Month: August 2011

Where does the Japanese slowdown come from?

Chris Reicher refers me to his recent paper, entitled “A simple decomposition of the variance of output growth across countries”:

This paper outlines a simple regression-based method to decompose the variance of an aggregate time series into the variance of its components, which is then applied to measure the relative contributions of productivity, hours per worker, and employment to cyclical output growth across a panel of countries. Measured productivity contributes more to the cycle in Europe and Japan than in the United States. Employment contributes the largest proportion of the cycle in Europe and the United States (but not Japan), which is inconsistent with the idea that higher levels of employment protection in Europe dampen cyclical employment fluctuations.

On Japan in particular, Chris sums up his results as follows: “I think that Karl Smith is right about Japan’s productivity performance; that seems to be the real long-term issue there.  Shrinking population + no more convergence in productivity + some convergence in hours worked per worker from a very high level = very slow growth, independently from the business cycle.”

Matt Yglesias frequently asks why TGS arrived first in Japan.  Chris’s paper reports:

In the United States, productivity only contributes about 27% of the cycle and labor input four-fifths. Meanwhile, in France and Germany, productivity contributes 43% and 38% of the cycle, respectively. Japan is more European than Europe in this regard; productivity contributes 59% of the cycle there, while Korea looks more like the United States.

That’s hardly an answer, but it suggests the Japanese economy was more dependent on productivity gains in the first place.  As those gains start to slow down or dry up, it bites harder and more quickly.

Here is Japan investment as a share of gdp.  Here are falling real wages in Japan.  Here is Noah on Japanese unemployment.  Another (possible) story is that Japan was hit first by outsourcing to China.

Greece fact of the day (not much of a bailout sir, is it?)

The uncertainty caused by the deal has led Greek bonds to plummet in recent days, with yields on Greece’s benchmark 10-year bonds breaching 18.5 per cent on Thursday, a new euro-era high, wiping away all gains achieved after the bail-out deal was reached.

There is more interesting information at the link, which is about whether there will be a bailout deal at all.

The silent run on European banks, update

Separately, bankers estimate that Italian banks lost the equivalent of €40bn-worth of money market funding in July. And while money market funds are still lending to French banks, the duration of deals has shrivelled dramatically, from several months to just a few weeks (at most). This matters, since French banks rely on money markets for about €200bn of funding.

Now, the good news is that these raw numbers are small compared to the total volume of money that eurozone banks raise in the wholesale and interbank markets, which is around €8,000bn. Better still, the European Central Bank has stepped into the gap to replace those vanishing funds. That has kept the system running, even as funding costs for eurozone banks have exploded to a level which are “massively prohibitive” – and thus unsustainable – for most banks, as Suki Mann, analyst at Société Générale says.

Here is the article.  The “Better still” sounds funny to my ears, but I think you get the point.  I’ve been saying for quite a while that this is the mechanism which will do in the (current configuration of the) euro, I suppose we will see.

Is fusion power going to work out?

Chris F. Masse sends me many links on this topic, and I am willing to give it a hearing.  Here is a new summary article:

“We could produce net electricity right now, but the costs would be huge,” says Cowley. “The barrier is finding a material than can withstand the neutron bombardment inside the tokamak. We could also just say damn to the cost of the electricity required to demonstrate this. But we don’t want to do something that cannot be shown to be commercially viable. What’s the point?”

…on Earth, scientists have to try and replicate a star’s intense gravitational pressure with an artificial magnetic field that requires huge amounts of electricity to create – so much that the National Grid must tell Culham when it is OK for them to run a shot. (Namely, not in the middle of Coronation Street or a big football match.)

Good news, sort of

Medicare’s growth slowdown has been much greater than that of private health insurance, however, as Maggie Mahar has noted on the Century Foundation’s Health Beat blog. In the 12-month period that ended in June 2011, Standard & Poor’s index for commercial health insurance rose 7.5 percent, while its Medicare index rose only 2.5 percent. The S&P data show that Medicare spending growth has been falling fairly steadily over the past 18 months.

