Japan, Yet Another Interesting Case

A recent post by Noah Smith about the recent economic policies and performance of Japan showed some interesting statistics, especially on the existence of deflation despite large depreciation of the Japanese Yen.

The depreciation of the Yen to USD is shown on Noah Smith’s post (courtesy to Noah Smith):

In addition to that, the trade weighted index of the Japanese Yen has also fallen drastically show means that Yen have also depreciated sharply against other currencies (Source: unciatrends.com):

Although a depreciation of currency leading to price raises in imported goods is not the only cause of inflation. Generally, an open economy will face inflationary pressures when there is depreciation of currency. Such as that we can see in Australia’s case:

Inflation Rate, Australia (Source: tradingeconomics.com):

Trade Weighted Index, Australia (Source: fxtrade.oanda.com)

Notice the spike of inflation rate from 2000 – 2001 and mid-late 2008 during the GFC? The data range from 2000 – 2001 needs to be read with care as during that period, a 10% Goods and Services Tax is implemented which by itself puts inflationary pressure on the economy. However, the inflation rate spike in mid-late 2008 to 2009 is mainly due to the depreciation of the Australian Dollar. The effect of the depreciation on the price of import can be found by looking at the Import Price Index (Source:  abs.gov.au):

IMPORT PRICE INDEX: all groups, Quarterly % change

The Import of Goods and Services as a % of GDP averaged at 15% for Japan for the period 2008 - 2011, while the average is 21% for Australia during the same period (Source: World Bank). While Japan’s import of goods and service as a % of GDP fluctuates more and is relatively lower as a proportion of GDP; the magnitude of the depreciation for the Yen should nevertheless put some inflationary pressure on the Japanese economy. As the import price index has also risen in Japan (Source: tradingeconomics.com):

 However Japan faced a deflation form June 2012 to January 2013 (Source: tradingeconomics.com):

The few possible reasons that could cause this are:

1.       The deflationary pressure was so large that it shadowed the inflationary pressure from the depreciation of the Yen (the price of domestic goods and services fallen sharply which shadowed the price rise of imported goods and services); and/or;

2.       Import of goods and services are not counted in the CPI of Japan; and/or;

3.       The rise in the price of import has not yet affected the price of domestic goods and services (statistical lag); and/or;

4.       The price of domestic goods and services are relatively unaffected by the price rise in import.

 

There can be a combination of the above listed reasons and I'm unsure about the second possible reason. With regarding to the fourth possible reason, here are the major imports of goods and services for both Australia and Japan (Note: I was unable to obtain detailed statistics of major imports of Japan and the source is wiki answers, so there could be mistakes and I’d greatly appreciate if anyone can provide links to Japan’s import in detail statistics):

·         Australia’s Major Imports 2008-2011 (Source: dfat.gov.au)

·         Japan’s Major Imports (Source: wiki.answers.com)

While the import of goods and services vary between the two countries, it is unlikely Japan’s import will have little or no impact on domestic goods and service. If the answer is the third reason (although there can be many other unlisted reasons), the data over the next few months should show an increase in inflation rate. I’ll keep an eye on Japan’s data over the next few months and it could be another interesting case to look at if there is still no visible rise on the inflation rate of Japan over the next few months.

A Seminar on "The Priority of Democracy" at Crooked Timber

Crooked Timber blog has an interesting seminar on a recent book “The Priority of Democracy”, which is written by Jack Knight and James Johnson. I would highly recommend anyone who is interested in political economy and/or political science to read the book review. The book is reviewed by the following academics:

·         Chris Ansell – professor of political science at University of California, Berkeley

·         Peter Boettke – professor of philosophy and economics at George Mason University

·         Henry Farrell – associate professor of political science and international affairs at George Washington University

·         Ingrid Robeyns – professor in practical philosophy at Erasmus University Rotterdam

·         Cosma Shalizi – associate professor of statistics at Carnegie Mellon University

·         Melissa Schwartzberg – associate professor and political theorist at Columbia University

·         Adrian Vermeule – professor at Harvard Law School

In the following list are the reviews and comments of the above academics on the book:

·         Chris Ansell – “The Political Consequences of Learning”

·         Melissa Schwartzberg – “Democratic Legitimacy and Democracy’s Priority”

·         Henry Farrell – “Some Microfoundations for Pragmatist Democracy”

·         Ingrid Robeyns – “Can Ideal Political Theory Be Valuable For a Pragmatist?”

