That’s what he says in his column today. This seems more than a bit fantastic given the run-up in prices to $150 a barrel in 2008 followed by a plunge to less than $40. Most of these movements might be attributable to growth and then recession in the real economy, but it would require a story of incredibly inelastic supply and demand to fully explain these movements by the fundamentals of the market. There is research (here [link corrected] and here) that shows the opposite of Samuelson’s assertion.
That’s what he says in his column today. This seems more than a bit fantastic given the run-up in prices to $150 a barrel in 2008 followed by a plunge to less than $40. Most of these movements might be attributable to growth and then recession in the real economy, but it would require a story of incredibly inelastic supply and demand to fully explain these movements by the fundamentals of the market. There is research (here [link corrected] and here) that shows the opposite of Samuelson’s assertion.
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That fact should have mentioned prominently in an NYT article discussing the debate over the adoption of the European Union’s stability pact by Ireland. The pact only places restrictions on deficits and debt in the public sector.
However Ireland had no problem with debt or deficits in the public sector, it was running budget surpluses until the crisis hit and it had a very low ratio of debt to GDP. Ireland’s problem was the buildup of massive private sector debt, which fueled an enormous housing bubble.
Unfortunately, the European Union has no proposals to do anything to prevent the sort of asset bubbles, the collapse of which has led to the current crisis. The European Central Bank (ECB), the obvious institution to carry this responsibility, insists that its only job is to target 2.0 percent inflation.
This means that the ECB will consider its job well done even if an outhouse in Ireland costs $50 million euros or there is 50 percent unemployment, as long as the inflation rate is 2.0 percent. This situation should have been made clear to readers.
That fact should have mentioned prominently in an NYT article discussing the debate over the adoption of the European Union’s stability pact by Ireland. The pact only places restrictions on deficits and debt in the public sector.
However Ireland had no problem with debt or deficits in the public sector, it was running budget surpluses until the crisis hit and it had a very low ratio of debt to GDP. Ireland’s problem was the buildup of massive private sector debt, which fueled an enormous housing bubble.
Unfortunately, the European Union has no proposals to do anything to prevent the sort of asset bubbles, the collapse of which has led to the current crisis. The European Central Bank (ECB), the obvious institution to carry this responsibility, insists that its only job is to target 2.0 percent inflation.
This means that the ECB will consider its job well done even if an outhouse in Ireland costs $50 million euros or there is 50 percent unemployment, as long as the inflation rate is 2.0 percent. This situation should have been made clear to readers.
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Actually, they did not do this (as far as I know), but if the government ever asserted that its motive in locking up journalists was to promote freedom of the press, presumably the NYT would not just take this assertion at face value. This is why readers must be scratching their heads over the assertion that:
“Aiming to ease budgetary pressure and spur growth, Prime Minister Mario Monti of Italy has announced cuts to state spending by the end of the year.”
Of course budget cuts will typically lead to slower growth, not faster growth. In a downturn, an economy needs demand. If the government reduces demand there is no obvious source of demand to replace it, which means that there will be less overall demand in the economy and therefore less growth.
Budget cuts across the euro zone have pushed the area back into recession. There is no reason to believe that further cuts will somehow boost growth.
Actually, they did not do this (as far as I know), but if the government ever asserted that its motive in locking up journalists was to promote freedom of the press, presumably the NYT would not just take this assertion at face value. This is why readers must be scratching their heads over the assertion that:
“Aiming to ease budgetary pressure and spur growth, Prime Minister Mario Monti of Italy has announced cuts to state spending by the end of the year.”
Of course budget cuts will typically lead to slower growth, not faster growth. In a downturn, an economy needs demand. If the government reduces demand there is no obvious source of demand to replace it, which means that there will be less overall demand in the economy and therefore less growth.
Budget cuts across the euro zone have pushed the area back into recession. There is no reason to believe that further cuts will somehow boost growth.
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That would have been an appropriate headline for a Washington Post article that essentially told readers that Treasury Secretary Timothy Geithner would focus on issues that matter to business in his discussions with Chinese leaders. The most important issue for workers in dealing with China is a drop in the value of the dollar relative to yuan.
This would reduce the price of U.S. exports to people living in China and make imports from China more expensive. This would lead to more exports and fewer imports. Also, many other countries would likely follow the lead of China if it were to raise the value of its currency relative to the dollar. This would improve the U.S. trade balance overall. Economists agree that if the United States is to achieve full employment without large budget deficits or negative private savings, as we saw during the housing bubble years, this sort of adjustment is essential.
