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Paul Krugman used his column this morning to point out how strong the economy was in the 1990s and how the low unemployment in the second half of the decade allowed for strong wage and income gains at the middle and bottom end of the income distribution. This is all very much on the mark. However, he also distinguished the impact of the stock bubble from the housing bubble by saying that the collapse of the latter had more serious consequences because of the growth of private debt.
There are a few points worth making on this assessment. First the collapse of the stock bubble did have very severe consequences for the labor market. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, this was the longest period without net job growth since the Great Depression. The weakness of the labor market was the reason the Fed kept the federal funds rate at 1.0 percent until the middle of 2004.
If Krugman is pointing to the financial crisis as fallout, then of course the issue of private debt is correct. There were a huge amount of mortgage loans and derivative instruments that could go bad with the collapse of house prices. This was not true in the case of stock prices. It’s much more difficult to borrow against stocks than housing. (The evil regulators at work.)
However, when it comes to the real economy, as opposed to the fun of watching collapsing financial behemoths, we don’t have any reason to look to debt. The investment boom sparked by the stock bubble was much smaller than the construction boom sparked by the housing bubble. The share of non-residential investment in GDP fell by 2.6 percentage points from its 2000 peak to its 2003 trough. Residential construction fell by 4.0 percentage points of GDP from 2005 to 2010.
In addition, the housing wealth effect on consumption is much larger than the stock wealth effect. This is due to the fact that it is much easier to borrow against wealth and also that housing wealth is much more evenly distributed. Bill Gates probably doesn’t increase his consumption much when the value of his stock doubles. Middle income homeowners are likely to spend much more when the value of their house doubles.
In short, while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn’t fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.
Paul Krugman used his column this morning to point out how strong the economy was in the 1990s and how the low unemployment in the second half of the decade allowed for strong wage and income gains at the middle and bottom end of the income distribution. This is all very much on the mark. However, he also distinguished the impact of the stock bubble from the housing bubble by saying that the collapse of the latter had more serious consequences because of the growth of private debt.
There are a few points worth making on this assessment. First the collapse of the stock bubble did have very severe consequences for the labor market. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, this was the longest period without net job growth since the Great Depression. The weakness of the labor market was the reason the Fed kept the federal funds rate at 1.0 percent until the middle of 2004.
If Krugman is pointing to the financial crisis as fallout, then of course the issue of private debt is correct. There were a huge amount of mortgage loans and derivative instruments that could go bad with the collapse of house prices. This was not true in the case of stock prices. It’s much more difficult to borrow against stocks than housing. (The evil regulators at work.)
However, when it comes to the real economy, as opposed to the fun of watching collapsing financial behemoths, we don’t have any reason to look to debt. The investment boom sparked by the stock bubble was much smaller than the construction boom sparked by the housing bubble. The share of non-residential investment in GDP fell by 2.6 percentage points from its 2000 peak to its 2003 trough. Residential construction fell by 4.0 percentage points of GDP from 2005 to 2010.
In addition, the housing wealth effect on consumption is much larger than the stock wealth effect. This is due to the fact that it is much easier to borrow against wealth and also that housing wealth is much more evenly distributed. Bill Gates probably doesn’t increase his consumption much when the value of his stock doubles. Middle income homeowners are likely to spend much more when the value of their house doubles.
In short, while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn’t fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.
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The NYT had a piece assessing which of Donald Trump’s promises he would be able to keep if he got in the White House. When discussing trade the piece implied that most workers would be hurt by his efforts to reduce the trade deficit since it would mean higher prices for a wide range of imports. This is faulty logic.
To see the point, suppose that our “free trade” deals had been focused on subjecting doctors, dentists, lawyers, and other highly paid professionals to international competition instead of manufacturing workers. (Yes, there are tens of millions of smart people in the developing world who would be happy to train to U.S. standards and work in the United States for half of the pay of U.S. professionals. We just don’t allow this inflow of foreign professionals because our trade policy is designed by protectionists.) In this case, we would be paying much less for health care and other services provided by these professionals. (The savings from paying doctors European wages would be around $100 billion a year or around 0.6 percent of GDP.)
