Welcome To The Menagerie I

This is the first in what are likely to be a series of stream-of-consciousness type posts about a project I am working on. If you need to find a culprit you could complain to New Economist who effectively set me up by saying of economics bloggers that we "as a group we're not quite there yet in terms of shaping the news agenda or coming up with important economic ideas". There are signs that en-bloc we may be begining to push the boat out a bit on the news agenda front, and the second part, the not coming up with important economic ideas, well that is like a red rag to a bull. Ripping-off the late and dearly lamented Gilbert Harding, I'm here solely and exclusively with this purpose in mind.

OK, now for the stream of consciousness: basically I am extraordinarily disatisfied with the state and use of contemporary macro theory. This isn't an ideological issue, its not about Keynesianism or monetarism, I can't abide austrianism, I am neither in or out of the neo-classical tradition, I take the parts I like and screen out the bits that irritate. No, its more a feeling of ontological excess, a kind of proliferation of parameters and models when some really simple nuts and bolts elements seem to be getting ignored.

Of course I'm talking about population dynamics here.

The important lesson that I think we have learnt in the last few years is that it is not population size which is important, but the age structure of the population. Perhaps, more than anyone else it has been the work of David Bloom which has clarified this point, and you can find a simple introduction to his work here.

I'll have a lot more to say about this another day, but I think I want to put him up now as an initial pointer.

Today I have been reading my way through some papers by Ralph Bryant and in particular this one on the cross border implications of demographic changes. Bryant, as well as hiss Brookings and IMF colleagues Hamid Faruqee, Delia Velculescu, Elif Arbatli, Ralph C. Bryant, Gary Burtless,Marc de Fleurieu and Warwick J. McKibbin have been quite tireless and effective in bringing to the fore a number of important and otherwise neglected issues. Since I will probably end up being fairly critical of them, it is important to set this out at the outset.

Basically what the work of this 'collective' has achieved is the bringing of some clarity to the issues lying behind what has come to be known as the global savings glut, and what are also fashionably known as the the substantial global imbalances.

What the work of Bryant et al definitively establishes afaiac is that changing population structure - whether through increasing longevity or through declining fertility (and as Bryant paciently points out the two are different, and have differing implications) - has identifiable implications for national saving and invest schedules, and for balance of trade and current account signs.

What the linked Bryant paper attempts to do is model a comparative assesment of the trajectories of two economies - effectively home and abroad - with differening trajectories towards the same steady state population-end in an open-economy environment. Whatever the issues of detail, what he does establish is that the demographic path matters, or to put this in a more concrete context the differences between Japan and Germany on the one hand and the US on the other are intelligable within this kind of framework.

Warwick J. McKibbin has a specific exploration of the Japan situation here.

There is also this presentation to look at, where Bryant and de Fleurieu begin to cast a critical eye over some of the issues which arise in their work.(Or come to think of it, you might find the whole contents of this meeting just plain interesting).

China Under Scrutiny

Associated Press is reporting that the Bank of China has issued a warning on its website about the risk of a property bubble whilst xhinuanet informs us that a growing number of Chinese economists are worried about the dangers of over-capacity-driven deflation later this year or sometime in 2006 (Hat-tip to Skeptical Speculator). Obviously things to watch.

Again in the 'while I'm here' category, James - econbrowser - Hamilton has been posting on China's oil connundrums following up on a hat-tip from Oil Drum. David has also been posting on the oil topic on Afoe, and yours truly has been busy in the comments section there too.

Oh, oh. This has also just gone up on the FT website:

"China’s urban fixed asset investment was up 27.2 per cent in the seven months to July from a year earlier, despite the central government’s persistent efforts to reign in speculative and unnecessary expansion.

The rate was slightly lower than in the previous two months, when the year-on-year growth hovered above 28 per cent. But the figure was higher than the average prediction of 25.8 per cent by several economists surveyed by Reuters.

Beijing has said that moderating fixed asset investment, especially the speculative money being funneled into real estate markets and overambitious industrial projects, is crucial for sustaining economic growth in the longer term."

This is obviously what all the public heartsearching is all about.