However the Post bizarrely told readers:
“chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.”
Actually, there has been zero progress towards closing the “yawning trade deficit.” The U.S. trade deficit with China in the first two months of 2012 was $45.4 billion, from $42.1 billion in 2011. This puts the U.S. on a path toward having yet another record trade deficit with China.
The piece then tells us in the passive voice [thanks Aloysius]:
“Even the issue of getting China to stop pegging its currency to the dollar — a major source of tension a few years ago — has receded somewhat, as the value of China’s yuan has moderately increased against the U.S. dollar.”
Actually, the issue doesn’t recede. Officials make a decision to de-emphasize it, which appears to be the case here.
The article then tells readers:
“U.S. business leaders view this round of talks as a prime opportunity. Advocates of reform within the Chinese government are speaking up, they said, and the mood is positive following the recent visit to the United States of future leader Xi Jinping.
‘No other country presents China’s particular mix of opportunities and challenges,’ Geithner said last week in a speech to the Commonwealth Club in San Francisco. The Obama administration, he said, has made “significant progress” on its goals.
U.S.-China Business Council President John Frisbie said American companies are hoping the Chinese will agree to open discussions on a bilateral investment treaty that would allow foreign investors to take full ownership of Chinese firms.”
I think that my headline much more accurately conveys the gist of the information presented in the article. Maybe the Post will correct the headline in its on-line version.
That would have been an appropriate headline for a Washington Post article that essentially told readers that Treasury Secretary Timothy Geithner would focus on issues that matter to business in his discussions with Chinese leaders. The most important issue for workers in dealing with China is a drop in the value of the dollar relative to yuan.
This would reduce the price of U.S. exports to people living in China and make imports from China more expensive. This would lead to more exports and fewer imports. Also, many other countries would likely follow the lead of China if it were to raise the value of its currency relative to the dollar. This would improve the U.S. trade balance overall. Economists agree that if the United States is to achieve full employment without large budget deficits or negative private savings, as we saw during the housing bubble years, this sort of adjustment is essential.
However the Post bizarrely told readers:
“chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.”
Actually, there has been zero progress towards closing the “yawning trade deficit.” The U.S. trade deficit with China in the first two months of 2012 was $45.4 billion, from $42.1 billion in 2011. This puts the U.S. on a path toward having yet another record trade deficit with China.
The piece then tells us in the passive voice [thanks Aloysius]:
“Even the issue of getting China to stop pegging its currency to the dollar — a major source of tension a few years ago — has receded somewhat, as the value of China’s yuan has moderately increased against the U.S. dollar.”
Actually, the issue doesn’t recede. Officials make a decision to de-emphasize it, which appears to be the case here.
The article then tells readers:
“U.S. business leaders view this round of talks as a prime opportunity. Advocates of reform within the Chinese government are speaking up, they said, and the mood is positive following the recent visit to the United States of future leader Xi Jinping.
‘No other country presents China’s particular mix of opportunities and challenges,’ Geithner said last week in a speech to the Commonwealth Club in San Francisco. The Obama administration, he said, has made “significant progress” on its goals.
U.S.-China Business Council President John Frisbie said American companies are hoping the Chinese will agree to open discussions on a bilateral investment treaty that would allow foreign investors to take full ownership of Chinese firms.”
I think that my headline much more accurately conveys the gist of the information presented in the article. Maybe the Post will correct the headline in its on-line version.
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Every quarter the Census Bureau puts out data on vacancy rates and homeownership. For some reason, this release is almost always ignored.
This is unfortunate because it often contains very useful information on the housing market. One of the reasons that I could be so sure that we were seeing a bubble when house prices started diverging sharply from historic trends was that the vacancy rate was reaching record levels as early as 2002. As we learn in advanced economics, excess supply is supposed to lead to lower prices, not higher prices.
Anyhow, yesterday’s release deserved special attention. It had both good news and bad news. The good news was that vacancy rates declined sharply from both the fourth quarter and the year ago levels. The rental vacancy rate fell by 0.9 percentage points from its year ago level, while the vacancy rate for ownership units fell by 0.4 percentage points. The levels are still much higher than normal, but this was by far the biggest quarterly drop since the recession.