Suppose our trade deals had gone the route of free trade in professional services. Then Donald Trump promised to restrict the number of foreign doctors who could enter the country. The NYT would say that U.S. doctors would be hurt by this restriction since they would be paying more for health care.
Of course they would pay more for health care, just like everyone else. However their increase in pay would almost certainly dwarf the higher cost of health care.
The same would almost certainly be the case for manufacturing workers and likely a large segment of non-manufacturing workers whose wages have been depressed by competition by displaced manufacturing workers. The NYT is misrepresenting the story by implying that these workers would be losers in this scenario simply because they would have to pay more for imported goods.
The NYT had a piece assessing which of Donald Trump’s promises he would be able to keep if he got in the White House. When discussing trade the piece implied that most workers would be hurt by his efforts to reduce the trade deficit since it would mean higher prices for a wide range of imports. This is faulty logic.
To see the point, suppose that our “free trade” deals had been focused on subjecting doctors, dentists, lawyers, and other highly paid professionals to international competition instead of manufacturing workers. (Yes, there are tens of millions of smart people in the developing world who would be happy to train to U.S. standards and work in the United States for half of the pay of U.S. professionals. We just don’t allow this inflow of foreign professionals because our trade policy is designed by protectionists.) In this case, we would be paying much less for health care and other services provided by these professionals. (The savings from paying doctors European wages would be around $100 billion a year or around 0.6 percent of GDP.)
Suppose our trade deals had gone the route of free trade in professional services. Then Donald Trump promised to restrict the number of foreign doctors who could enter the country. The NYT would say that U.S. doctors would be hurt by this restriction since they would be paying more for health care.
Of course they would pay more for health care, just like everyone else. However their increase in pay would almost certainly dwarf the higher cost of health care.
The same would almost certainly be the case for manufacturing workers and likely a large segment of non-manufacturing workers whose wages have been depressed by competition by displaced manufacturing workers. The NYT is misrepresenting the story by implying that these workers would be losers in this scenario simply because they would have to pay more for imported goods.
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The Washington Post’s lead editorial is a pitch to defend the “liberal international order.” The piece notes the rise of right-wing populist movements in much of the world and includes a swipe at Bernie Sanders “false promise of trade protectionism.” Incredibly the editorial goes on to give a pitch for the Trans-Pacific Partnership (TPP) which it describes as a “free-trade agreement.”
Of course, the TPP is not a “free-trade” agreement. The reductions in trade barriers provided for in the pact are very limited since most of the barriers between the countries in the pact are already low. (The U.S. already has trade deals with six of the eleven other countries in the pact.) Last week the International Trade Commission projected that the trade liberalization provisions in the TPP will increase income by just 0.23 percent when its effects are fully realized in 2032.
The TPP actually increases protectionist barriers in a wide variety of areas, most importantly by requiring stronger and longer patent and copyright protection. These barriers are likely to have much more impact in slowing growth than the tariff reduction provisions of the TPP will have in increasing growth. In the case of prescription drugs alone the United States will spend close to $430 billion in 2016. It would likely spend roughly one-tenth this amount in the absence of patents and related protections. The difference of $380 billion is more than 2.0 percent of GDP.
The goal of the TPP is raise drug prices in the partner countries closer to U.S. levels and lock in place the high drug prices in the United States. The cost of higher protections in other areas may be comparable.
It is also worth noting that highly paid professionals in the United States, most importantly doctors, will continue to be protected even with the TPP in place. If our doctors’ salaries were brought down to European levels it would save patients close to $100 billion a year in health care costs (0.6 percent of GDP). The Post is apparently fine with this sort of protectionism.
If the Post were serious about an agenda to counter right-wing populism it would be talking about economic policies that reversed the upward redistribution of income of the last four decades. This would mean changing trade policy and ending austerity. Instead the Post wants more upward redistribution and then will morally condemn the victims of its policies for not supporting the “liberal international order.”
The Washington Post’s lead editorial is a pitch to defend the “liberal international order.” The piece notes the rise of right-wing populist movements in much of the world and includes a swipe at Bernie Sanders “false promise of trade protectionism.” Incredibly the editorial goes on to give a pitch for the Trans-Pacific Partnership (TPP) which it describes as a “free-trade agreement.”