·         Peter Boettke – “Institutional Problems Demand Institutional Solutions”

·         Cosma Shalizi – “Dissent Is the Health of the Democratic State”

·         Adrian Vermeule – “Two Risks for Second-Order Democracy”

Jack Knight and James Johnson have posted their defence on Crooked Timber as guests.

I’ll update the post if there are any further review posts, comments or conversations on Crooked Timber about “The Priority of Democracy”.

Economic forecast for 2013

Before we start, I will not take any responsibility for any investment decision made on this post, if you are an investor, you will have to rethink how you make your investment decisions if you base your decisions on a blog post.

Since a lot of people have the impression that economists’ prediction are only as good as throwing a dart to a dartboard, I guess I’ll try to keep track of how well my economic prediction goes based on the economic theory I use, which is Post Keynesian theory.

My predictions are also based on certain assumptions:

1.       US and the EU will not implement any significant stimulus program during the 2013 calendar year.

2.       The Australian Government will continue with its self-destructive austerity and mindless pursuit for budget surplus regardless which party will be elected during this calendar year.

3.       There will not be a significant depreciation of the Australian Dollar during the year (it will remain at above $1 USD).

Movements in the labour market:

The starting data is the January figures for the labour force.

·         Participation rate dropped 0.1% from 65.1% to 65% in the period of December 2012 to January 2013; this is likely to fall further.

·         Full time employment dropped 9,800 to 8,098,400 since December 2012; this is likely to remain constant or fall further slightly.

·         Part time employment increased by 20,200 to 3,450,700 since December 2012; this is likely to increase due to the movement from full time position to part time, casual positions and new entrants of the labour market.

·         Unemployment rate remained constant 5.4% from December 2012 to January 2013; however this is due to more people giving up looking for work (decrease of participation rate) and this figure is likely to increase by the end of this year.

·         Aggregate monthly hours worked decreased by 3.9 million hours to 1,619.7 million hours. This is what you would expect if there is a movement from full time employment to part time employment, and/or loss of work hours in part time employment. The figure is likely to fall further during the year.

Movements in other economic indicators:

The starting data is the September 2012 national accounts as the December data is not yet available at the time of writing (hence September 2013 is the national account I will use for ending data):

·         GDP growth from September 2011 to September 2012 is 3.1%; this is likely to be further weakened. Note this is below the required rate of growth for stabilisation of the labour market.  For more comprehensive statistical analysis, visit this blog post by Bill Mitchell.

·         Inflation rate from December 2011 to December 2012 is 2.2%; this is within the lower range of the 2% to 3% range of the RBA. This is likely to be the case for this calendar year.

·         Interest rate was cut to 3% at the beginning of December 2012; there are several factors involved in decisions made by the RBA, which I will discuss in later posts. I expect the interest rate to be cut below 3% by the end of the year due to weak economic outlook (and the government is making it worse with austerity!), however it is unlikely the interest rate will be cut to below 2.5%.

Overall, the prediction for 2013 represents an economy that will grow at below the growth rate required for the labour market to stabilise. I will update this post when the September 2013 data comes out for GDP growth and December 2013 data for other indicators to see if I can beat a random dart.

"A few thoughts on depression" by Noah Smith

Note: depression in Noah Smith’s post refers to psychology depression not economics.

I feel like sharing this post by Noah Smith about his experience in depression. Readers might know that there is no definitive treatment for depression and it may relapse even if you got through it. Noah Smith also mentioned:

“Obviously, everyone's experience of depression is different, so I don't intend these thoughts to be a universal guide or general theory.”