The bad news was that the homeownership rate also plunged. It fell by 1.0 percentage point from its year ago level to 65.4 percent. This is 3.6 percentage points from its bubble peak and the lowest level since the first quarter of 1997. The homeownership rate for African Americans fell by 1.7 percentage points from its year ago level to 43.1 percent. That’s the lowest level since the 4th quarter of 1995.
By age group, the homeownership rate for households headed by someone between ages 45-54 was down 1.8 percentage points from its year ago level to 71.3 percent. For the 35-44 age group it was down by 3.0 percentage points to 61.4 percent. This suggests that a unusually large number of near retirees will reach retirement without any equity in a home as an asset. Perhaps the younger group will be able to make up their loss, but the current economic picture does not make this look likely.
Anyhow, this release was big news that warranted some attention. The data are sometimes erratic, and these numbers may be partially reversed in next quarter’s data, but the trends indicated in the release are a big deal.
Every quarter the Census Bureau puts out data on vacancy rates and homeownership. For some reason, this release is almost always ignored.
This is unfortunate because it often contains very useful information on the housing market. One of the reasons that I could be so sure that we were seeing a bubble when house prices started diverging sharply from historic trends was that the vacancy rate was reaching record levels as early as 2002. As we learn in advanced economics, excess supply is supposed to lead to lower prices, not higher prices.
Anyhow, yesterday’s release deserved special attention. It had both good news and bad news. The good news was that vacancy rates declined sharply from both the fourth quarter and the year ago levels. The rental vacancy rate fell by 0.9 percentage points from its year ago level, while the vacancy rate for ownership units fell by 0.4 percentage points. The levels are still much higher than normal, but this was by far the biggest quarterly drop since the recession.
The bad news was that the homeownership rate also plunged. It fell by 1.0 percentage point from its year ago level to 65.4 percent. This is 3.6 percentage points from its bubble peak and the lowest level since the first quarter of 1997. The homeownership rate for African Americans fell by 1.7 percentage points from its year ago level to 43.1 percent. That’s the lowest level since the 4th quarter of 1995.
By age group, the homeownership rate for households headed by someone between ages 45-54 was down 1.8 percentage points from its year ago level to 71.3 percent. For the 35-44 age group it was down by 3.0 percentage points to 61.4 percent. This suggests that a unusually large number of near retirees will reach retirement without any equity in a home as an asset. Perhaps the younger group will be able to make up their loss, but the current economic picture does not make this look likely.
Anyhow, this release was big news that warranted some attention. The data are sometimes erratic, and these numbers may be partially reversed in next quarter’s data, but the trends indicated in the release are a big deal.
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Robert Samuelson somehow concludes that the rich don’t have disproportionate influence on policy because the top quintile pays almost 70 percent of federal taxes. It is difficult to understand the logic of this one.
The rich don’t just lobby for lower taxes, they also lobby for rules that redistribute before tax income upward. For example, patent monopolies on prescription drugs redistribute roughly $270 billion a year from the public as a whole to drug companies in the form of higher drug prices. Protectionist restrictions on foreign doctors practicing in the United States has pushed the average pay of doctors to around $250,000. This amounts to a transfer of close to $100 billion a year compared to a situation in which doctors were subject to the same sort of market competition as auto workers or dish washers.
The government also provides enormous subsidies to the super-rich in the form of too big to fail insurance for financial companies and one-sided labor laws that impose harsh restrictions on union-side violations but wrist slaps for employer side. There are many other ways in which the rich use lobbyists to ensure that income gets redistributed upward. It is understandable that they would like the public to only focus on taxes, but that is obviously a sidebar.
Robert Samuelson somehow concludes that the rich don’t have disproportionate influence on policy because the top quintile pays almost 70 percent of federal taxes. It is difficult to understand the logic of this one.
The rich don’t just lobby for lower taxes, they also lobby for rules that redistribute before tax income upward. For example, patent monopolies on prescription drugs redistribute roughly $270 billion a year from the public as a whole to drug companies in the form of higher drug prices. Protectionist restrictions on foreign doctors practicing in the United States has pushed the average pay of doctors to around $250,000. This amounts to a transfer of close to $100 billion a year compared to a situation in which doctors were subject to the same sort of market competition as auto workers or dish washers.