Of course, the TPP is not a “free-trade” agreement. The reductions in trade barriers provided for in the pact are very limited since most of the barriers between the countries in the pact are already low. (The U.S. already has trade deals with six of the eleven other countries in the pact.) Last week the International Trade Commission projected that the trade liberalization provisions in the TPP will increase income by just 0.23 percent when its effects are fully realized in 2032.
The TPP actually increases protectionist barriers in a wide variety of areas, most importantly by requiring stronger and longer patent and copyright protection. These barriers are likely to have much more impact in slowing growth than the tariff reduction provisions of the TPP will have in increasing growth. In the case of prescription drugs alone the United States will spend close to $430 billion in 2016. It would likely spend roughly one-tenth this amount in the absence of patents and related protections. The difference of $380 billion is more than 2.0 percent of GDP.
The goal of the TPP is raise drug prices in the partner countries closer to U.S. levels and lock in place the high drug prices in the United States. The cost of higher protections in other areas may be comparable.
It is also worth noting that highly paid professionals in the United States, most importantly doctors, will continue to be protected even with the TPP in place. If our doctors’ salaries were brought down to European levels it would save patients close to $100 billion a year in health care costs (0.6 percent of GDP). The Post is apparently fine with this sort of protectionism.
If the Post were serious about an agenda to counter right-wing populism it would be talking about economic policies that reversed the upward redistribution of income of the last four decades. This would mean changing trade policy and ending austerity. Instead the Post wants more upward redistribution and then will morally condemn the victims of its policies for not supporting the “liberal international order.”
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Arthur Brooks, the the president of the American Enterprise Institute, used his NYT column to complain that people in the United States were not moving enough. He argues that people were reluctant to move from depressed areas of the country to the growing areas which offer more opportunities. Ironically, his examples of prosperous areas and sectors were based on badly outdated information.
Brooks tells readers:
“We might expect movement from a high-unemployment state like Mississippi (unemployment rate: 6.3 percent) to low-unemployment states like New Hampshire (2.6 percent) or North Dakota (3.1 percent). Instead, Mississippians are even less likely to migrate out of the state today than they were before the Great Recession hit.”
While New Hampshire’s economy (with total employment of 660,000) still seems to be healthy, North Dakota has lost 3.8 percent of its jobs over the last year. While Brooks might expect people from Mississippi to move to leave their family and move to a frigid state whose economy is collapsing with the oil bust “we” probably don’t.
Brooks continues in this vein:
“There has also been a decline in blue-collar skills, like welding on a pipeline, that often require moving. This has created a needs-skills mismatch, with companies desperate for skilled tradesmen sitting alongside idle workers.”
The link is to an article from March of 2014 which discusses the surging demand for welders as a result of the oil boom. With the bust, employment in the mining sector has collapsed. According to the Bureau of Labor Statistics, employment in mining has fallen by 132,000 (15.7 percent) in the last year.
The more general point about a serious needs-skill mismatch was never supported by the data. The way we know there is a shortage of workers with a particular skill is that wages in that occupation rise rapidly, as employers attempt to get workers to fill vacancies. There were/are no major occupations seeing rapidly rising wages, which means that there are no major areas with shortages of workers.
The moral of this story is that the main problem with the labor market continues to be weak demand overall. This is remedied by either the government spending more money or reducing the trade deficit. If a strong economy lead to vibrant labor markets in certain regions, it is likely that people would move there. (Better government support for such moves would be beneficial.) However no one should be surprised that people are reluctant to move across the country in pursuit of phantom jobs.
Arthur Brooks, the the president of the American Enterprise Institute, used his NYT column to complain that people in the United States were not moving enough. He argues that people were reluctant to move from depressed areas of the country to the growing areas which offer more opportunities. Ironically, his examples of prosperous areas and sectors were based on badly outdated information.
Brooks tells readers:
“We might expect movement from a high-unemployment state like Mississippi (unemployment rate: 6.3 percent) to low-unemployment states like New Hampshire (2.6 percent) or North Dakota (3.1 percent). Instead, Mississippians are even less likely to migrate out of the state today than they were before the Great Recession hit.”
