consumption is not an “exceptionally low share” of GDP:

The BOJ should instead adopt a more expansionary monetary policy combined with fiscal austerity.  There are many options, including NGDP level targeting.  As for the policy instrument, I suggest either exchange rate targeting, or a “do whatever it takes” approach to QE.  So far, the BOJ has refrained from either approach.  If the BOJ prefers a smaller balance sheet, then they should set a higher NGDP (or inflation) target.  And by all means, shift from growth rate targeting to level targeting.

Of course the “concrete steppes” crowd will whine “but they’ve already done so much . . . ”  Nonsense.  As Yoda said:

Do. Or do not. There is no try.

Off topic, Trump believes that Fed decisions on the proper level of IOR should be determined by car bombings in Paris:

“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!,” he said in a tweet just a day before the start of the final Fed policy meeting of the year.

America cities were burning in 1967 and 1968.  And what happened to inflation?

(And please don’t comment on whether it makes sense for the Fed to raise interest rates. Leave that for another post.)

I’m choosing Japan for this post, but it could refer to almost any developed country.

I would argue that the answer to the question in the title depends on how you define “life”:

Definition A:  The total utility of the typical life.

Definition B:  The average flow of human utility in a typical year.

Economists usually think in terms of definition A, even though one could argue that strict application of our widely used utilitarian framework implies definition B is more appropriate.  (Or even another definition, total flow of utility.)

Below is a typical picture of Japanese life in the 1950s, along with a more recent picture, which shows what a typical day in Japan might look like during the 2050s.  In which of these two pictures are “living standards” higher?

Now you may complain that I’m comparing apples and oranges, that of course life is more fun when you are young than when you are elderly.  And that’s true, but I’d also argue that these two pictures fit my definition B of “life”.  In each case, I’m showing the typical experience of Japanese life during a given day, or even a given year.

Consider the population distributions, by age for Japan in 1960, 2020 and 2050:

You can see that during the 1950s, life in Japan was mostly young life.  During the 2050s, life in Japan will be mostly old life.  In my previous post I argued that I’d gladly accept a much lower income to have the health and energy I had at age 31, rather than my current 62.

Just to be clear, I’m not a nihilist arguing that Japan’s amazing economic progress since the 1950s has been of no value.  Living standards in material terms really are vastly higher.  Not only are the Japanese much richer, they also live much longer.  Nor am I arguing for a natalist policy to boost birthrates—I see no obvious market failure that calls for government interference.  On the other hand, I’m not denying that a natalist policy might be beneficial, just that I haven’t yet seen any convincing arguments for interfering with people’s personal decisions on having children.  So I don’t have any sort of agenda here, other than to make people think about what it means for life to be “better” than in the past.

Of course all this hinges on my preference for definition B of “life”.  Most people probably think in terms of definition A, and hence would not be at all bothered by these trends, as long as the average complete life is better than before.  My “flow approach” partly fits in with my denial of personal identity.  I think of life as a series of experiences, and I think of “me” as being a completely different person from the “me” at age 8.  Japan in the 1950s had a big flow of “young life”.

I’m so agnostic about all of this that I’m not even sure younger people really are happier. Happiness research doesn’t necessarily support this claim, even though we almost all instinctively feel that we’d like to be younger.  Think about the vast industry for beauty products to make people look younger.  Or “health clubs”.  But maybe our worship of youth is all just looking through rose-tinted glasses.

BTW, the Japanese population pyramid from 1960 is roughly how things looked throughout most of human history, almost everywhere in the world.  It’s the new distribution that is uncharted territory.  If youth really does equate with happiness, how do we compare life in Mali and Niger, with life in Japan?  Also, because poor countries typically have higher birth rates, and because birth rates fall as countries get richer, Japan’s birthrate cannot be increased by economic growth, no matter how many stories you read about modern East Asian families being unable to “afford” more than one child.  Singapore is twice as rich as Japan, and has an even lower birth rate.  Crazy rich Asians!

PS.  The little girl on the left didn’t have an iPhone.  I’m old enough to remember just how sad life was back then.  Young people today can’t even imagine.

Sci-fi is especially popular with the young.  As I got older, I became less interested in stories about space travel, and hence began reading less sci-fi and more of other forms of literature.  But I never lost interest in the idea of alternative worlds.  This is what makes Japan so interesting.  It’s not so much that parts of Tokyo look very futuristic, rather that even Edo period Japan offered an alternative way of living, which was not obviously inferior to the West.  Indeed as far back as 1700, Tokyo was the largest city in the world, with 1.2 million people and a very interesting culture.