The government also provides enormous subsidies to the super-rich in the form of too big to fail insurance for financial companies and one-sided labor laws that impose harsh restrictions on union-side violations but wrist slaps for employer side. There are many other ways in which the rich use lobbyists to ensure that income gets redistributed upward. It is understandable that they would like the public to only focus on taxes, but that is obviously a sidebar.
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The NYT ran a profile of House Republican Budget Committee Chairman Paul Ryan today. It misrepresented some important features of Representative Ryan’s budget plan.
For example, while it told readers that the plan would, “reduce domestic federal spending to its smallest share of the economy since World War II.” it failed to point out that it would essentially eliminate all areas of the federal government, except Social Security, Medicare and other health care spending, and the military.
The Congressional Budget Office analysis of the Ryan budget, which was done under his direction, shows all non-health care, non-Security Security spending shrinking to 4.5 percent of GDP by 2040 and to 3.75 percent of GDP by 2050. The military budget is currently over 4.0 percent of GDP and has never been less than 3.0 percent of GDP since the start of the Cold War.
Assuming that Ryan keeps military spending in its historic range (he has indicated that he would), this implies the elimination of almost the whole federal government. His budget would leave no room for federal support of education, roads, bridges and other infrastructure, the federal court system, the Food and Drug Administration, the national park system and everything else associated with the federal government. It would have been useful to point this fact out to readers in a lengthy piece that attempted to give readers a sense of Representative Ryan’s vision.
The piece was also misleading when it told readers that:
“he has proposed collapsing today’s six personal income tax rates into two, 10 percent and 25 percent.”
The number of tax brackets is trivial. The more important feature of Representative Ryan’s tax plan is that it would reduce the tax rate faced by the wealthy from 39.6 percent under current law to 25.0 percent. This implies an enormous tax cut for the wealthiest people in the country.
If this tax cut is offset by eliminating tax breaks, as Representative Ryan claims would be the case, then it would imply large increases on middle class families through the elimination of tax breaks such as the mortgage interest deduction and the deduction for employer provided health insurance.
It would have useful to tell readers that Representative Ryan wants to finance large tax cuts for the wealthy with big tax increases on the middle class. That is presumably an important part of his philosophy.
The NYT ran a profile of House Republican Budget Committee Chairman Paul Ryan today. It misrepresented some important features of Representative Ryan’s budget plan.
For example, while it told readers that the plan would, “reduce domestic federal spending to its smallest share of the economy since World War II.” it failed to point out that it would essentially eliminate all areas of the federal government, except Social Security, Medicare and other health care spending, and the military.
The Congressional Budget Office analysis of the Ryan budget, which was done under his direction, shows all non-health care, non-Security Security spending shrinking to 4.5 percent of GDP by 2040 and to 3.75 percent of GDP by 2050. The military budget is currently over 4.0 percent of GDP and has never been less than 3.0 percent of GDP since the start of the Cold War.
Assuming that Ryan keeps military spending in its historic range (he has indicated that he would), this implies the elimination of almost the whole federal government. His budget would leave no room for federal support of education, roads, bridges and other infrastructure, the federal court system, the Food and Drug Administration, the national park system and everything else associated with the federal government. It would have been useful to point this fact out to readers in a lengthy piece that attempted to give readers a sense of Representative Ryan’s vision.
The piece was also misleading when it told readers that:
“he has proposed collapsing today’s six personal income tax rates into two, 10 percent and 25 percent.”
The number of tax brackets is trivial. The more important feature of Representative Ryan’s tax plan is that it would reduce the tax rate faced by the wealthy from 39.6 percent under current law to 25.0 percent. This implies an enormous tax cut for the wealthiest people in the country.
If this tax cut is offset by eliminating tax breaks, as Representative Ryan claims would be the case, then it would imply large increases on middle class families through the elimination of tax breaks such as the mortgage interest deduction and the deduction for employer provided health insurance.
It would have useful to tell readers that Representative Ryan wants to finance large tax cuts for the wealthy with big tax increases on the middle class. That is presumably an important part of his philosophy.
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The Washington Post was a strong supporter of NAFTA at the time the deal was approved. It continues to be a strong defender of the pact nearly two decades later. It has repeatedly shown itself willing to make up facts or just ignore them to push its pro-NAFTA line.
