Doing more with less

There’s been a lot of discussion about the impact of Abenomics.  I’ve been sort of a moderate on the issue, arguing that it helped, but isn’t going to have a transformative impact.  Recently I ran across a piece of data that made me slightly more optimistic about Japan:

The number of people in the world’s third-largest economy dropped by 0.17 percent or 217,000 people, to 127,298,000 as of last Oct. 1, the data said. This figure includes long-staying foreigners.

The number of people aged 65 or over rose by 1.1 million to 31.9 million, accounting for 25.1 percent of the population, it said.

.  .  .

Meanwhile, the country’s main working population aged 15 to 64 fell below 80 million as of Oct. 1, for the first time in 32 years due to the country’s rapidly aging society, according to the government data.

Of the total, the workforce stood at 79,010,000, down 1,165,000.

A 0.17% population decline is modest, but that last line caught my attention. That’s a 1.45% decline in a single year!  If you are lazy and just read headlines you might notice that Japanese RGDP rose 1.7% last year.  But just as in the US, year-over-year figures are misleading.  The Q4 over Q4 figures are about 2.5% RGDP growth, almost the same as the US.

But the US working age population rose by . . . actually I can’t find the data anywhere, so I guesstimated by interpolating between 2008-2010 growth rates, and 2015-2020 forecasts.  The working age population was forecast to rise by about 5 million or 2.5% between 2010 and 2015.  So let’s say about 0.5% per year.  BTW, the Census forecasts show the rate slowing sharply, from 0.9%/year around 2008 to 0.25%/year between 2015-20.  Expect very slow RGDP growth ahead.

The Japanese RGDP figures show growth of nearly 4% per working age adult, which would be equivalent to a 4.5% RGDP growth rate in the US.  That makes me a bit more optimistic about Abenomics.

Two reasons for caution:

1.  Japanese figures are erratic; I expect slightly slower growth this year.

2.  It’s not clear the working age population is the right metric, especially if increasing numbers of Japanese elderly are working.

However under any reasonable population assumptions the Japanese RGDP figures are more impressive than they look.  Also note that the unemployment rate fell from 4.3% in January 2013 to 3.7% in January 2014, after falling only 0.2% during the previous 12 months.  The 3.6% rate in February 2014 is tied for the lowest rate since the 1990s.  I.e. it equals the lowest rate achieved in the Koizumi boom. Expect to see that mark broken soon.

I believe the Japanese output gap is real, but smaller than many of my fellow demand-siders assume.  The big gain from Abenomics is that it reduces the debt burden, as faster NGDP growth hasn’t raise JGB yields.  If both minus 0.5% and positive 1.5% CPI inflation are compatible with the zero bound on interest rates, what government in its right mind (with a debt of over 200% of GDP) wouldn’t opt for the 1.5% rate?

PS.  While using Google to make sure I spelled Koizumi correctly, I came across an excellent Noah Smith post on the subject:

The fact that the spending cuts and the growth speedup exactly coincide is probably a coincidence (unless the Confidence Fairy lives in Japan and never visits Europe). But the point is, austerity didn’t hurt Japan as much as we might expect, and the 2000-07 boom was definitely not caused by a sudden surge in stimulus spending. So the Koizumi era seems not to have been a Keynesian success story.(Update: Of course, I don’t want to confuse levels with growth rates here. The deficit was at its peak during 2000-2003. The “austerity” I mention was a decrease in the rate of growth of the deficit; the decrease in the deficit didn’t really come until 2004-2007. So it’s conceivable that the large deficits of 2000-2003 “jumpstarted” a recovery, or perhaps acted with a lag. But that leaves the question of why deficits suddenly started working after not seeming to do much in the 90s, in which growth kept falling even though deficits kept rising. And it also leaves the question of why the decrease in deficits in 2004-2007, when the interest rate was still at the ZLB, didn’t noticeably hurt the recovery.)

The update made me think he got complaints from Keynesians that it’s levels that matter, not changes.  Of course now Keynesians are trying to explain away the Osborne boom with exactly the opposite argument.

PPS.  Just to be clear, NGDP data is the best way of testing whether Abenomics boosted AD.  It did. By looking at RGDP data you test the joint hypothesis that it boosted AD, and than AD boosted RGDP.



23 Responses to “Doing more with less”

  1. Gravatar of Major_Freedom Major_Freedom
    15. April 2014 at 18:27

    That Smith quote is a fine example of a reminder that no matter what the data says, Keynesianism is vindicated.

  2. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2014 at 21:29

    “It’s not clear the working age population is the right metric, especially if increasing numbers of Japanese elderly are working.”–Sumner.