While New Hampshire’s economy (with total employment of 660,000) still seems to be healthy, North Dakota has lost 3.8 percent of its jobs over the last year. While Brooks might expect people from Mississippi to move to leave their family and move to a frigid state whose economy is collapsing with the oil bust “we” probably don’t.
Brooks continues in this vein:
“There has also been a decline in blue-collar skills, like welding on a pipeline, that often require moving. This has created a needs-skills mismatch, with companies desperate for skilled tradesmen sitting alongside idle workers.”
The link is to an article from March of 2014 which discusses the surging demand for welders as a result of the oil boom. With the bust, employment in the mining sector has collapsed. According to the Bureau of Labor Statistics, employment in mining has fallen by 132,000 (15.7 percent) in the last year.
The more general point about a serious needs-skill mismatch was never supported by the data. The way we know there is a shortage of workers with a particular skill is that wages in that occupation rise rapidly, as employers attempt to get workers to fill vacancies. There were/are no major occupations seeing rapidly rising wages, which means that there are no major areas with shortages of workers.
The moral of this story is that the main problem with the labor market continues to be weak demand overall. This is remedied by either the government spending more money or reducing the trade deficit. If a strong economy lead to vibrant labor markets in certain regions, it is likely that people would move there. (Better government support for such moves would be beneficial.) However no one should be surprised that people are reluctant to move across the country in pursuit of phantom jobs.
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Max Ehrenfreund had an interesting column reporting on research that showed the prices of goods purchased by higher income households fell more rapidly than the prices of goods purchased by lower income households. The basic argument is that new goods introduced into the market tend to be targeted towards higher end households. These new goods put downward pressure on the prices of the older goods with which they are competing. Since these are goods disproportionately purchased by higher end households (e.g. craft beers), it means the goods they consume rise less rapidly in price.
This story is actually not new. Two decades ago there was an effort to reduce Social Security by claiming that the consumer price index (CPI) overstates the true rate of inflation. (Social Security benefits are indexed to the CPI after workers retire.) One of the main arguments for an overstatement was that the new goods that were declining rapidly in price often did not enter the CPI basket until after their most rapid period of price decline. The poster child for this argument was the cell phone, which didn’t get into the index due to a fluke until 1998, when almost half of all households owned a cell phone. (Due to changes in procedures, this sort of mistake is virtually impossible with the current methodology.)
However, with the cell phone and other new items, the first purchasers who would enjoy these large price declines would be overwhelmingly high end individuals. The new goods argument might be a compelling case that the CPI overstates the rate of inflation experienced by the wealthy, but the story is much less plausible for the less well off segment of the population. The failure to include the cell phone in the CPI did not lead to any overstatement whatsoever in the rate of inflation experienced by the half of the population that didn’t own a cell phone, as some of us tried to point out at the time.
There are likely to be continuing battles over the rate of inflation experienced by different groups. There has been some research arguing that the poor actually see a lower rate of inflation than wealthy households. (See Shawn Fremstad’s analysis here.) Many elite types, like the Washington Post editorial board, continue to argue that Social Security should be cut because the CPI overstates the true rate of inflation. Unfortunately, all of these people oppose constructing an elderly CPI that would determine the extent to which this claim is true. Anyhow, it is apparently much easier to cut benefits for people by changing the measurements than by actually voting directly for benefit cuts, so look for many more battles over the measurement of inflation in the years ahead.
Max Ehrenfreund had an interesting column reporting on research that showed the prices of goods purchased by higher income households fell more rapidly than the prices of goods purchased by lower income households. The basic argument is that new goods introduced into the market tend to be targeted towards higher end households. These new goods put downward pressure on the prices of the older goods with which they are competing. Since these are goods disproportionately purchased by higher end households (e.g. craft beers), it means the goods they consume rise less rapidly in price.