Visiting Japan is the closest I’ll ever get to visiting an alternative world.

PS.  In a recent post I made fun of the “cultural appropriation” insanity in America.  The NYT has a new piece on that topic:

When the furor reached Asia, though, many seemed to be scratching their heads. Far from being critical of Ms. Daum, who is not Chinese, many people in mainland China, Hong Kong and Taiwan proclaimed her choice of the traditional high-necked dress as a victory for Chinese culture.

“I am very proud to have our culture recognized by people in other countries,” said someone called Snail Trail, commenting on a post of the Utah episode by a popular account on WeChat, the messaging and social media platform, that had been read more than 100,000 times.

“It’s ridiculous to criticize this as cultural appropriation,” Zhou Yijun, a Hong Kong-based cultural commentator, said in a telephone interview. “From the perspective of a Chinese person, if a foreign woman wears a qipao and thinks she looks pretty, then why shouldn’t she wear it?”

If anything, the uproar surrounding Ms. Daum’s dress prompted many Chinese to reflect on examples of cultural appropriation in their own country.

“So does that mean when we celebrate Christmas and Halloween it’s also cultural appropriation?” asked one WeChat user, Larissa.

Good question.  At least the Japanese and Chinese have not completely lost their minds.

(This is cute.)

PPS.  Some commenters have questioned my credentials.  I am having my personal doctor prepare a letter describing my competence.  I can assure you that the letter will provide a glowing report as to my mental health.

A quick follow-up to my previous post on Japan.  Leaving the sleek, attractive, courteous, efficient Narita Airport and arriving into messy, rude, chaotic, disorganized LAX is a real slap in the face.  My favorite part is when the airlines give you a customs form to fill out while still on the airplane.  After landing, you never show the customs form to anyone.  I guess they view it as a way for passengers to pass the time, sort of like doing Suduko.  On the other hand, south Orange County seems like paradise after visiting Japanese cities full of small houses, concrete buildings and power lines.  It’s really hard to compare America and Japan, as they have such different strengths and weaknesses.

I don’t have a lot of travel tips, as most people have different interests from me.  For instance, on the train to Narita airport I saw people staring at their cell phones.  I spent the time looking out the window, and enjoyed the view as much if not more than 90% of the films that I have seen.  I enjoy seeing the amazing variety of architecture in Tokyo, especially the stuff that reminds me of the 1960s.

During the final part of our trip we visited some less urban areas.  Two places stood out.  We spent 3 days on the Izu peninsula at a onsen (hot springs hotel)  near Kawazu, but I could see spending another month exploring the region.  (Of course I’ll never go back, just as I’ll never go back to all the other places I told myself I’d return to someday and see in more depth.)

Another highlight was the onsen at Takaragawa (in Gunma).  The hotel is rated 4 stars, but in reality is pretty delapidated.  Nonetheless, it’s well worth visiting due to the spectacular outdoor hot spring baths.  In the past, hotel customers could bathe with a black bear.  That’s no longer allowed, but they still do serve bear soup.

I do plan to go back to Japan someday, as it remains my favorite country.

PS. One of my favorite sights was the vending machines selling cigarettes and alcohol:

The machines also sell some 9% alcohol drinks. Indeed Japan has a huge vending machine industry, with an amazing variety of products.

PPS.  I also appreciate that Japan doesn’t accept the “cultural appropriation” insanity of the SJWs.  The Japanese view it as a compliment when Kay Perry dresses up in a kimono.  What is wrong with this country?

They also have lack America’s bizarre obsession with the safety of children.  I don’t have the article, but I recall reading a North Ridgeville, Ohio newspaper that reported an 8th grade school trip to DC was recently cancelled because school officials were worried about “terrorism”.  Not any specific terrorist threat, but just terrorism in general.  Tyler Cowen recently reported that Penn State was cancelling a student group that did outings to wilderness areas.

What’s happened to this country?  When I was young a whacky TV personality named Pat Paulson ran for President as a joke.  Back then, Americans were smart enough to realize that you don’t actually elect someone President who is running as a prank.

Reality is increasingly resembling the Onion newspaper.