    This is a key point.

    1. For one, a large fraction, or about one-third, according to The Economist, of the Japanese labor force is now freelancers, and this could include a lot of elderly.

    2. Societies are mutable. For “elderly” to work may not be a big deal, if it means minding a small family shop and not picking rice in the sun. In Asian societies, employment and even volunteer helping out in family businesses is common.

    This is why “structural or demographic impediments” are holding any particular nation back are not convincing arguments.

    Even Japan has huge reservoirs of “elderly” and underemployed and freelancers who can be drawn back into the workforce if demand exists. In the USA, we are flush with labor, or potential labor resources.

    What is holding back Japan and the United States is a lack of aggregate demand. That argument I find very compelling.

    Read my lips: Not enough demand!

    It is asinine to leave so much output on the table, due to a demented kowtowing to purported “impediments.”

    And btw, there are plenty of 65-year-olds who will pop you if you call them elderly.

  3. Gravatar of Ralph Musgrave Ralph Musgrave
    15. April 2014 at 22:16

    Keynsianism (or at least one form of Keynsianism) equals government and central bank print money and spend it (and/or cut taxes). If such spending takes place, that boosts employment. Plus in either case the amount of money in the hands of the less well-off (and the net assets of the private sector) is boosted.

    Market monetarism equals government and central bank print money and buy assets, thus the value of private sector assets remains constant. Plus extra money ends up in the pockets of the section of the population least likely to spend it: the well off.

    It should be obvious which is the more potent policy.

  4. Gravatar of Tom Brown Tom Brown
    15. April 2014 at 23:50

    O/T: Do any MMists here have any thoughts/criticisms/praise for this write up on long term interest rates:


  5. Gravatar of J Mann J Mann
    16. April 2014 at 04:23

    Major Freedom, I think it’s the exact opposite of that – IIUC, Noah is saying that modern Keynsian theory can’t explain Japan’s recent economic performance as the effect of stimulus or austerity.

    I suppose it doesn’t disprove Keynsian theory either, because it’s possible that the economy is responding to stimulus and austerity as a modern Keynsian would predict, but that some other factor is swamping the effect, but it certainly doesn’t support it.

    As a good Baysian, I assume Noah is updating his internal probabilities.

  6. Gravatar of ssumner ssumner
    16. April 2014 at 05:16

    Ben, We’ll find out pretty soon how many there are–I suspect it won’t be a large enough number to move the needle very far.

    Ralph, You said;

    “Keynsianism (or at least one form of Keynesianism) equals government and central bank print money and spend it (and/or cut taxes). If such spending takes place, that boosts employment.”

    Didn’t work in Japan.

    And I’m afraid you don’t know what market monetarism is, as your description sounds more like old monetarism.

    BTW, I doubt whether Bill Gates walks around with a lot of base money in his pockets.

  7. Gravatar of ssumner ssumner
    16. April 2014 at 05:20

    Tom, There is some truth in that, but I don’t agree with the part of the analysis that is inconsistent with the EMH (i.e. the claimed ability to predict bond prices.)

  8. Gravatar of Gregor Bush Gregor Bush
    16. April 2014 at 05:26


    Working age population in Japan is projected to fall by 1.1% in 2014. Over the next 8 years, the rate of decline will ebb, so that by 2022 the 16-64 population will be falling by 0.6% per year. It will fall at roughly that rate for a few years and then the rate of decline will accelerate again starting in the late 2020s. By the late 2030s the rate of decline will have reached 1.5%, an even weaker growth than we’re seeing now.
    What’s interesting is that the pattern of changes in growth rates in the working age population in Japan are the mirror image of those in Germany. The German working age population fell by only 0.1% in 2013 but that rate of decrease is set to accelerate to 0.8% by 2012 and -1.4% by 2030.
    The numbers for the US meanwhile are fairly benign: +0.5% in 2013, +0.1% in 2023 and +0.3% in 2033.
    Question for you: in your view, do (will) these fluctuations affect the natural rate of interest in Japan and Germany (the euro zone) over time? Is the natural rate of interest affected one for one will potential labour supply (as in Solow) or is it relatively unaffected by changes in labour supply (as in Ramsey)? Or is the natural rate of interest not a useful concept?

  9. Gravatar of Brian Donohue Brian Donohue
    16. April 2014 at 07:30

    Benjamin Cole,

    #2 is a key point, I think. People need to DO SOMETHING. The idea that old people just play golf and go to casinos depresses me to no end, and I don’t think it’s a healthy template for ‘retirement’.

