Category Archives: Post Growth

Greece: A Tale of Two Consultations

Posted on July 18, 2013 | 2 comments

The IMF certainly wasn’t responsible for Greece’s economic downturn; indeed, Greece only entered an IMF programme (jointly orchestrated with the European Commission and the European Central Bank—the so called Troika) through a Stand-By Arrangement (SBA) agreed in May 2010, 18 months after the collapse of Lehman Brothers in September 2008 (the fulcrum point for the credit crisis).

Nonetheless, the IMF’s track record in both evaluating Greece’s economic risk before trouble hit and in helping craft a set of coherent economic policies that would supposedly build the foundations for renewed growth has been abysmal.

Unfortunately for the IMF, we have a ‘before and after’ comparison in the form of the last two Article IV Consultations (the IMF’s economic health checks) of Greece, the first conducted on July 2009 before the recession bit (here) and the latest conducted in June 2013 after all hell had broke loose (here).

Let’s start with how we always keep score in economics: GDP growth. In the 2009 consultation, the IMF forecast that GDP would contract by 1.7% in 2009, followed by 0.4% in 2010, before seeing a return to 0.6% growth in 2011 and 1.2% in 2012. In their words:

Staff projects negative growth in 2009 and 2010. Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

Milder? The reality was far, far worse: -3.1% for 2009 and -4.9% for 2010. And then far from rebounding, the downturn picked up speed with the economy shrinking an extraordinary 7.1% in 2011. For 2012, the advance estimates have the economy down another 6% plus. This is a stunning forecasting failure: the IMF was off by around 20%—a fifth of GDP! Continue reading →

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The Remarkable Resilience of Greece

Posted on July 13, 2013 | Leave a comment

Back in February 2012, I wrote a post entitled “Greece as the Canary in the Coal Mine for Collapse?” in which I wondered whether the harshness of the Greek recession (perhaps better described as a ‘depression’) could unpick the socio-political order so as to push the country into collapse. After a two-week political tour of the country that stretched from the outlying islands to Athens, and took in both the elites and the underclass, the quick answer to my question has to be ‘no’.

It is easy to find examples of poverty and desperation: the photo I took below is of a stray cat sleeping on a homeless woman in the square of Athens’ central cathedral. The blog Zerohedge has assembled similar such photos to create a narrative of a country sinking into a state of impoverishment and despair. But you can play this game in any major city of the industrialised west: London certainly has a similar army of the down-and-out and destitute.

SAM_0446

Yet what I saw in Greece was a society showing remarkable resilience. Take George, a bartender on the idyllic island of Samos. George is a live example of the IMF’s prescribed policy of ‘internal devaluation’. By ‘internal devaluation’, the IMF means the domestic resetting of wages and prices to restore the competitiveness of the Greek economy. Unfortunately, and as the IMF admits, most the adjustment has fallen to wages and little to prices. Continue reading →

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Greece: Contraction or Collapse?

Posted on June 22, 2013 | Leave a comment

I am currently on a trip to Greece run by Nicholas Wood of Political Tours. The aim of each tour is to get below the skin of a country in the political limelight. In the case of Greece, the critical question is, of course, how the country is coping (going to cope) with its bone-crunching economic downturn, and whether the extent of the recession/depression will lead to an unravelling of its existing political and social fabric.

The chart below (click for larger image) is put together from the International Monetary Fund (IMF) database, updated with the latest projections made for Greece in the IMF’s April 2013 World Economic Outlook. I’ve looked at the data back to 1970 to get some perspective; this period takes in the end of the so called Regime of the Colonels and the return to democracy in 1974, the joining of the European Union in 1981 and the entry into the Eurozone in 2001.

Greek GDP, Constant Prices jpeg

As you can see, four distinct economic phases are visible. First, a period of rapid growth in the wake of democratisation. Second, a period of slow growth stretching through into the early 1990s; this period saw two devaluations of 15.5% and 15% in 1983 and 1985, respectively. Third, an era of turbo-charged growth both before and after euro entry. Finally, a collapse following the unfolding of the global credit crisis and the domestic implementation (at the urging of the Troika: European Commission, European Central Bank and IMF) of an aggressive austerity programme.

