Japan slides into recession

Japan’s economy contracted at a much-worse-than-expected 3.7% annualized rate in the January-March period, tipping the country into a recession as the March 11 earthquake and tsunami caused declines in consumer spending, business investment and private-sector inventories.

The article is here.  It’s not worse than I expected, or worse than what Michael Mandel expected.  The simple lesson is that earthquakes and tsunamis are contractionary, not expansionary.  This is a classic example of real business cycle theory and how it can also apply to economies which are, in some regards, still in Keynesian corridors.

Comments

those are some big broken windows.

FYI, here you have Chile's quarterly national account data. Draw your own conclusions about what happened after the big earthquake of February 27, 2010.
http://www.bcentral.cl/estadisticas-economicas/publicaciones-estadisticas/trimestrales/pdf/CuentasNacionales_primer_trimestre2011.pdf

The medium and longer term effects could be different. What you are seeing here is the knee-jerk. Also, these Jan-March statistics can hardly capture the reconstruction effects of a March event. This is barely post hoc , leave alone propter hoc .

I agree with you. Hope you can read Chile's latest national account report that I referred to in an earlier comment (sorry no English version).

That it takes something as dramatic as this to have an unequivocal real shock recession is a reminder of what a joke all those RBC models are that rely on unspecified "technology shocks" to explain short-term macro fluctuations, even though this approach apparently continues to dominate what gets taught in most grad macro classes.

Hope you can explain how you would apply any theory to explain the economic consequences of an earthquake. Please refer to any particular application you are aware of.

I would argue that valid economic theories would be based on the natural world, and the predicted and unpredicted natural events driving the economy.

Behavioral economics at least incorporates the people who are in the natural world, but it seems the reason is to find ways to force the people to conform to economic theory on how people should behave, instead of economics modeling how people actually behave in the natural world.

But the idea that the past performance of natural capital destruction based activity predicts the future is clearly the dominant basis of economic theory, so the expectation that a decade or century of no disaster predicts smooth sailing ahead is clearly incorporated into all the thinking of economists. Economists thus call government regulation a waste because the regulation is in expectation of events that will never occur in the models economists use.

IMO people do not care as much about GDP as they do about employment and that is why they make the statements that they do about disasters. I think that what people care about most in he economy going from most important to least:

1. Employment
2. Inflation
3. GDP or rather growth in per capita income and wealth.
4. Gini or differences in wealth and income

Rosser is right. Even worse, the unemployment rate in Japan has trended steadily downward during the entire 6 months of their "recession." It is possible that natural disasters can explain temporary declines in real output--but I doubt they explain the sort of high unemployment that one observes during demand-side recessions. On the other hand unemployment is a lagging indicator, so it may rise a bit in the next few months. But I doubt it persists at a high level.

Please feel free to answer the question I posed to Rosser.

Hahaha, the problem with Japan is that the (un)employment data are an awful indicator as to real activity. Almost all output movements there come from movements in measured productivity, with some movement in hours per worker.

E. Barandian, I'd expect an earthquake to reduce SRAS, which would reduce output. I doubt there'd by much change in output or the unemployment rate, one year after the earthquake. In contrast, an adverse demand shock will reduce output and employment a year after the shock.

Both in Japan and Chile the earthquakes were local --they didn't affect the whole country. In Japan, the local economy directly affected by the earthquake was large (in terms of absolute value of output) but closely integrated into the national economy and well integrated into the world economy. This integration implies that once the immediate work of restoring basic services and facilities, the local demand for goods and services will recover quickly to its previous level (people will receive transfers from the rest of the country and borrow in national and world markets, but the composition of their demand will change because they will have to buy housing and durable consumption goods). In Chile, the local economy was small but was well integrated to the world economy so the national accounts have shown a large impact on March 2010 (the main economic effects were the destruction of old buildings and storage facilities of agricultural and manufacturing enterprises) and a rapid recovery of aggregate demand and aggregate supply.
You point to SRAS but there has also been a SRAD problem, both much more serious in Japan than in Chile. The reconstruction of the capital stock in the local economy may take (much?) longer than a year, but the timing of the recovery of the local economy depends on how well integrated it is into the national and world economies. Anyway, I doubt macro theories provide appropriate frameworks for studying the timing of the recovery.

It’s not worse than I expected

Are your expectations about Japan documented somewhere? Or, to put it differently, is there *any* evidence that your expert predictive power is better than random?

This shows which they last very much lengthier and thus saving you income which could otherwise are actually utilized to purchase new ones.
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