    I think Japan will be OK.

  10. Gravatar of TravisV TravisV
    16. April 2014 at 07:47

    “Market Rises on Good Industrial Production Report”

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. April 2014 at 08:25

    Tom Brown,
    Vince Foster’s analysis indicates he understands term structure theory quite well. But the stuff about the spreads between the 5-year and the 10 and 30-year is largely a distraction.

    I find that the monetary base Granger causes the 10-year rate at the 5% significance level and the 30-year rate at the 1% significance level since December 2008 and the impulse response is positive in both cases. However I find no significant correlation between the monetary base and the 5-year rate or the spreads.

    Yes, as QE is tapered we will probably see longer term rates drop.

    But the movements in the spread that Foster is alluding to are nothing more than statistical noise. The monthly spread between the 5-year and the 10-year has averaged between 0.9% and 1.46% since December 2008. The recent move from 1.35% in November to 1.08% in March is less than the monthly standard deviation of 0.3% over the past 60 years.

    Also, keep in mind the spread averaged 0.3% since 1953 and was never higher than 1.1% until the Great Recession. It can’t stay at this stratospheric level forever. As we get closer and closer to the inevitable liftoff from the zero lower bound the 5-year rate will rise and the spread will narrow.

  12. Gravatar of Matt McOsker Matt McOsker
    16. April 2014 at 09:48

    IMO Abe tried to stimulate with one hand, and at the same time increased taxes like the consumption tax which may take any meager benefit right back (the hike just went into effect). At the same time I believe Japanese wages have been stagnant, so I am sure the higher tax will be a drag. And how much boost to GDP came from the buying in anticipation of the increase.

    NGDP has not been stellar in Japan:

  13. Gravatar of Tom Brown Tom Brown
    16. April 2014 at 11:33

    Scott & Mark, thanks much for your comments!

  14. Gravatar of Doug M Doug M
    16. April 2014 at 11:53

    I am coming to the conclusion that the Keynesian multiplier is, in fact, negative.

  15. Gravatar of ssumner ssumner
    16. April 2014 at 16:40

    Gregor, I’d guess that the slower population growth will reduce interest rates.

    Travis, People who don’t think the economy is recovering should look at that IP graph.

    Mark, Interesting comment about how the 5/10 spread is quite unusual.

    Matt, I agree that some of it was people buying ahead of the tax increase, which means second quarter growth will be weak. But there is a lot of evidence that the net effect of Abenomics has been positive. And I think they had to raise taxes, despite the drag on growth in the second quarter.

  16. Gravatar of Major_Freedom Major_Freedom
    16. April 2014 at 18:06

    RGDP is a horrible measure of economic well being.

    It counts government spending.

  17. Gravatar of Benjamin Cole Benjamin Cole
    16. April 2014 at 19:33

    Brain D-

    I know plenty of people who want to be retired, but then also plenty who want to keep their hand in. My guess is half-in-half.

    Certainly, Japan has to decide whether retirement at age 65 makes sense, in a world of better health and less physically demanding labor.

    I think people are wrong when they apply a Great Depression-era metric—everyone retires at age 65—to modern economies.

    Like I always say, cultures and societies adapt. So you are retired, Your son is running a successful retail outlet. “Dad, the economy right now is so hot, we are selling tons, and I can’t find someone reliable at the cash register. Can’t you come in on weekends and help out?”

    Another version: “Sis, I just got offered a good job at good pay. My kids need watching. Can you come in during the afternoons and watch the kids, so I can take this job?”

    The labor pool is not set in concrete. I do know one fella retired from Merck, he was a factory inspector. Merck hires him as consultant to look at a few factories a year. High-end work, btw. Makes a ton, and works only a few months a year. Make him feel valuable, useful, likee the money.

    That may be the future too.

  18. Gravatar of Ralph Musgrave Ralph Musgrave
    17. April 2014 at 01:44


    By way of arguing against Keynsianism, you cite Japan. Very convenient. Japan is precisely the country where Keynsianism is least likely to work well because of the very high propensity of Japanese households to save. But the point must come where sufficient base money or government debt fed into Japanese household pockets would induce them to spend. Or are you suggesting that when given a $1million windfall, that would have no effect on spending by the average Japanese household?