Real GDP is now back to the level seen in 2001 when the country entered the euro. Further, while the IMF is forecasting a bottoming out of the economy in 2014, its growth forecasts to date have been woefully optimistic, so we could go lower.

A key concern is whether Greece’s policy of adopting an internal devaluation within a fixed exchange rate mechanism can lead to a stabilisation of the economy, from which growth may return. Or will the austerity being imposed on the country be such as to undermine the social and political fabric of society, with all the dangers that this could entail (as we saw in the 1930s). I am also interested in how Greece’s terrible demographics and complete energy dependency enters into the policy mix.

Nonetheless, I was in central Athens yesterday and it certainly did not look like a city on the verge of collapse (no dystopian images of the type Zerohedge loves to report). Athens most swanky hotel, the Grande Bretagne on Syntagma Square, looked on to bustling cafes rather than rioters last night. Indeed, the upmarket and tourist-dominated Plaka district felt like one giant party. Over the next few days, I hope to find out how much pain is being felt elsewhere.

Hotel Grande Bretagne

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Post-Growth Political Philosophy: The Policy that Dare Not Speak Its Name

Posted on June 12, 2013 | 4 comments

In the introduction to his book “When the Money Runs Out: the End of Western Affluence”, Stephen D. King (a contemporary of mine age-wise and the Chief Economist of HSBC) notes that per capita incomes  in the U.K. almost tripled in the first four decades since his birth in 1963, but in his fifth decade rose only 4%. Other advanced countries have done slightly better or slightly worse, but they have all seen a downward gear-shift in growth.

King goes on to expand on his thesis that the current growth stagnation is not a cyclical phenomenon, but a permanent change in the economic landscape. Further, such a change needs to be proactively adapted to politically and socially. In short, this time is really different (that is, as compared with the two hundred odd years of the industrial revolution).

The thrust of King’s argument connects directly with this blog — which basically can be seen as a meditation on post-growth scenarios. I would say that the most immediate threat to growth is almost Marxist in nature: the tendency for new technology to destroy effective demand through the concentration of wealth and income into an ever-narrower elite (with demographics and decreasing returns to technology thrown into the mix). Close behind this is the threat resource depletion poses for growth, and finally a few decades hence we have the potential damage to growth from climate change.

For advanced nations, slower or zero growth does not necessarily have to lead to unhappiness. The happiness literature is quite advanced and we know that a)   individuals are quite capable of resetting to a different level of income and wealth (which is why Afghans are remarkable happy) and b) GDP per head is just one of the many determinants of happiness. I think we all know individuals who are intelligent, diligent and motivated but have made a conscious choice not to enter high-paying professions such as finance. Many (not all) are leading happy lives. Then again I have come across many multi-millionaire hedge fund managers who I wouldn’t characterise as happy.

The challenge for the political and policy makers here is to accept that there may exist a growth constraint. At which point the policy agenda of a Harold Wilson or a Margaret Thatcher looks totally inappropriate. Both followed similar growth philosophies, but with a different distributional tilt tacked on as per their ideological bent. But in a post-growth world, these orthodoxies look redundant and out of date.

In today’s Financial Times, Martin Wolf joins some of the dots up in seeing inflation as less of a threat following lax monetary policy but rather a danger that could emerge due to a lack of growth. Where we differ can be summarised in the fact that he titles his article “The Overstated Inflation Danger“. But his analysis appears correct, even if I would argue over the probability we should attach to such an inflation outcome is different. Simplistically, if you have growth, then the need for austerity or stimulus is a side issue.

The UK has an interesting recent history of managing high public debt. After the second world war, net debt was more than 200 per cent of gross domestic product. By the early 1970s, that was down to 50 per cent. How did this remarkable change happen? The answer is that nominal debt outstanding rose by just 29 per cent between 1948-49 and 1970-71, while nominal GDP rose by 336 per cent. Both real GDP (up 91 per cent) and the price level (up 128 per cent) contributed to this happy outcome: the compound rate of growth of nominal GDP was 6.9 per cent, of the real economy 3 per cent and of the price level 3.8 per cent.