This story is actually not new. Two decades ago there was an effort to reduce Social Security by claiming that the consumer price index (CPI) overstates the true rate of inflation. (Social Security benefits are indexed to the CPI after workers retire.) One of the main arguments for an overstatement was that the new goods that were declining rapidly in price often did not enter the CPI basket until after their most rapid period of price decline. The poster child for this argument was the cell phone, which didn’t get into the index due to a fluke until 1998, when almost half of all households owned a cell phone. (Due to changes in procedures, this sort of mistake is virtually impossible with the current methodology.)
However, with the cell phone and other new items, the first purchasers who would enjoy these large price declines would be overwhelmingly high end individuals. The new goods argument might be a compelling case that the CPI overstates the rate of inflation experienced by the wealthy, but the story is much less plausible for the less well off segment of the population. The failure to include the cell phone in the CPI did not lead to any overstatement whatsoever in the rate of inflation experienced by the half of the population that didn’t own a cell phone, as some of us tried to point out at the time.
There are likely to be continuing battles over the rate of inflation experienced by different groups. There has been some research arguing that the poor actually see a lower rate of inflation than wealthy households. (See Shawn Fremstad’s analysis here.) Many elite types, like the Washington Post editorial board, continue to argue that Social Security should be cut because the CPI overstates the true rate of inflation. Unfortunately, all of these people oppose constructing an elderly CPI that would determine the extent to which this claim is true. Anyhow, it is apparently much easier to cut benefits for people by changing the measurements than by actually voting directly for benefit cuts, so look for many more battles over the measurement of inflation in the years ahead.
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Economists have been largely puzzled by the sharp slowdown in productivity growth over the last decade. (Sorry, robot fans, they aren’t taking jobs yet.) Anyhow, productivity growth has fallen from nearly 3.0 percent annually from 1995 to 2005, to less than 1.0 percent over the last decade. We’ve actually seen negative growth over the last two years.
Anyhow, there are no widely accepted explanations for this sharp falloff. (My story is that in a weak labor market with workers desperate to find jobs, many employers are hiring them at very low productivity jobs. Think of the midnight shift at a convenience store or the greeters are Walmart. In a stronger economy, these workers would move to higher paying jobs and these low productivity jobs would go unfilled.)
The NYT reports on a possible way of increasing productivity, shorten work hours. It reports on the situation in Gothenburg, Sweden, where the city put in place a 6-hour workday for public employees last year. According to the piece, the workers hugely value the shorter workday. They claim that it has improved the quality of their lives and also made them more productive workers.
While there is no hard data to support this contention, the one numerical example given seems to support the claim. The article reports on a hospital that had 89 workers before the experiment started, which hired an additional 15 workers to compensate for the shorter workdays. If all of the 89 workers had previously put in 8-hours days, and all 104 workers (counting the 15 new hires) now work 6-hour days, this would imply an 14.1 percent increase in productivity, assuming no change in output. This would be an enormous gain — more than the U.S. economy has gained over the last decade. In fact, the piece indicates there actually has been an increase in output, implying an even larger gain in productivity.
In general, it is not easy to find ways to increase productivity. The standard recipes involve investing in more capital and better education and training for the workforce. While both of these routes are good, they are expensive and the gains will typically take a long period of time to be realized. If shortening work hours actually does lead to gains in productivity, this would be a remarkably easy route to accomplish this goal. And, it would make workers’ lives much better.
Economists have been largely puzzled by the sharp slowdown in productivity growth over the last decade. (Sorry, robot fans, they aren’t taking jobs yet.) Anyhow, productivity growth has fallen from nearly 3.0 percent annually from 1995 to 2005, to less than 1.0 percent over the last decade. We’ve actually seen negative growth over the last two years.
Anyhow, there are no widely accepted explanations for this sharp falloff. (My story is that in a weak labor market with workers desperate to find jobs, many employers are hiring them at very low productivity jobs. Think of the midnight shift at a convenience store or the greeters are Walmart. In a stronger economy, these workers would move to higher paying jobs and these low productivity jobs would go unfilled.)
The NYT reports on a possible way of increasing productivity, shorten work hours. It reports on the situation in Gothenburg, Sweden, where the city put in place a 6-hour workday for public employees last year. According to the piece, the workers hugely value the shorter workday. They claim that it has improved the quality of their lives and also made them more productive workers.