    Re your point that my description of market monetarism is defective because the description is close to the description of what you call “old monetarism”, that point is weak given that you yourself said that market monetarists “have many similarities to monetarism”. See:

    Next, I described market monetarism as consisting of “government and central bank print money and buy assets”. Brad DeLong seems to agree with my description. He says, “Believers in market monetarism thought that… the adoption of QE III would substantially… spur the recovery.” That’s here:

    As to the exactly amount of base money that Bill Gates or any other SPECIFIC INDIVIDUAL holds, that point is wholly irrelevant. The brute and inescapable reality is that if the government / central bank print and spend money, that money ends up being held by a selection of private sector entities.

  19. Gravatar of Matt McOsker Matt McOsker
    17. April 2014 at 05:03

    Major Freedom – government spending makes it an accurate measure IMO. If you slashed government spending in half tomorrow, GDP would plummet and people would become unemployed – meaning the overall economic well being becomes worse. Even if you did not count that spending in the formula you would have the same effect. The federal government is putting money and assets into the economy via deficits and spending, while taking some out via taxes. While treasuries issued via deficits are not defined as money, the Fed can buy those and convert it to money. I just don’t think you can ignore the latter process because it does have an effect on economic outcomes. Now if you want to argue positive or negative, then that is something entirely different.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. April 2014 at 05:22

    Ralph Musgrave,
    “Japan is precisely the country where Keynsianism is least likely to work well because of the very high propensity of Japanese households to save.”

    Every six months or so you repeat this nonsense I point to OECD statistics showing this is false and then six months later you’re back with it again:

    The Japanese household savings rate was the highest in the advanced world…*40 years ago*. But for the last two decades it has not been all that remarkable, and in 2013 it was lower than every OECD member with the sole exception of Denmark.

    You might also note that Japan is currently running a record current account deficit which is symptomatic of a *negative* national savings rate.

    Ralph Musgrave:
    “Brad DeLong seems to agree with my description. He says, “Believers in market monetarism thought that… the adoption of QE III would substantially… spur the recovery.” That’s here:…”

    At the time a number of people pointed out to DeLong in comments that this was blatantly false. For example, here’s what Scott actually said shortly after QE3 was announced:

    “But the truth is there there’s nothing to see here folks, just move right along. The QE3 did a little bit of good, but not enough to spur a rapid recovery. If you want more (and I do) then we need to press for NGDPLT.”

    There’s an awful lot you know that just ain’t so.

  21. Gravatar of Major_Freedom Major_Freedom
    17. April 2014 at 08:33

    Matt McOsker:

    It does not follow from the likely event of a rise in unemployment arising from a rapid halving of government spending, that this means government spending is an accurate measure of economic well being.

    The following is an extreme example designed specifically to address your premises, and it is not designed to compare it, with our society: suppose that during 1940, say on a Tuesday in December, the Nazi regime suddenly reduced its military spending down to zero. By your metric of “employment”, because it would drastically fall, as all the workers who were building the gas chambers and tanks would become laid off, it would mean that Nazi spending is an accurate measure of economic standards of living.

    Hopefully you can understand that just because unemployment would rise, it doesnn’t mean the money currently being spent, is reflectivr of desirable standards of living.

    So if we consider our society now, I would still argue that including government spending is not an accurate measure of economic well being. It may be not as bad as 1940 Germany, but it is still undesirable, in the opinions of those who are coerced into paying taxes in the currency the government is monopoly issuer over.

    The non-private sector is not putting “money and assets” into the economy. It is putting fiat notes that they force people to pay taxes in. The “assets” are produced in the private sector. The non-private sector is merely using coercion to shift resources from their most highly valued use, to their own use.

    The private sector does not need continuous increases of fiat notes printed by the non-private sector.

  22. Gravatar of Doug M Doug M
    17. April 2014 at 09:40

    Matt McOsker,

    You are making a mistake. You are treating the number of jobs as finite, when, in fact, jobs are created and destroyed every day. While I agree, it would be quite a shock of half of all government employees were laid-off tomorrow, lets look at a slightly less extreme example.

    Suppose one employee is laid-off tomorrow. What does that do to output. Well output falls by the amount of that employee’s productivity. Eventually he will find a job, or start a business and create a job. So, how much as GDP changed. It has changed to the degree that he is more productive or less productive in his new job.

    If you are right-of center, you will say that most government employees will be more productive as private employees. And if you lean left, you will say that the value of these government employees is greater than something that can measured in dollars and cents, and if you are Major Freedom, you will say that the productivity of government employees is not significantly greater than zero and all economic activity can me measured in dollars and cents.

  23. Gravatar of ssumner ssumner
    17. April 2014 at 16:29

    Ralph, So Brad DeLong is your expert on market monetarism? Is that a joke? And no, what he said is not the same as what you said. Nor do the Japanese save all that much.

Leave a Reply