But if we don’t have growth, what are our choices? Wolf describes them as austerity, financial repression or inflation. Of the three, inflation is the politically easiest to enact since is does not result in an open redistribution of wealth between debts and creditors, the young and old, the rich and the poor. In sum, not an open redistribution, but a hidden one all the same.

A more cogent argument for the likelihood of high inflation is not that it is a necessary consequence of today’s policies, but rather that it is the simplest way for policy makers to deal with the overhang of public (or private) debt. In this view, distributional conflicts – between creditors and debtors or perhaps between young and old – are resolved by inflationary default on liabilities. It is easy to think of precedents for such an inflationary redistribution of wealth. What, after all, are the alternatives? Broadly speaking, they are: austerity; growth; and financial repression (reductions in interest rates, probably combined with exchange controls and other restrictions on investors). Inflation can fit quite comfortably with these alternative elements.

We can restate this: inflation provides the most painless political path when faced with excessive debt and no growth.

For this reason, I still see inflation as a significant threat, even if it has not materialised to date (and inflation, in turn, a reason for still taking gold seriously as a store of wealth). In other words, if growth doesn’t return, inflation will become an increasing threat. The critical point here is that the predominant belief within political, media and financial circles is that growth will ultimately return. This is the dominant paradigm. In King’s words:

Of course, these (post growth scenarios) can all be readily dismissed as no more than Cassandra-like predictions of a less bountiful future. Who, after all, knows what sort of technological innovations might materialize in coming decades? Our disturbing early twenty-first century reality of continuing stagnation cannot, however, be easily ignored. Yet we haven’t even begun to think about the consequences for society of a world in which levels of activity are persistently much lower that we-all-too-casually used to assume.

From a risk perspective, we can expand on this. Advanced nations have had ten years of close to zero growth (and worse for median incomes). We can view this as a temporary or permanent phenomenon. The political and media elites, as well as the financial markets, have taken the second interpretation as given: growth is taking a respite but it will be back. Accordingly, the first interpretation is not discounted. When one outcome is full discounted and in the price, then personally I would always look at the alternative.

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Are Our Problems Purely Short Term (Or Bernanke’s Contradiction)?

Posted on May 23, 2013 | 2 comments

Last weekend, I posted a link to a speech given by Fed Governor Ben Bernanke entitled  “Economic Prospect for the Long Term”. The speech is interesting because Bernanke rarely touches on the topic of long-term growth, but on this occasion he addressed the fears of many young graduates (at least those graduates of a reflective disposition) that they face a difficult future:

Now here’s a question–in fact, a key question, I imagine, from your perspective. What does the future hold for the working lives of today’s graduates? The economic implications of the first two waves of innovation, from the steam engine to the Boeing 747, were enormous…..

…… some knowledgeable observers have recently made the case that the IT revolution, as important as it surely is, likely will not generate the transformative economic effects that flowed from the earlier technological revolutions. As a result, these observers argue, economic growth and change in coming decades likely will be noticeably slower than the pace to which Americans have become accustomed. Such an outcome would have important social and political–as well as economic–consequences for our country and the world.

To counter this rational pessimism (which this blog espouses), Bernanke gave three main counter arguments.

