January 26, 2015
Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don’t look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.
However Samuelson does get some items wrong. He tells readers that Japan’s economy is in a recession. This is almost certainly wrong. We don’t have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan’s recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter.
The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.
The other point worth correcting is Samuelson’s comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.
Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.
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