An example of the former occurred in December of 2007 when its lead editorial criticized the leading Democratic presidential candidates for saying that they would renegotiate NAFTA. The editorial told readers that not only had NAFTA been good for the U.S., it had been great for Mexico:
“Mexico’s gross domestic product, now more than $875 billion, has more than quadrupled since 1987.”
For those keeping score, the actual increase was 83 percent.
Today the Post is again touting the praises of its beautiful baby. Its lead editorial noted the decline in illegal immigration from Mexico to the United States. It told readers:
“Migration plummeted after 2005 because of reduced U.S. demand for labor and the slowing of Mexican population growth — but also because NAFTA started to pay off in the form of dynamic new export industries in Mexico such as automobile manufacturing. Analysts suggest the gap in wages between the United States and its southern neighbor, while still wide, has narrowed to the point where staying home is economically rational for a growing number of Mexican workers.
NAFTA encouraged both the United States and Mexico to make optimal use of their scarce resources. In the short run, this shifted jobs and income within each society and between them. This inherently disruptive process doubtless caused Mexicans who lost out to seek opportunity in the United States.
But over time, NAFTA helped make Mexico more efficient and, hence, wealthier. It formed part of a broader restructuring that has transformed Mexico from the underdeveloped, authoritarian country it was 30 years ago to the increasingly middle-class democracy it is now.
The gross domestic product per capita in Mexico was $12,400 in 2010, up about 21 percent in real terms since 1980.”
Wow, that really sounds great. Now let’s take a quick look at what the IMF has to say about Mexico’s situation. The graph below shows per capita income growth in Mexico from 1980 to 2011, compared with Argentina, Brazil, Chile, and the United States.
Source: International Monetary Fund.
Mexico’s 23.5 percent per capita growth over this period puts it dead last among this group. Its growth is almost one-thrid less than Brazil’s 32.9 percent and less than half of Argentina’s 52.7 percent.
Interestingly, its per capita growth is also just a bit more than one-third of the 66.3 percent growth in the U.S. over this period. That might raise questions about the extent to which the wage gap has closed over this period. Of course there has been a substantial upward redistribution of income in the United States over this period (partly due to trade deals like NAFTA), so some closing of the wage gap is plausible. On the other hand, Mexico stands out among Latin American countries in having substantial upward redistribution itself in the last decade, so it’s not clear that ordinary workers received much benefit from even the country’s limited growth.
Of course many factors affect Mexico’s growth and it may not be fair to attribute much of its economic troubles to NAFTA. However no one can look at the data and seriously tout Mexico’s strong growth and transformation. It clearly is a laggard, no matter how vigorously the Post might argue otherwise.
The Washington Post was a strong supporter of NAFTA at the time the deal was approved. It continues to be a strong defender of the pact nearly two decades later. It has repeatedly shown itself willing to make up facts or just ignore them to push its pro-NAFTA line.
An example of the former occurred in December of 2007 when its lead editorial criticized the leading Democratic presidential candidates for saying that they would renegotiate NAFTA. The editorial told readers that not only had NAFTA been good for the U.S., it had been great for Mexico:
“Mexico’s gross domestic product, now more than $875 billion, has more than quadrupled since 1987.”
For those keeping score, the actual increase was 83 percent.
Today the Post is again touting the praises of its beautiful baby. Its lead editorial noted the decline in illegal immigration from Mexico to the United States. It told readers:
“Migration plummeted after 2005 because of reduced U.S. demand for labor and the slowing of Mexican population growth — but also because NAFTA started to pay off in the form of dynamic new export industries in Mexico such as automobile manufacturing. Analysts suggest the gap in wages between the United States and its southern neighbor, while still wide, has narrowed to the point where staying home is economically rational for a growing number of Mexican workers.
NAFTA encouraged both the United States and Mexico to make optimal use of their scarce resources. In the short run, this shifted jobs and income within each society and between them. This inherently disruptive process doubtless caused Mexicans who lost out to seek opportunity in the United States.
But over time, NAFTA helped make Mexico more efficient and, hence, wealthier. It formed part of a broader restructuring that has transformed Mexico from the underdeveloped, authoritarian country it was 30 years ago to the increasingly middle-class democracy it is now.
The gross domestic product per capita in Mexico was $12,400 in 2010, up about 21 percent in real terms since 1980.”
Wow, that really sounds great. Now let’s take a quick look at what the IMF has to say about Mexico’s situation. The graph below shows per capita income growth in Mexico from 1980 to 2011, compared with Argentina, Brazil, Chile, and the United States.