  1. We can’t predict the technological future
  2. The IT revolution has barely started and its best fruit, in terms of economic growth, may yet to be harvested
  3. Globalisation allows the generation, transmission and adaption of new ideas to take place on an unprecedented scale

The only problem with this rose-tinted spectacle view of the world is that it flies in the face of the market’s own evidence. In a speech just two months earlier, Bernanke tackled the question of why interest rates were so low. The collapse of nominal interest rates is visible everywhere, as one of the charts accompanying his speech shows (click for larger image):

10-Year Government Bond Yield jpeg

Bernanke then described a nominal interest rate as being composed of three components: a) expected inflation, b) expected short-term real interest rates and c) the term premium (risk associated with a longer maturity bond). A chart from his speech disaggregating the U.S. nominal rate into these three components can be seen here (click for larger image):

Decomposition of 10 Year Treasury jpeg

Note that the expected average short-term real interest rate has come down from around 2% in the year 2000 to essentially zero now. And what does this mean in economic terms. Bernanke provides the answer:

In the longer term, real interest rates are determined primarily by nonmonetary factors, such as the expected return to capital investments, which in turn is closely related to the underlying strength of the economy. The fact that market yields currently incorporate an expectation of very low short-term real interest rates over the next 10 years suggests that market participants anticipate persistently slow growth and, consequently, low real returns to investment. In other words, the low level of expected real short rates may reflect not only investor expectations for a slow cyclical recovery but also some downgrading of longer-term growth prospects.

The disjoint between the two speeches is obvious. In the first, Bernanke’s message—when talking to a class of fresh-faced new graduates—is a relatively upbeat one: don’t give up on growth. In the second, a speech given at a macroeconomic conference, Bernanke suggests that the market is signalling that we have a growth problem.

This also has huge implications for fiscal and monetary policy. If growth has slowed in recent years due to underlying technological factors and not just due to the credit crisis, then it will be exceedingly difficult to kick start the economy through unconventional monetary policy and aggressive fiscal injections. The policy of quantitative easing, which monetary authorities are pursuing in most advanced countries, is premised on the idea that there exists a gap between what the economy could be producing and what it is actually producing (the so called output gap). Should that gap prove a mirage then current policies will be ineffectual.

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The Absurdity of ‘Abenomics’ and the PM’s ‘Three Bendy Arrows’ (Part 4: Bubble Economics)

Posted on May 13, 2013 | Leave a comment

As I write this post, the yen has broken below 100 to the U.S. dollar and the Nikkei has closed at a five-year high. So surely Abenomics is working, isn’t it? Well, it is certainly pushing up asset prices. Indeed, if I were still in my old job as a Japanese equity hedge fund manager I would have swung the bat as hard as I could after Bank of Japan Governor Kuroda’s original April 4 announcement. And I would plan to keep swinging the bat well into the future. Indeed, if my risk manager was not having a heart attack by now, I would feel I had not done my job properly.

Strange as it may seem, this is the logical path to follow given that Kuroda has based his analysis lock, stock and barrel on New Keynesian monetary theory. The two canonical papers that sit behind this are Paul Krugman’s “It’s Baaack! Japan’s Slump and the return of the Liquidity Trap” and Gauti Eggertsson and Michael Woodford’s “The Zero Bound on Interest Rates and Optimal Monetary Policy”. The Eggertsson and Woodford paper, which we can think of as Krugman 2.0, has become the intellectual bedrock for the Fed in fighting deflation and is much quoted by Fed Governor Ben Bernanke.

Both papers are difficult reads for the non-economist, but, as I mentioned in my previous post, the Richmond Fed has made available a “A Citizen’s Guide to Unconventional Monetary Policy” for non-specialists that contains the core policy prescription of the two academic papers referred to above.  From A Citizen’s Guide, the critical passage is this:

In the Eggertsson and Woodford model, the com- mitment to making monetary policy “too easy” would only stimulate economic activity if the commitment is viewed by the public as highly credible. That is, markets must believe that the central bank will, in fact, hold rates “too low” in the future simply because it promised to in the past, despite the fact that at that point, it would wish to raise rates to avoid inflation.

Krugman, ever the wordsmith, put this more succinctly:

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible…

Now we now that asset price inflation operates on a different time scale to consumer price inflation: indeed, Japan’s stock price indices are already up 50% from their December lows, while consumer price inflation has barely budged. Nonetheless, to whatever level asset prices go, Kuroda has to keep his mouth firmly shut to have any chance of the changing public perceptions of future inflation. He is not allowed to make Greenspan-type gnomic references to “irrational exuberance”, let alone pull back from Japanese government bond buying. He must drive Japan’s monetary policy as if he was in one of those defective Toyota cars that was recalled due to a faulty accelerator pedal that got stuck to the floor.