While there is no hard data to support this contention, the one numerical example given seems to support the claim. The article reports on a hospital that had 89 workers before the experiment started, which hired an additional 15 workers to compensate for the shorter workdays. If all of the 89 workers had previously put in 8-hours days, and all 104 workers (counting the 15 new hires) now work 6-hour days, this would imply an 14.1 percent increase in productivity, assuming no change in output. This would be an enormous gain — more than the U.S. economy has gained over the last decade. In fact, the piece indicates there actually has been an increase in output, implying an even larger gain in productivity.
In general, it is not easy to find ways to increase productivity. The standard recipes involve investing in more capital and better education and training for the workforce. While both of these routes are good, they are expensive and the gains will typically take a long period of time to be realized. If shortening work hours actually does lead to gains in productivity, this would be a remarkably easy route to accomplish this goal. And, it would make workers’ lives much better.
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The NYT is once again confused about the story of deflation, telling readers that it’s bad news for Japan that the yen has recently risen in value since a higher yen reduces import prices, increasing the risk of deflation. While a higher valued yen is a problem because it makes Japan’s goods and services less competitive internationally, and therefore worsens the trade deficit, its impact on the inflation rate is of little consequence for the economy.
The impact on the trade balance is straightforward and direct. The higher valued yen will make Japanese made goods and services more expensive to people in other countries, so they will buy less of them. On the other hand, imports will be cheaper for people living in Japan, so they will buy more imports. The net effect is to worsen the trade balance, decreasing demand in the economy.
However, the effect of lower import prices on the inflation rate is likely to have little effect on demand. While it is often claimed that deflation hurts demand because it leads consumers to delay purchases with the idea that the price will be lower due to waiting, as a practical matter, this makes almost no sense.
If the deflation rate is -1.0 percent (much larger than Japan has seen in recent years), it means that consumers can save themselves 1.0 percent of the price of a product by delaying a purchase for a year. On a $20,000 car, a consumer can save $200 if they wait a year. On a $500 television set, they will save $5.00 and on a $30 shirt, they will save 30 cents. If the deflation rate is half this much (-0.5 percent), the savings will be half of these sums. It is unlikely that many people will put off purchases for such savings.
The more likely impact will be on investment. The issue here is the real interest rate, the difference between the rate of interest firms must pay and the rate of increase in the price of the products they are selling.
Suppose that a company was selling a product for $1000 (or the yen equivalent price), with $100 of the cost of the production of this product due to imported items. Suppose that its costs of production were $800, leaving a profit of $200 on each item. Now imagine that a 10 percent rise in the yen leads the price of the imported inputs to fall to $90. If the drop in the price of imported inputs is fully passed on to consumers, then the price of the product falls to $990, leaving profit margins unchanged.
In this case, the company has the same incentive to invest after the rise in the value of the yen as it did before the rise in the value of the yen. The one-time drop in prices is not a problem. (If the drop in the price of imported inputs is not fully passed on, then the increased profit margin would increase the incentive to invest.) This would only be an issue if it was expected that the yen would keep rising leading to continuing falls in the price of the product. For this reason, a reduction in the inflation rate, or even deflation, that is the result of lower import prices should not be bad news for Japan’s economy.
Just to remind folks, the problem of deflation is actually a problem of the inflation rate being too low. Since it is difficult to push nominal interest rates below zero, or at least much below zero, when inflation is low there are limits to how much the central bank can boost the economy with low real interest rates. When the inflation rate declines or turns negative due to a drop in oil prices or other imports, it does not affect the real interest rate as seen by firms. For this reason, the drop in import prices is not the problem implied by this article.
The NYT is once again confused about the story of deflation, telling readers that it’s bad news for Japan that the yen has recently risen in value since a higher yen reduces import prices, increasing the risk of deflation. While a higher valued yen is a problem because it makes Japan’s goods and services less competitive internationally, and therefore worsens the trade deficit, its impact on the inflation rate is of little consequence for the economy.