 

However if you know somebody who has depression, Noah Smith's post may help as a guide.

Lerner's Functional Finance Part II

Continuing on from my previous post about Lerner’s Functional Finance, we now look at the effects of government expenditure.

This equation can be used to determine the changes in gross public debt to GDP ratio:

 

Source: Hart, N 2011, ‘Macroeconomic Policy and Abba Lerner’s System of Functional Finance’, Economic Papers, vol. 30, no. 2, pp. 210.

From the equation, an increase in G will increase Y, by the amount of increase in G multiplied by the fiscal multiplier for the planned policy. This will then lead to an increase in T, thus the Gt – Tt (the budget deficit) is not increased by 1 X ∆G but ∆G - ∆Tt, where:

∆G = change in government expenditure as a result of the fiscal stimulus

∆Tt = change in tax receipt as a result of the fiscal stimulus

As mentioned in this post and the previous post, the fiscal multiplier is very important in determining the effectiveness of government spending and this fiscal multiplier depends on a lot of factors such as the design of the stimulus (the spending components involved), the structure of the economy, and consumer and business sentiments. In US and Australia, where infrastructures lags behind a lot of countries such as South Korea, Japan and China, spending on infrastructures have a very large multiplier. From this post by Noah Smith, it showed a table from a NBER working paper by Alan Auerbach and Yuriy Gorodnichenko estimating the effect of government expenditure on consumption and investment for the US:

 

The important thing to take note here is that although investment spending has a larger multiplier than consumption spending, it has less immediate effects on the economy. Thus if the government wishes to stabilise the economy (stabilising the lost in income due to increase in unemployment) immediately when the economy faces a downturn, consumption spending works better but it does not necessarily “pay for itself”[1] in the long run, while investment spending (such as building roads, railways, investing in education, health) provides longer term benefits such as productivity gains, reducing unemployment in the longer run, and it is very likely to “pay for itself”.

Consumption spending also has one other very important effect which investment spending lacks; this effect is the stabilising of consumer and business sentiments in a downturn. The earlier and quicker the stimulus is enacted when an economy faces downturn, the less consumer and business sentiment falls, as demand for goods and unemployment is stabilised (even if it’s for a short term). This will reduce the output gap and making it less “expensive”[2] for the government to stabilise the economy with stimulus spending. If a stimulus in a recession lacks short term stabilising effects and/or took too long to implement, not only the output gap will be larger (thus needing a larger stimulus), but it will have significant social cost (cost of unemployment to households) and business investment will also take longer to recover if decision makers in businesses are uncertain about future economic prospects.

While the fiscal multiplier is important, its size should never be the main determinant of whether a government is to implement a fiscal stimulus or not. The most important determinant should always be whether if the economy is in full employment. If President Obama does not want to use the 14th Amendment and the $1 trillion dollar platinum coin option is out, there needs to be a plan which the US government will need to enact to avoid further austerity (when it is in fact, the austerity currently enacted by the government that is dragging down the economy) and implement stimulus. At the moment, the US government is failing miserably to provide prosperity to its population despite the GFC, when employment to population ratio have no yet recovered to pre-crisis level for more than four years from the crisis.

Employment to population ratio, with no disability, age 16 to 64, men (Source: St. Louis Fed):

 

Employment to population ratio, with no disability, age 16 to 64, women (Source: St. Louis Fed):

 

Footnote:

[1] “Pay for itself” refers to a situation when an increase in nominal public debt led to a reduction in public debt as a % of GDP. There are examples of raw statistic correlation in the previous post.

[2] “Expensive” only in a sense that if the government decides not to print national currency to finance its spending. Neil Hart argues in his paper (cited above) that the significance of the ability to print national currency changes the whole debate of the “debt crisis” (if this actually exists outside the European Monetary Union and other countries which do not have its own national currency). In specific:

Source: Hart, N 2011, ‘Macroeconomic Policy and Abba Lerner’s System of Functional Finance’, Economic Papers, vol. 30, no. 2, pp. 211.