Source: International Monetary Fund.
Mexico’s 23.5 percent per capita growth over this period puts it dead last among this group. Its growth is almost one-thrid less than Brazil’s 32.9 percent and less than half of Argentina’s 52.7 percent.
Interestingly, its per capita growth is also just a bit more than one-third of the 66.3 percent growth in the U.S. over this period. That might raise questions about the extent to which the wage gap has closed over this period. Of course there has been a substantial upward redistribution of income in the United States over this period (partly due to trade deals like NAFTA), so some closing of the wage gap is plausible. On the other hand, Mexico stands out among Latin American countries in having substantial upward redistribution itself in the last decade, so it’s not clear that ordinary workers received much benefit from even the country’s limited growth.
Of course many factors affect Mexico’s growth and it may not be fair to attribute much of its economic troubles to NAFTA. However no one can look at the data and seriously tout Mexico’s strong growth and transformation. It clearly is a laggard, no matter how vigorously the Post might argue otherwise.
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The Washington Post has a practice of running a story ever month or so about Japan facing a demographic nightmare because its population is living longer. The idea is that this will impoverish the nation’s youth, imposing a crushing burden for caring of the elderly. Of course those who know arithmetic know better.
This month’s feature began by telling readers:
“The ominous demographics of this aging nation have long been seen by Japanese as a distant concern, not a present-day one. But that mind-set is being called into question by a prime minister who says that a crisis requiring immediate sacrifices has already begun.
In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.
And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.
Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.
Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.”
Okay, let’s unpack this one a bit. First, by every measure Japan’s economy is operating far below its potential capacity. Why on earth does it need tax increases to pay for anything right now? This makes zero sense.
Japan can simply continue doing what it has been doing, running large deficits and having it central bank finance them by buying up government bonds.
Is there a problem with this? Japan has been seeing deflation for much of the last two decades. The interest rate on 10-year government bonds is hovering near 1.0 percent.
If Prime Minister Noda is arguing that the country needs to raise taxes he either does not understand economics or has a hidden agenda that the Post article did not discuss. In the current economic situation it is quite obvious that there is no need whatsoever to raise taxes. A tax increase would actually hurt the economy by reducing demand and employment.
Let’s consider the longer term issue. According to OECD data, productivity growth in Japan has been increasing at the rate of 1.8 percent a year over the last two decades. If this continues, output per worker will be 150 percent higher in 2050 than it was in 2000.
If the ratio of workers to retirees falls roughly 3 to 1 over this period to roughly 1 to 1, as the article tells us, and the pension system provides Japan’s workers with a pension equal to 50 percent of the income of the average worker (Social Security benefits equal 40 percent of the average wage) then the after Social Security tax wage will be roughly 80 percent higher in 2050 than it is today.
If we look at the issue more closely, this almost certainly understates the likely gains. First, as the work force shrinks productivity growth is likely to accelerate. This would occur for two reasons. First, the least productive jobs (e.g. the midnight shift at the 7-11) will simply go unfilled, thereby raising average productivity.
The other reason is that a smaller population will reduce pressure on the natural environment and infrastructure. If the population declines by 50 percent, then the share of the population who will be able to live in houses with ocean views will double. Also traffic jams will be much less serious, trains will be less crowded and people will have to spend much less time commuting. Some of these gains are likely not to be included in official statistics since they are not designed to pick up these sorts of quality improvements.
Also, it is likely that the share of the population that is employed will increase. This will be both true among the under 65 population, as more women enter the workforce, and also many healthy older Japanese may decide to work later in life. If Japan can achieve that same employment to population ratio among its age 16-64 population as Iceland has today, this pace of productivity growth would allow after-tax living standards to double over the years from 2000-2050.
Finally, the issue about trimming spending on education may seem less of a concern when we remember that the whole story is that number of children in Japan is plummeting. Why wouldn’t Japan trim spending in education. In short, this means that the tax increases needed to fund a larger population of retirees will be in part offset by the lower taxes needed to support a smaller population of children.
In short, there is not really a plausible story whereby a declining population will cause future generations of Japanese to be poorer than the current generation. Of course inept economic management could well bring about this result, but that is a very different story.
The Washington Post has a practice of running a story ever month or so about Japan facing a demographic nightmare because its population is living longer. The idea is that this will impoverish the nation’s youth, imposing a crushing burden for caring of the elderly. Of course those who know arithmetic know better.
