New Economist

East Asia's dollars

In a well-crafted essay, R. Taggart Murphy writes for New Left Review on the sustainability of the US current account deficit and the role played by East Asia's dollars (also available as a PDF). He is particularly interesting on Japan, where he teaches. Here's a short excerpt:

There is talk in financial circles in Tokyo that the Ministry of Finance has concluded that global imbalances have become too great; that the limits of Japan’s dollar support capability have finally been reached. A real chance exists that Japan will stop throwing good money after bad in the next dollar crisis and sit on its hands. Of course the price would be heavy—once the dollar goes into freefall and the yen breaks past its historical high water mark of ¥79/$1, Japan will be facing the write-off of much of its accumulated dollar hoard and the potential loss of hundreds of thousands of manufacturing jobs. But Japan has learned a great deal during the past fifteen years about coping with and spreading out the pain of job loss; Mikuni Akio has suggested that, finally freed of the deflationary burden of supporting vast pools of idle dollars (idle as far as Japan is concerned), the Japanese economy could find new strength in an era of a super yen.

Among other things, the new purchasing power of Japanese households could not only help compensate those facing job loss but could finally provide the elusive shift to an economy driven by vibrant domestic demand rather than exports—the stated goal of Japan’s policy makers for a generation. A case can be made that Japan is in better shape now to deal with the economic fallout of a dollar crisis than it has been at any time in the past twenty years.

The political fallout is another question entirely. The collapse of the dollar will take with it American hegemony; the United States will be hard-pressed to sustain its global military reach in a world where it must earn euros or yen to pay its foreign creditors rather than fob them off with more us government paper. No matter what form it takes, the end of American hegemony will bring the return of the central Japanese political question—the right to rule—with a vengeance; particularly so because it may well be accompanied by serious upheaval in Japan’s most important neighbour. There is no obvious present substitute for the American market in providing the engine of demand to sustain the kind of growth China needs in order to manoeuvre its way past the ever-looming threat of a domestic financial crisis, unless it were to be Japan itself.

The piece end with no real conclusion, and is a little too millenarist. Worth reading, nonetheless.

An update on the global blame game

Bloomberg columnist William Pesek Jr offers readers "an update on the global blame game" in his latest column, Global Game of Musical Chairs May End Badly. He argues that the risks that East-West tensions over global imbalances "will become a huge problem are growing".

As is often the case, the latest East-West flashpoint is currencies.  ...the U.S. Treasury Department was unhappy with efforts by Japanese officials to slow the yen's gains since a meeting of the Group of Seven last month. Japan was miffed the U.S. seems to be encouraging a weaker dollar and downplaying its record current-account and budget deficits. China also voiced concern about the depreciation of the U.S. dollar.         

All this is code for "the world's economic imbalances aren't my fault, but yours.'' If events in Hyderabad crystallized anything, it's that the blame game that's become a common feature of the global economy is entering a new and more dangerous phase. What's even more worrisome is that there's no adult in the room in which this game is playing out.

The G-7 can't act as referee because its members are part of the problem. The International Monetary Fund is too busy trying to remain relevant in a world devoid of crises to offer much direction. Of course, if today's imbalances get out of hand, the IMF's bailout abilities won't be up to the challenge. The world economy isn't too big to fail, but too big to save.

Here's an update on the global blame game:

For a record $805 billion current-account deficit that's clearly unsustainable, the U.S. blames China and Japan. If only officials in Beijing and Tokyo would let currencies rise, the U.S. argues, all would be well. The U.S. almost seems to think it's over-consuming out of a sense of global altruism.

Asians blame the West, especially the U.S., for Asia's policy of parking more than $1 trillion of savings in U.S. debt. Officials in this region claim the U.S. has created a global system to help fund its way of life, and that Asians have little choice but to play along.         

Europe blames Asia's mercantilist ways for its declining competitiveness. It seems Europe's weak demand, high unemployment and worsening fiscal position are caused by Asians pushing the euro higher with their dollar purchases.

In all cases, the reality lies somewhere in between. The thread of truth that runs through each accusation was nicely articulated in Hyderabad by Li Yong, China's vice finance minister: ``We are all on the same boat. No one will escape if this boat sinks.''

Great expectations: How FDR ended the Depression

Can this be the final nail in the monetarist coffin? Gauti Eggertsson, an economist at the New York Fed, argues in new Staff Report 234, Great Expectations and the End of the Depression, that the US economic recovery under FDR was not about monetary factors, but public expectations:

This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and—even more important—announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations.

In his conclusions he draws some policy lessons for Japanese policymakers:

If a credible inflation program is implemented in Japan, with coordinated monetary and fiscal policy, it is quite likely that the effect will be swift and visible, much in the same way as the recovery in 1933-37 in the US under Franklin Delano Roosevelt.

Aussie econobloggers deliver down under

Australian economists held their 34th Annual Conference of Economists at the University of Melbourne earlier this week. Aussie John Quiggin caught up with fellow econobloggers Stephen Kirchner and Andrew Leigh, "and lots of old friends and sparring partners". First, the econobloggers contributions:

* John gave a keynote address (written with Simon Grant) on Learning and Discovery (PDF), "an attempt to unravel the knotty problem of unknown unknowns".

* Stephen delivered a paper on Japanese Monetary Policy under Quantitative Easing: Neo-Wicksellian versus Monetarist Interpretations (PDF), which argued that "central bank policies are unlikely to be credible in the absence of a compelling account of the underlying monetary policy transmission mechanism at the zero bound".

* Andrew gave a paper (written with Justin Wolfers) on Competing Approaches to Forecasting Elections: Economic Models, Opinion Polling and Prediction Markets (PDF), which found that during the last Australian election betting markets wre much better at predicting the outcome than opinion polls.

The keynote speeches included:

The Sun Also Sets

By Edward

In one of those strange coincidences that life so often thows our way Mark has just posted on the worrying plight of Oregon's wild fish (and incidentally I don't think we economists should make any apology for expressing strong opinions on such topics, au contraire we should make a point of doing so, but I guess it's a bit easier to say this sitting over here in Europe).

But no, this post isn't about fish, or even about something fishy, it is about an endangered species though: the Japanese. This is a bit strong, you will say. Well I don't know how else you can describe a group of people who sustain a TFR of 1.3 and who seem totally resistant to inward-migration (Japan last year was a net exporter of migrants). With every generation the population of Japan is set to reduce, and in a relativey small and finite number of generations it could become very small indeed.

Oh, I know, I know, we can't see that far into the future and all our demographic projections tend to incorporate important levels  of uncertainty (although over a mid term window of 10 to 30 years theyse are much more secure than, say, GDP projections, which should be a chastening thought. Since we know who is already born we can see certain structural demographic features pretty clearly over a significant time horizon). Anyway this is not the issue here. What I want to talk about today is not how Japan might be 50 years from now, but how it is today.

Manufacturing productivity: Japan beats US

Japan had the largest manufacturing productivity increase in 2003, according to revised BLS estimates. An 11% increase in manufacturing productivity in Japan, measured by output per hour, was the largest among 14 economies compared for 2003. But at 9.7%, the rise in the US was also impressive. Full report here.