The impact on the trade balance is straightforward and direct. The higher valued yen will make Japanese made goods and services more expensive to people in other countries, so they will buy less of them. On the other hand, imports will be cheaper for people living in Japan, so they will buy more imports. The net effect is to worsen the trade balance, decreasing demand in the economy.
However, the effect of lower import prices on the inflation rate is likely to have little effect on demand. While it is often claimed that deflation hurts demand because it leads consumers to delay purchases with the idea that the price will be lower due to waiting, as a practical matter, this makes almost no sense.
If the deflation rate is -1.0 percent (much larger than Japan has seen in recent years), it means that consumers can save themselves 1.0 percent of the price of a product by delaying a purchase for a year. On a $20,000 car, a consumer can save $200 if they wait a year. On a $500 television set, they will save $5.00 and on a $30 shirt, they will save 30 cents. If the deflation rate is half this much (-0.5 percent), the savings will be half of these sums. It is unlikely that many people will put off purchases for such savings.
The more likely impact will be on investment. The issue here is the real interest rate, the difference between the rate of interest firms must pay and the rate of increase in the price of the products they are selling.
Suppose that a company was selling a product for $1000 (or the yen equivalent price), with $100 of the cost of the production of this product due to imported items. Suppose that its costs of production were $800, leaving a profit of $200 on each item. Now imagine that a 10 percent rise in the yen leads the price of the imported inputs to fall to $90. If the drop in the price of imported inputs is fully passed on to consumers, then the price of the product falls to $990, leaving profit margins unchanged.
In this case, the company has the same incentive to invest after the rise in the value of the yen as it did before the rise in the value of the yen. The one-time drop in prices is not a problem. (If the drop in the price of imported inputs is not fully passed on, then the increased profit margin would increase the incentive to invest.) This would only be an issue if it was expected that the yen would keep rising leading to continuing falls in the price of the product. For this reason, a reduction in the inflation rate, or even deflation, that is the result of lower import prices should not be bad news for Japan’s economy.
Just to remind folks, the problem of deflation is actually a problem of the inflation rate being too low. Since it is difficult to push nominal interest rates below zero, or at least much below zero, when inflation is low there are limits to how much the central bank can boost the economy with low real interest rates. When the inflation rate declines or turns negative due to a drop in oil prices or other imports, it does not affect the real interest rate as seen by firms. For this reason, the drop in import prices is not the problem implied by this article.
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The Washington Post, which has decided to abandon journalism for the cause of bashing Bernie Sanders, included this bizarre comment in a piece on the failure of the college headed by Jane Sanders, Senator Sanders’ wife:
“…many observers wonder whether the septuagenarian socialist even fully understands how the economy works. His inability to explain how he’d break up the big banks during the disastrous sit-down with the New York Daily News editorial board last month remains a good data point in the case that he is in over his head on policy.”
Actually, Senator Sanders (the septuagenarian above — ageism in the service of Sanders-bashing is cool at the Post), explained exactly how he would break up the big banks. He said that he would have the banks break themselves up. The logic is simple. The banks know the most efficient way to break themselves into smaller pieces and the incentive to do so is in order to preserve shareholder value. The government’s role is to give them size target(s), timelines, and penalty schedules for failing to meet the targets.
It does seem like someone is over their head in this story and it’s not the Senator from Vermont.
The Washington Post, which has decided to abandon journalism for the cause of bashing Bernie Sanders, included this bizarre comment in a piece on the failure of the college headed by Jane Sanders, Senator Sanders’ wife:
“…many observers wonder whether the septuagenarian socialist even fully understands how the economy works. His inability to explain how he’d break up the big banks during the disastrous sit-down with the New York Daily News editorial board last month remains a good data point in the case that he is in over his head on policy.”
Actually, Senator Sanders (the septuagenarian above — ageism in the service of Sanders-bashing is cool at the Post), explained exactly how he would break up the big banks. He said that he would have the banks break themselves up. The logic is simple. The banks know the most efficient way to break themselves into smaller pieces and the incentive to do so is in order to preserve shareholder value. The government’s role is to give them size target(s), timelines, and penalty schedules for failing to meet the targets.
It does seem like someone is over their head in this story and it’s not the Senator from Vermont.
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