Don't Miss This

I have, on occasion, been want to criticise the ever-prolific Elga Bartsch. Essentially I think she fails to appreciate the aggregate demand implications of the (back door) wage deflation she advocates in the German context. But she is by no means a stopped clock, and she is certainly far from being always in the wrong. A good case in point would be a piece she wrote-up for the MS GEF last week on the potential implications for ECB inflation policy of including owner occupied house prices in the eurozone harmonised price index. As she suggests the inclusion might make the price index more volatile and, if this turned out to be the case, the ECB’s definition of price stability might be open to debate again. She lists a number of possible areas of impact, and the whole piece is worth a read for those (like me) interested in such 'arcane' matters, but perhaps the most revealing part is this bit:

Fourth, the greater discrepancy between the inflation rates in individual countries. This could again call into question the sustainability of the ECB’s one-policy-fits-all approach. Thus far, inflation discrepancies in the euro area have not been larger than in the US. That might change, however, once OOH is taken into account. The impact of the inclusion of OOH on country specific inflation depends on three main factors.

• The first factor is the role of owner-occupied housing in the country. The higher the share of households living in owner-occupied housing, the greater the impact on the CPI is likely to be. Within the euro area, the share of OOH varies from 42% in Germany to 85% in Spain.

• The second factor is the extent to which rent controls and other housing policies have prevented rents from reflecting housing market conditions.

• The third factor is the actual house price dynamics in the respective country. Whereas the euro area as a whole is tracking 7%, the range varies from slightly falling prices in Germany to increases of around 15% in Spain and France.

Also, the inclusion of OOH will likely make it more difficult for Central and Eastern European countries, which will likely see booming property markets on the back of interest-rate convergence towards the lower EMU level, to fulfill the Maastricht inflation criteria.

While I'm Here

Posting over the coming days will continue to be sporadic. I'm not thinking of really starting up on Afoe till next month, since I've made myself a half-promise not to blog and to try and work up something more substantial in the background. Doing a lot of walking, eating, sleeping and thinking over the last couple of weeks - camping in the mountains is certainly conducive to getting an early night :) - I'm more convinced than ever that something as straightforward and simple as a median-age table tells us a hell of a lot about relative growth dynamics. More on this - much more - will follow.

For now I will just say I find some of the feedback I get rather curious.One Afoe commenter said he found the demography story 'just too pat', others say they doubt you can explain 'everything' using demography, or that you can't 'put it all down to demographics'. With respect - although of course we would need a closer inspection of the meaning of the terms <> and <>, I don't think I have ever suggested you could. Feeling bullish after the sun, green and fresh air, I will just stick my nexk out and say you can probably explain between 70 and 80% of the differential growth story (on a rule of thumb, back of the envelope sort of basis) using comparative demographics. That still leaves 20 to 30% to be explained by things like efficient financial systems, market mechanisms, structural elements, and prudent and sound administrative and institutional frameworks. Let me be clear, 20 to 30% of the explanation of total global growth is no small beer, and people shouldn't be belittling it.

Of course, looking at this the other way round, transitional demographic dynamics plus the law of large numbers do explain quite a big chunk of it, which again is no mean feat. As to the 'too pat' bit, whoever decided that things had to be incredibly complicated? I would have thought Occam's razor rather lead us in the other direction. Einstein suggested we make things simple, but cautioned against oversimplifying, so the trick is to get them just simple enough. Sometimes the beauty lies in the simplicity, and the hardest things to see are the simplest ones. Nature is resplendent in its variety, but Darwin's mechanism is - at the end of the day - off-puttingly simple.

Back From Holidays

Yep, I'm back, and so is Andy Xie:

The current situation is similar to what frequently occurred in the 19th century – financial innovations increased liquidity and caused speculative bubbles primarily in commodities, technology, and property. The key condition for this type of phenomenon is the existence of a deflationary force that stops liquidity from becoming inflation. The industrialization of the west and its associated deflationary pressure created ideal conditions for speculative bubbles. Now, the introduction of three billion industrializing people (China, India, and the Soviet block) into the global trading system has made the world bubble-prone once again.

Absolutely spot on. Anyone who doesn't try to situate the current global environment in terms of late 19th century dynamics - at least in terms of a 'comparable historical periods', 'lessons from the past' type approach - just doesn't "get" something important, at least in my book. Of course Andy has only part of the picture (which at least is something) since he is only looking at deflationary pressures in terms of the labour dynamic in the developing economies. The other half of the equation - the ageing OECD populations and the rising liquidity and cramped demand growth that this produces - is still absent from the picture, but still, better a glass half-full than one which is completely empty.