That is from Peter Orszag, interesting throughout.  Some of this may actually be productivity improvements.

Nothing to Envy

Based on hundreds of interviews with escaped North Koreans, the novel-like Nothing to Envy is a fascinating portrait of North Korea, a sociological investigation of how a totalitarian state operates and a love-story with an O. Henry like ending. Here is one stunning excerpt that describes a defector as she crosses over into China.

Dr. Kim staggered up the riverbank. her legs were numb, encased in frozen trousers. She made her way through the woods until the first light of dawn illuminated the outskirts of a small village.…

Dr. Kim looked down a dirt road that led to farmhouses. Most of them had walls around them with metal gates. She tried one; it turned out to be unlocked. She pushed it open and peered inside. On the ground she saw a small metal bowl with food. She looked closer – it was rice, white rice, mixed with scraps of meat. Dr. Kim couldn’t remember the last time she’d seen a bowl of pure white rice. What was a bowl of rice doing there, just sitting out on the ground? She figured it out just before she heard the dog’s bark.

Up until that moment, a part of her had hoped that China would be just as poor as North Korea. She still wanted to believe that her country was the best place in the world. The beliefs she had cherished for a lifetime would be vindicated. But now she couldn’t deny what was staring her plain in the face; dogs in China ate better than doctors in North Korea.

Highly recommended.  I will say more in future posts.

Hat tip: Bryan Caplan.

How bad is it in Japan?

Karl Smith offers some useful comments, stressing that Japanese unemployment does in fact seem high.  My view is twofold:

1. Japanese output performance, while hardly stunning, is not as bad as the numbers make it appear.  In a TGS age, the numbers will basically overstate the performance of health care + education economies (lots of rent-seeking counted as output) and understate the performance of export economies.  Most exports are “real stuff,” and with some exceptions, such as arms sales, the buying is not driven by rent-seeking or agency-ridden third party payment.  Japan of course is an export-based economy.  Consider the possibility that the U.S. and Japanese growth rates have not been as different as they look in the published numbers.

By the way, regarding output per man hour, Japan has been about 70 percent of the U.S. level since the 1990s and not falling.

2. As Interfluidity points out, it is precisely the inefficient sectors of the U.S. economy which are the sources of whatever employment growth we have.  If those sectors are smaller in your economy, reemployment will be correspondingly tougher.

Put this together and you get a common picture.  The U.S. for a while has been more willing to absorb its displaced workers in the rent-seeking sectors and thus it looked more different from Japan than it really was.  Some of that willingness has gone away, as voters have sought or tolerated cuts in state and local government spending,and other areas.  Our published growth numbers decline and our measured unemployment increases, and so we look more like Japan, but it’s not as big a shift in regime as it might appear.

Oddly, it is Japan which comes off looking like the more transparent society.

What is the alternative to explanations along this track?  That Keynesian nominal stickiness holds across time horizons of twenty years and up?  Let’s turn to Scott Sumner again:

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.)

Japan is in any case full of puzzles.

Jon Huntsman speaks

When we take a position that isn’t willing to embrace evolution, when we take a position that basically runs counter to what 98 of 100 climate scientists have said, what the National Academy of Science – Sciences has said about what is causing climate change and man’s contribution to it, I think we find ourselves on the wrong side of science, and, therefore, in a losing position….I can’t remember a time in our history where we actually were willing to shun science and become a – a party that – that was antithetical to science. I’m not sure that’s good for our future and it’s not a winning formula.

Here is more.  The recent evidence, by the way, is making matters look worse, not better.

Who will receive the next national holiday?

Adam Burns, a loyal MR reader, asks:

Who do you think will be the next person to receive a national holiday in the US?

Or, if they are currently unknown, what characteristics/achievements will this person have to earn themselves that recognition?

