Problems With the Output Gap?

Eddie's just come through from Singapore, with some relevant and interesting stuff. Relevant to the last post because he's taking time out with his children, preparing for his exams, and he asks the intelligent question: do they get too much homework? He also wants to know about why I feel the output gap argument may be dynamically flawed. I do open my mouth too easily don't I? But I still think there's a point I want to make about this. To do it seriously this means tomorrow, but I'll put Eddie up in case anyone else wants to join in.But Europe please note the point about the recession meaning the immigrants go home. I have the same impression from Argentina.

My kids are 9 and 6. Often I wonder if their childhood is passing too quickly & that they spend too much time doing homework. They have fallen behind pretty relentless schoolwork. So Daddy comes and gives them a push. They’ve got years ahead of them, to learn and educate themselves. But kids get streamed at 10yrs here. So much for the family.

You’re brilliant. Your mail and reference to the Krugman question is fascinating. And you’re absolutely right on “undocumented labour”. They are here in Asia too. However I’m lost when you talk about: “the idea of 'potential output' may be useful as a rule of thumb guide, but it becomes deeply flawed - for the above mentioned creative destruction reasons - when you want a richer more dynamically oriented analysis: the type of analysis for which neo-classical economics is relatively poorly equipped”

Please find some time to explain to me. I’ve been trying to educate people here on why deflation is possible even with growth by using the “outgap gap” explanation. It’s been illuminating for some. Serious people here still don't treat the deflation threat that seriously. I can see the serf labor argument, but can’t relate your talk about Schumpeter, Keynes and the output gap?

I kept a post you made sometime back. I had somewhat similar reservations about the Stephen Roach rebalancing argument (by forcing structural reforms in Jap / EU). I couldn’t quite grasp how structural reforms would release demand. And then you spoke about this huge notionally accumulated wealth that would be written off by the pension reform. Now that’s more likely in my mind. It’s deflationary rather than inflationary.

When you talk about “labour market reform has a similar look to it ... This writing down takes two forms. First lower salary expectations, and secondly lower compensation when jobs are 'bought out'.” Again, I share these sentiments. But what do you mean by bought out? I guess labour market reforms essentially translate into releasing more labour into the market …

Now perhaps all this comes back to my earlier question about the output gap analysis? When you talk about deflation in both nominal and real, that’s scary. A case of falling potential output, but outpaced by demand falling even faster? And falling potential output causing falling demand as one dynamic? In such a situation should we worry about the size of budget deficits at all?

Your point about ageing society fearing inflation is well taken. Seems to me, like the falling dollar situation, that time is running out. If targeting inflation is to work, the sooner the better. Similarly, if Spore wants to alleviate its deflationary threat, it should depreciate before the US does. Spore should have done it 3 years ago.

Your point about Spore is just too well regulated (the land where you can't eat chewing gum), so the potential for the mass introduction of immigrants just isn't there Yes, there’s difficulty in attracting immigrants from developed western countries. While many have come to work here and appear to like it, few really want to settle for good. But we get a lot of mainland Chinese and Vietnamese. Now I can see them settling here. Standard of living is higher. More freedom too. But the problem now seems to be the recession. No job, so go home. A lot of Asian students here too, but again, if no job after graduation, go home. I believe a reason why the domestic economy here is compressing so much is a reverse flow of foreign workers.

What are the 5 C's? The material trappings .. A condo, credit card, car .. you get the picture. people were too materialistic for too long. but i dont believe in "payback time" or "day of reckoning" either. It cant be used as an excuse for allowing high unemployment.