This, of course, is a bubble meister’s charter, since for Kuroda to succeed in changing consumer expectations he must keep the accelerator pedal depressed for years. It is also worth keeping in mind that the Bank of Japan’s newly minted 2% inflation target is only an intermediate goal. As I explained in my last post, what monetary policy is really trying to achieve here is the closure of an output gap, i.e., the difference between where the economy is currently operating and where it could be operating if labour and capital were fully employed.

Moreover, the problem is perceived as one of lack of demand, not supply. The idea is that households won’t spend today because they think goods will get cheaper tomorrow. In effect, even if they hold cash at the bank earning zero, deflation means that they are getting a comfortable real return. The policy goal a la Krugman, Woodford and Eggertsson is to make that real return negative. And the only way to create a negative real return when interest rates are zero is to have inflation. If you can persuade the populace that inflation is barrelling toward them in the future, then they will cut savings and increase consumption now—or so the theory goes.

In addition, if the economy is idling below potential with unused capital and labour, any sudden jump in demand will result in high productivity and economic growth. Growth, in turn, will lead to higher wages and greater government tax receipts. Thus—and this is where the magic of macroeconomics comes in—the act of spending more now results in higher wages and living standards in the future.

Surely, a classic win-win: more consumption and more growth. What’s not to like? Nonetheless, there are a number of problems. First, how smoothly this all works depends to a large degree on the extent of the output gap. An article by Gavyn Davies in The Financial Times takes a look at the difference between output gaps if we just extrapolate past growth and those if we take into account supply side phenomenon (click for larger image) for a number of countries.

Output Gap Measurement jpeg

He explains the graphs in more detail: Continue reading →

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The Absurdity of ‘Abenomics’ and the PM’s ‘Three Bendy Arrows’ (Part 3: Monetary Policy and a Fictitious Can)

Posted on May 8, 2013 | Leave a comment

In my two previous posts on Abenomics (here and here), I argued that Japan is a post-growth economy. As the OECD explains in its Compendium of Productivity Indicators 2012, growth can be achieved in only three ways:

Economic growth can be increased either by raising the labour and capital inputs used in production, or by improving the overall efficiency in how these inputs are used together, i.e. higher multifactor productivity (MFP). Growth accounting involves decomposing GDP growth into these three components, providing an essential tool for policy makers to identify the underlying drivers of growth.

Therefore, if I am to be proved wrong in my declaration that Japan is post-growth, Abenomics must be able to boost labour inputs, and/or increase capital inputs and/or improve multifactor productivity (innovation and efficiency). By definition, the Abe agenda must encompass one or more of the three—there are no other means of achieving growth.

Against this background, Prime Minister Abe has given top billing to monetary stimulus within his ‘three arrow’ policy agenda. He campaigned and won a general election on a pledge to force Japan’s central bank, the Bank of Japan, to adopt a binding 2% inflation target through unlimited monetary easing and thus slay deflation. Moreover, to execute such a strategy, he backed a new BOJ governor, Haruhiko Kuroda, who took office in March. Kuroda, in turn, has executed Abe’s monetary policy agenda with gusto. (For a fascinating article on how Kuroda deftly manoeuvred the BOJ board into unanimously support the policy shift, see this Reuters’ article here).

In contrast with the speeches of his predecessor, Masaaki Shirakawa, Kuroda’s early utterances have been accompanied by a very thin chart pack dominated by the now famous ‘all the twos’ slide (click for larger image):

BOJ Quantitative Easing jpeg

These measures will give rise to an extraordinary jump in the monetary base over a two-year period from ¥138 trillion at the end of 2012 to ¥270 trillion at the end of 2014. In fiscal 2012, Japan’s GDP was estimated at approximately ¥475 trillion in nominal terms, so the monetary base is targeted to rise from around 30% of GDP to 55% of GDP.

