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Friday, August 26, 2005

Problems That Just Won't Go Away

Like deflation in Japan, for example:

"Japan remains stuck in mild deflation, keeping a rein on the gradually growing optimism about the country’s economic recovery. The core index of consumer prices, which excludes volatile fresh food prices, fell 0.2 per cent in the year to July, according to government figures published on Friday – the same fall as in June. The core index for Tokyo – seen as an indicator of future price trends – fell 0.3 per cent in August, compared with a 0.4 per cent fall in July. Nationwide price figures show that Japan has remained in very mild deflation since the beginning of 2003, but with no real convincing trend suggesting an actual end to price falls."

I read this, as everything running steady, no important change in sight. Yesterday's news that export volumes in fact declined last month, though a detail, emphasises what a complicated picture this all is. Again in Japan, as in Germany, everyone is waiting for domestic consumpition to take the load, and I keep pointing out that there are good a-priori grounds for thinking this may not happen.

I am struck by the similarities between Germany and Japan, and by the way so many commentators seem to continually think that good times are just around the corner. These blog posts (here, here, and here ) show what a remarkable week it has been on the German front.

Wednesday, August 24, 2005

Wolfgang Lutz and the Low Fertility Trap

OK, let's subtitle this post "On the Importance of Wolfgang Lutz".

But before I get into what this means, there is an important detail which needs to be clarified: this relates to the way economists tend to use the term fertility. Basically I think there is a very lax useage around. Fertility can be used to mean the number of children born per woman of childbearing age in any given society or the Total Fertility Rate (TFR).So when we talk about say 'low fertility' societes, we are generally suggesting that statistically they have (lets say) a TFR of less than 2.1 (replacement level). But there is another, stricter, shall we say biological, sense in which fertility is used, to refer to the capacity of males or females to reproduce. If I say low fertility societies are not necessarily societies with high levels of infertility (although that may be the case) the distinction should be clear. I think the origins of this kind of confusion lie in the fact that biologists and demographers tend to use the terms fertility and fecundity differently. For biologists, fertility refers to the ability to conceive, whereas fecundity refers to quantity of actual offspring. For demographers, fecundity (or fecundability) refers to ability to conceive, whereas fertility refers to quantity of actual offspring. From this point on I am using the demographers terminology.

Why is this distinction important? Well this relates to the extent to which Malthus was right and Malthus was wrong, and the implications for the ways in which this nuance comes out in some versions of modern growth theory. I will develop this a little more extensively as we go on, it's just the distinction which I think we need to be aware of at this stage. Of course, if you start getting interested in all this, the best read I can recommend is Harvard Anthropologist Peter T Ellison's 'On Fertile Ground' (subtitled a Natural History of Human Reproduction). Ellison makes a lot of this distinction, and, I think, rightly so.

Now to take this forward I want to make another distinction related to the present demographic transition, and that is the one between tempo and quantum elements in fertility declines. What is all this about? Well the reduction in fertility (in TFR terms) which all OECD societies are currently experiencing has two components. The first, the quantum component, concerns the number of children eventually born to each woman, and the second, or tempo effect, relates to the timing of having children.

This distinction was originally made in a paper by John Bongaarts and Griffin Feeney: On the Quantum and Tempo of Fertility (1998). A reasonably easy to understand version of all this is to be found in a Bongaarts paper: The end of the fertility transition in the developed world.

Now.... the tempo effect can be seen as having itself two components. Firstly the general quantum reduction means that there are generally less cases of the higher parities (that is more than 2 children). This has the effect that the average age of childbirth goes down. However this process is normally accompanied by a steadily rising age at first childbirth, and at some stage this second element begins to dominate over the first one and average age at childbirth in aggregate begins to rise. This is the tempo effect in the classic low TFR developed societies.

OK now you've struggled this far maybe I should mention the fact that demographer Tomáš Sobotka has a very interesting presentation about these issues.

Alright, now why is Lutz important? He is important basically I would argue since he identified the structural importance of the tempo effect - that permanent damage to the structure of the population ensues - even if final cohort TFRs ultimately are higher than anticipated, and that the only way this is overcome is by having a 'reverse tempo effect' at a later date, something which doesn't seem likely. This structural damage effect will turn out to have significant economic consequences.

Secondly he is important for having emphasised the critical 1.5 TFR boundary where negative feedback processes appear to set in which made it difficult to climb out of the hole. This has focussed our attention in a very important way.

As with all 'cutting edge thinking', it doesn't remain cutting edge for long, and Tomáš Sobotka is already (as can be seen from the presentation) modifying his ideas, although the substance still stands I think.

A fuller discussion by me of Lutz's 1.5 fertility trap ideas can be found here (in post and comments).

Here's another useful presentation from Lutz that I'm posting as much because I don't want to lose the link as for any other useful reason.

Monday, August 22, 2005

How To Finance Rising Health Costs

Or rather, "How To Finance Rising Health Costs" Japan style. Issue bonds apparently. The advantage is that in the short term the costs don't hit government spending data, but how does this help pay the bill in an ageing society, with health costs on the up and up. Isn't the use of Special Purpose Vehicles here surprisingly reminiscent of Enronomics? Take a quick look at total health care costs:

"In 2002-03, patients contributed less than Y5,000bn to the costs of Japan's healthcare system, out of a total of Y31,000bn excluding over-the-counter drugs. The rest was paid for directly by government or through Japan's public medical insurance system itself subsidised by government. In recent years ministers have progressively increased the amount patients have to pay, but it remains a small proportion of total healthcare costs".

So patients pay about one sixth of the cost. Issuing the bonds staves off paying for some of the other five sixths, but with a declining workforce and rising unit costs plus a growing proportion of the population needing medical care, this can't go on indefinately into the future. Well, ok, it can go on just until the day it can't.