This month’s feature began by telling readers:
“The ominous demographics of this aging nation have long been seen by Japanese as a distant concern, not a present-day one. But that mind-set is being called into question by a prime minister who says that a crisis requiring immediate sacrifices has already begun.
In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.
And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.
Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.
Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.”
Okay, let’s unpack this one a bit. First, by every measure Japan’s economy is operating far below its potential capacity. Why on earth does it need tax increases to pay for anything right now? This makes zero sense.
Japan can simply continue doing what it has been doing, running large deficits and having it central bank finance them by buying up government bonds.
Is there a problem with this? Japan has been seeing deflation for much of the last two decades. The interest rate on 10-year government bonds is hovering near 1.0 percent.
If Prime Minister Noda is arguing that the country needs to raise taxes he either does not understand economics or has a hidden agenda that the Post article did not discuss. In the current economic situation it is quite obvious that there is no need whatsoever to raise taxes. A tax increase would actually hurt the economy by reducing demand and employment.
Let’s consider the longer term issue. According to OECD data, productivity growth in Japan has been increasing at the rate of 1.8 percent a year over the last two decades. If this continues, output per worker will be 150 percent higher in 2050 than it was in 2000.
If the ratio of workers to retirees falls roughly 3 to 1 over this period to roughly 1 to 1, as the article tells us, and the pension system provides Japan’s workers with a pension equal to 50 percent of the income of the average worker (Social Security benefits equal 40 percent of the average wage) then the after Social Security tax wage will be roughly 80 percent higher in 2050 than it is today.
If we look at the issue more closely, this almost certainly understates the likely gains. First, as the work force shrinks productivity growth is likely to accelerate. This would occur for two reasons. First, the least productive jobs (e.g. the midnight shift at the 7-11) will simply go unfilled, thereby raising average productivity.
The other reason is that a smaller population will reduce pressure on the natural environment and infrastructure. If the population declines by 50 percent, then the share of the population who will be able to live in houses with ocean views will double. Also traffic jams will be much less serious, trains will be less crowded and people will have to spend much less time commuting. Some of these gains are likely not to be included in official statistics since they are not designed to pick up these sorts of quality improvements.
Also, it is likely that the share of the population that is employed will increase. This will be both true among the under 65 population, as more women enter the workforce, and also many healthy older Japanese may decide to work later in life. If Japan can achieve that same employment to population ratio among its age 16-64 population as Iceland has today, this pace of productivity growth would allow after-tax living standards to double over the years from 2000-2050.
Finally, the issue about trimming spending on education may seem less of a concern when we remember that the whole story is that number of children in Japan is plummeting. Why wouldn’t Japan trim spending in education. In short, this means that the tax increases needed to fund a larger population of retirees will be in part offset by the lower taxes needed to support a smaller population of children.
In short, there is not really a plausible story whereby a declining population will cause future generations of Japanese to be poorer than the current generation. Of course inept economic management could well bring about this result, but that is a very different story.
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That was the headline of a Washington Post article (March 13, 1935, p 22). The subhead was, “technological progress has been so rapid during the depression that welders and other experts, idle since 1929, are outmoded.” The first paragraph told readers:
“unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week.”
This shows that technology might change rapidly, but economic reporting at the Washington Post doesn’t. Many of the stories it has written in the last two years about shortages of skilled workers in the midst of mass unemployment could have been plagiarized from this 1935 piece.
It is also striking that this piece, like much current economic reporting, relies exclusively on business sources. The article does not make any reference to any independent experts and of course, no one from a union or any workers’ organization.
(Thanks to Seth Ackerman for sending me this gem from the past.)
That was the headline of a Washington Post article (March 13, 1935, p 22). The subhead was, “technological progress has been so rapid during the depression that welders and other experts, idle since 1929, are outmoded.” The first paragraph told readers:
“unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week.”
This shows that technology might change rapidly, but economic reporting at the Washington Post doesn’t. Many of the stories it has written in the last two years about shortages of skilled workers in the midst of mass unemployment could have been plagiarized from this 1935 piece.
It is also striking that this piece, like much current economic reporting, relies exclusively on business sources. The article does not make any reference to any independent experts and of course, no one from a union or any workers’ organization.
(Thanks to Seth Ackerman for sending me this gem from the past.)
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