Monetary Base Target jpeg

By contrast, the action by the Federal Reserve Board in the U.S. looks positively cautious (here), with the monetary base a modest 17% of GDP. Continue reading →

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The Absurdity of ‘Abenomics’ and the PM’s ‘Three Bendy Arrows’ (Part 2: Accounting for Growth)

Posted on May 6, 2013 | Leave a comment

In my last post on the policy agenda of Shinzo Abe, I took issue with both the Japanese prime minister’s choice of economic growth as almost the sole goal of government, but more importantly his ability to achieve such growth. Indeed, it is my contention that Japan has a post-growth economy, the principal reasons for which are twofold: demographics and diminishing returns to technology.

The above statement can be put in the context of growth accounting. From the OECD Compendium of Productivity Indicators 2012 we see a summary statement on growth drivers:

Economic growth can be increased either by raising the labour and capital inputs used in production, or by improving the overall efficiency in how these inputs are used together, i.e. higher multifactor productivity (MFP). Growth accounting involves decomposing GDP growth into these three components, providing an essential tool for policy makers to identify the underlying drivers of growth.

Next, let’s look at the headwinds to growth cited by the last governor of the Bank of Japan, Maasaki Shirakawa, who hardly ever stepped onto a podium to give a speech without including the following slide in his presentation pack (click for larger image):

Labour Force jpeg

As you can see from the chart above, labour inputs—the red section of each bar—have become a strongly (and increasingly) negative component of growth. The blue section of each bar—which encompasses both capital deepening and multifactor productivity (innovation and efficiency)—has also shrunk substantially.

So if Shinzo Abe wishes to bolster growth he has to do one of three things when he shoots his three policy arrows: 1) increase labour inputs, 2) expand capital inputs or 3) encourage multifactor productivity growth (innovation, creativity and organisational efficiency). Continue reading →

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The Absurdity of ‘Abenomics’ and the PM’s ‘Three Bendy Arrows’ (Part 1: What Is He Trying to Achieve?)

Posted on April 26, 2013 | Leave a comment

Although Japan has been eclipsed by the European southern periphery for the title of the world’s foremost post-growth economy, it still matters for its sheer economic size  (currently number three in the world behind the U.S. and China). However, despite sneers over Japan’s lost decade (or decades), the country has managed its decline rather well.

True, its outlying prefectures are peppered with depopulated and dilapidated towns and villages (beautifully chronicled in the past by Richard Hendy in Spike Japan), but there is none of the social implosion of, say, a Detroit or an Athens. Moreover, the Anglo-Saxon sniggers appear increasingly misplaced since the credit crisis hit, at which time the ephemeral nature of growth was recognised throughout the OECD.

Nonetheless, the election of Shinzo Abe in December 2012 has given rise to a resurrected style of evangelical “yes we can” style of politics (for veterans of Japan, we have been here before with Hosokawa and Koizumi). My preferred reply to Abe’s exultation would be this: “no, we can’t”, supplemented by “why are we even trying?”

So what exactly is Prime Minister Abe trying to do, especially as it has already been honoured with its own name: ‘Abenomics’. If you want to get an overview of Abenomics, you can find a short four-minute video on the subject from The Financial Times here.

First and foremost, he wants to invigorate growth (as a philosophy, this is about as novel as wanting peace on earth) through a ‘three arrows’ agenda of monetary stimulus, fiscal stimulus and structural reform . Quite why he wants more growth is never really explained. Perhaps it will help reduce government debt. But government debt is an intermediate outcome. How many people wake up in the middle of the night and say to a partner “I can’t sleep darling, I am so worried about the government’s debt.”

What people really worry over is whether they 1) can buy stuff such as food, housing and toys (like iphones, SUVs and foreign holidays), in accordance with their expectations 2)  are healthy, 3) have status (which starts by having a job), 4) have agency (which means the ability to have some degree of control over one’s job, environment and life outcomes, 5) have a partner, 6) have friends, 7) feel part of a broad, safe community,  8) get enough sex, again in accordance with expectations, and 9) have thriving children (for parents).