Someone Latino sounds about right, since there is a growing number of Latino voters.  Yet who exactly should that be?  It’s been a long time since Cesar Chavez and in any case his cause is no longer fashionable.  Picking “an invisible Latino” won’t quite do the trick either.  American Latinos seem to have less mainstream canonicity, at least qua Latino.  There is no equivalent of Martin Luther King.  Nor are we about to dedicate a day to all the people who run across the border, no matter how persuasive Michael Clemens may be.

How about a day named after a generic old person?  They vote too, and this could be done while limiting the “doc fix” to trick them into submission before preparing the ice floes.  But how to make it polite?  “Oldies Day” won’t cut it, even if they can get away with a version of that in baseball or on the radio.

Most likely is that a naming opportunity will be sold to the highest bidder, in the midst of our forthcoming fiscal crisis, 侯逸凡 Day anyone?

More rooftop-ready results on reservation wages

These are from Alan Krueger and Andreas Muller (pdf):

This paper presents findings from a survey of 6,025 unemployed workers who were interviewed every week for up to 24 weeks in the fall of 2009 and spring of 2010. Our main findings are: (1) the amount of time devoted to job search declines sharply over the spell of unemployment; (2) the self-reported reservation wage predicts whether a job offer is accepted or rejected; (3) the reservation wage is remarkably stable over the course of unemployment for most workers, with the notable exception of workers who are over age 50 and those who had nontrivial savings at the start of the study; (4) many workers who seek full-time work will accept a part-time job that offers a wage below their reservation wage; and (5) the amount of time devoted to job search and the reservation wage help predict early exits from Unemployment Insurance (UI).

Here is a popular summary of some of the results, including the recommended Figure 4.1 (p. 47 in the paper):

… today’s job seekers seem more picky. According to an analysis of surveys of 6,000 job seekers, the minimum wages that the unemployed are willing to accept are very close to their previous salary and drop little over time, says Mr. Mueller. That could help explain in part why they have so much trouble finding work, he says.

I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers.

This paper has many other excellent points and results, see for instance pp.27-29.

For the pointer I thank the excellent Andrew Sweeney.

Stephen Williamson on the liquidity trap

The scarcity we are observing is not a traditional currency scarcity. As such, we can’t correct the scarcity by using conventional central banking tools – open market operations in short-term government debt and discount window lending. Neither can we correct it through “quantitative easing.” We cannot ease anything through swaps of reserves for long-maturity debt, as that cannot make reserves relatively less scarce under the current circumstances. But the inability of monetary policy to correct the liquidity scarcity problem has nothing to do with the zero lower bound on short-term nominal interest rates, as the key problem is a contemporary liquidity trap, not Grandma’s liquidity trap.

How can government action mitigate the liquidity scarcity? If monetary policy cannot do it, that leaves fiscal policy. But there is a tendency, particularly in the blogosphere, to frame the problem in Old Keynesian terms. In this view, we are facing Grandma’s liquidity trap, the LM curve is flat, monetary policy doesn’t work, so shift the IS curve instead. Further, unemployment is very high and persistent, so it might seem natural to have the government employ people directly by spending more. But the problem here is financial, and it’s not a Keynesian inefficiency associated with real rates of return being too high; in fact real rates of return are too low given the scarcity of liquid assets, which produces large liquidity premia.

One way to solve the problem would be to have the Treasury conduct a Ricardian intervention, i.e. issue more debt with the explicit promise to retire it at some date in the future. If the future arrives, and we still have a scarcity, then do it again. This requires a transfer, or a tax cut in the present, and leaves the present value of taxes unchanged, but the result is not Ricardian because of the exchange value of the government debt issued.

Here is more, and you can take this post as a validation of many (not all) of the broader methodological points Williamson likes to make.  “Neoclassical macroeconomics” is not totally out to lunch, and it is ignored at our peril.

Bad bank, bad bank

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.  “We are creating a classic good bank, bad bank structure”…

…“It’s a way to get investors focus on the good,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s a way to talk about good things and ignore the bad.”

That was in March 2011.  Here is August 2011.  Here is a chart.