When Abe says, in all his munificence, that he wants to bestow on the people of Japan the gift of growth, he is saying that this gift will make people happy. But he is not saying through which avenue of growth this happiness will be attained. Will raising Japan’s long-term potential rate of growth provide people with enough sex to fulfil their expectations (a sure fire way to make people more happy)? I doubt it. Will it allow them to make new, close friends? You get my drift.

But hang on, you say, it will give them more toys! Perhaps. But then we are in a situation of who gets the toys and whether in the process of getting more toys the actions taken impair some of the other variables relating to happiness. I will come back to this point when I look at Mr. Abe’s ‘three bendy arrows’ agenda in more detail (in a later post).

So putting aside the question of whether growth will actually make the people of Japan happier, the next question is whether Abenomics can achieve the wished-for growth? To answer this question, let’s start by sneaking into the hallowed halls of the Bank of Japan (something I also used to do 20 plus years ago when I edited some of the most boring reports known to mankind). In his quest for the Holy Grail of growth, Prime Minister Abe has appointed a punditry applauded New Model Central Banker (NMCB), Haruhiko Kuroda. I, however, personally pine for his dull, dour predecessor Maasaki Shirakawa. Why?

Now Shirakawa never said that growth was not a good thing to strive for. See this statement from his final speech as Bank of Japan governor, given to the Japan Business Federation.

Needless to say, the ultimate aim of economic policy is to raise the living standard of each citizen. While there is no single indicator for gauging people’s quality of life, if we were to put this in approximate terms, the key aim of macroeconomic policy is to raise the per capita consumption level, or to raise the real gross domestic product (GDP), which is closely related to the former, in a sustainable manner.

Personally, I believe that in response to the request “Please sir, can I have some growth?” Shirakawa should have been more honest and given this reply:

No, tough shit, you are not going to get any growth, so there.

And in so doing, he could have conveyed the more meaningful message:

Rather than pursue something you can’t have, why don’t you all move on and do something more useful with your lives—something that will actually make you more happy.

Why do I say this? Because at the back of almost every Shirakawa speech is a set of charts clearly demonstrating that there is no growth to be had. As an example, I will plunder Shirakawa’s chart book from his last speech (given in February 2013) because the numbers are up-to-date. Many if not most of his speeches, however, have similar slides, so it doesn’t really matter which speech you pick.

First, we see that Japan’s growth rate has wilted over the last few decades:

LT Japan Real Growth jpeg

And this has been driven by declining productivity and poor demographics.

Labour Force jpeg

We also note that Japan’s productivity is not that bad in comparison with other major OECD countries.

Japan Productivity jpeg

Further, if we compare Japan’s record on a like-for-like basis with other economies—that is, correcting for the impact of demographics—then employee-adjusted GDP looks perfectly respectable:

Adjusted Growth jpeg

And just to remind ourselves, I will show a chart from a Japanese Ministry of Health, Labour and Welfare (MHLW) presentation that demonstrates just how bad the demographics will get:

Populaton Trends Japan jpeg

After this short series of charts, we know exactly what Prime Minister Abe’s  ‘three bendy arrow’ policy agenda is seeking to achieve. He is seeking to overcome a roughly 1% per annum drag on growth from fixed demographics. So to get 1% real GDP growth, his ‘three bendy arrows’ will need to double productivity growth; and to get 2% real GDP growth, they will need to treble productivity growth. Also, he is aiming to do this at a time when all the OECD countries have seen decadal declines in productivity, and not one advanced country is consistently recording 2% plus rates of productivity growth in the current climate.

I will argue in my next post that the achievement of such huge jumps in productivity growth are an impossibility. What is more, in trying to attain what cannot be attained, Abe risks setting off a range of unintended consequences that could harm happiness, and, counterintuitively, whatever economic stability Japan has been able to achieve in recent decades.

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Technology, the One Percent and Happiness

Posted on April 22, 2013 | 3 comments

One of the central themes of this blog is the pressure that low, zero or negative growth places on economic and social institutions. Technology, however, appears to be ramping up the pressure on these institutions through directing the fruits of whatever growth there is toward an ever-smaller pool of winners. As a result, trickle down appears to be dead, which ultimately means that the current market structure could be gradually undermining the post-war political consensus.

This sounds all very Marxist, but a recent paper by Emmanuel Saez of the University of California shows the amazing extent to which top earners in the U.S. are taking an accelerating share of total income. True, the Great Recession saw a short hiccup in this trend, but the bounce-back since then has been extraordinary: all the gain has been captured by the top one percent (click for larger image).

Real Income Growth jpeg

Saez also puts current income concentration in the context of the historical trends since 1917. As things stand, the rich (top 10%) are pulling away from their 1920s equivalents let alone the average household of the post-war period.

Top Decile Share jpeg

And even within the rich, there is a further level of concentration:

Top Decile Income Share jpeg

Further, even within the 1%, there are relative winners: the top 0.01% (households with earnings of just under $8 million a year) is taking close to 5% of total income.

The Top 0.01% jpeg

Given that there are around 120 million households in the U.S., we are talking about only 12,000 families in this category. Forget Russia, the U.S. has also become a society of plutocrats and oligarchs.

What is even more surprising to me is that despite the economic disruption of the Great Recession, increased unemployment and greater concentration of income (and wealth), indices of ‘happiness’ show no downward trend. The chart below taken from a paper by Graham, Chattopadhyay and Picon shows Gallup’s ‘Best Possible Life (blp) index (using data from a daily survey of 1,000 U.S. adults) plotted against the Dow Jones Industrial Average. At the height of the crisis, when Lehman Brothers went bankrupt, recorded happiness did slump but has since bounced back to levels even higher than those pre-recession; this is despite the fact that a slew of economic indicators show that many households are still struggling.

Best Possible Life jpeg

The ‘best possible life’ question is based on the Cantril Ladder that I blogged on previously here and is phrased in this way (source here):

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.

The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.

On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)

On which step do you think you will stand about five years from now? (ladder-future)

There is lots of evidence that ‘happiness’ reverts to previous levels when subject to either positive (for example a lottery win) or negative shocks, but I still find the resilience of the U.S. population very strange given the rise in unemployment, food stamp recipients and homeless families. For example, the chart below shows the number of recipients of the U.S. Supplemental Nutrition Assistance Programme (SNAP, data from here), better known as food stamps. As of January 2013, 47.8 million Americans (23.1 million households) were receiving benefitting from SNAP, up from 27.8 million individuals in December 2007, when the crisis was just commencing.

SNAP Recipients jpeg

Carol Graham, an economist who specializes in the field of happiness, postulates in her book “The Pursuit of Happiness: An Economy of Well-Being” that the less-than-expected correlation between poverty and happiness may be due to a phenomenon she calls ‘happy peasants, frustrated achievers’. In short, those who have less opportunity or ability to effect their surroundings reset their happiness within the constraints that control them. Further, she differentiates between current opportunity and future opportunity. Food stamp recipients may believe that their situation is temporary and that they will have an opportunity to achieve the American Dream at some point in the future. The fact that social mobility has been falling in recent decades is irrelevant according to her line of thinking: happiness is perception.

I am not entirely convinced. Indeed, I wonder if Gallup does actually capture those Americans really struggling at the bottom. Can they contact those whose place of residence is in a state of flux or are completely homeless? Do the very poor respond to surveys? I don’t know the answer to these questions, but would love to see some empirical work on the happiness of those receiving food stamps.

Which takes me back to the beginning of the post where I wondered whether falling growth and burgeoning inequality could set the scene for social instability. Perhaps Graham is showing us a version of Aldous Huxley’s “Brave New World” where the masses are kept quiescent and content through the use of the drug soma. But in our case, soma is replaced with Jim Kunstler‘s Nascar, junk food, internet porn, tatoos, piercings, and day-time TV (oh, and of course, belief in the American Dream). Or perhaps not.

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