From the paperlinked in my last post. This should give some idea of what all this means:
We define lowest-low fertility as a total fertility rate below 1.3. TFR levels below 1.3 are clearly not a demographic equilibrium, and sustained lowest-low fertility implies far-reaching demographic, economic and social consequences. For instance, a TFR of 1.3 implies an annual decline of the population size by 1.5% in a stable population with an overall mean age at birth of 30 years. A TFR of 1.3 also implies a reduction of the birth cohort by 50% and a halving of the stable population size every 45 years.2 If the TFR further declines and persists at a level of one, the annual rate of decline in the stable population rises to 2.4% and the halving-times of population size and birth cohorts are merely 30 years. This substantially faster decline of the population also reveals that the precision of demographic measures becomes increasingly important in lowest-low fertility contexts: a difference in the TFR between 1.0 and 1.3 is equivalent to the difference between 3.2 and 4.2 in terms of stable population growth rates.
Saturday, September 17, 2005
Another Fertility Paper
Here's another interesting paper on the fertility decline: The Emergence of Lowest-Low Fertility in Europe During the 1990s - Hans-Peter Kohler Francesco C. Billari José Antonio Ortega (2002).Here's a hint of what they argue:
Several aspects of this convergence towards low fertility are particularly striking. First, the spread of belowreplacement fertility to formerly high fertility countries has occurred at a remarkably rapid pace and implied a global convergence of fertility indicators that has been quicker than the convergence of many other socioeconomic characteristics. Second, earlier notions that fertility levels may naturally stabilize close to replacement level have been shattered.1 In the early 1990s, for instance, Italy and Spain were the first countries to attain and sustain lowest-low fertility levels, which we define in this paper as total fertility rate (TFR) levels below 1.3, and at the end of the 1990s there were 13 lowest-low fertility countries in Southern, Central and Eastern Europe with a total population of over 370 million persons. Third, recent fertility trends in Europe and other developed countries have been accompanied by a remarkable divergence in the fertility levels, ranging in the late 1990s from lowest-low fertility to TFR levels above 1.7 in France or Denmark and to TFR levels close to 2.1 in the United States.
In this paper we investigate the emergence and persistence of lowest-low fertility in Europe, analyze its demographic patterns and socioeconomic determinants, and address the factors that underlie the divergence of fertility levels in Europe and developed countries more generally. The central thrust of our argument is that the emergence of lowest-low fertility in Europe is due to the combination of five distinct demographic and behavioral factors. First, demographic distortions of period fertility measures, caused by the postponement of fertility and changes in the parity-composition of the population, have reduced the level of period fertility indicators below the associated level of cohort fertility. Second, economic and social changes have made the postponement of fertility a rational response for individuals. Third, social interaction processes affecting the timing of fertility have rendered the population response to these new socioeconomic conditions substantially larger than the direct individual responses. As a consequence, modest socioeconomic changes can explain
the rapid and persistent postponement transitions from early to late age-patterns of fertility that have been associated with recent trends towards low and lowest-low fertility. Fourth, institutional settings in Southern, Central and Eastern European countries have favored an overall low quantum of fertility. Fifth, and finally, postponement-quantum interactions have amplified the consequences of these institutional settings, and they have caused particularly large reductions in completed fertility in lowest-low fertility countries due to the delay of childbearing. Moreover, a differential relevance of postponement-quantum interactions is an important factor contributing to the divergence of European countries into those that have accommodated late childbearing without substantial declines in cohort and period fertility and those that experienced large declines of fertility during the postponement transition. We conclude our paper with a discussion of future scenarios for fertility trends in lowest-low fertility countries and lowest-low 'candidates’.
Several aspects of this convergence towards low fertility are particularly striking. First, the spread of belowreplacement fertility to formerly high fertility countries has occurred at a remarkably rapid pace and implied a global convergence of fertility indicators that has been quicker than the convergence of many other socioeconomic characteristics. Second, earlier notions that fertility levels may naturally stabilize close to replacement level have been shattered.1 In the early 1990s, for instance, Italy and Spain were the first countries to attain and sustain lowest-low fertility levels, which we define in this paper as total fertility rate (TFR) levels below 1.3, and at the end of the 1990s there were 13 lowest-low fertility countries in Southern, Central and Eastern Europe with a total population of over 370 million persons. Third, recent fertility trends in Europe and other developed countries have been accompanied by a remarkable divergence in the fertility levels, ranging in the late 1990s from lowest-low fertility to TFR levels above 1.7 in France or Denmark and to TFR levels close to 2.1 in the United States.
In this paper we investigate the emergence and persistence of lowest-low fertility in Europe, analyze its demographic patterns and socioeconomic determinants, and address the factors that underlie the divergence of fertility levels in Europe and developed countries more generally. The central thrust of our argument is that the emergence of lowest-low fertility in Europe is due to the combination of five distinct demographic and behavioral factors. First, demographic distortions of period fertility measures, caused by the postponement of fertility and changes in the parity-composition of the population, have reduced the level of period fertility indicators below the associated level of cohort fertility. Second, economic and social changes have made the postponement of fertility a rational response for individuals. Third, social interaction processes affecting the timing of fertility have rendered the population response to these new socioeconomic conditions substantially larger than the direct individual responses. As a consequence, modest socioeconomic changes can explain
the rapid and persistent postponement transitions from early to late age-patterns of fertility that have been associated with recent trends towards low and lowest-low fertility. Fourth, institutional settings in Southern, Central and Eastern European countries have favored an overall low quantum of fertility. Fifth, and finally, postponement-quantum interactions have amplified the consequences of these institutional settings, and they have caused particularly large reductions in completed fertility in lowest-low fertility countries due to the delay of childbearing. Moreover, a differential relevance of postponement-quantum interactions is an important factor contributing to the divergence of European countries into those that have accommodated late childbearing without substantial declines in cohort and period fertility and those that experienced large declines of fertility during the postponement transition. We conclude our paper with a discussion of future scenarios for fertility trends in lowest-low fertility countries and lowest-low 'candidates’.
On Demographic Determinism
I am just reading the Bloom and Sachs paper I referred to in the last post.
I have come to a very interesting extract. They wish to defend themselves from the charge of being 'geographic determinists'. They state the following:
"Our paper could well be misunderstood. Some will regard it as a new case of "geographic determinism," that Africa is fated to be poor because of its geography. Some will regard it as a distraction from the important truth that geographic difficulties or not, African governments seriously mismanaged economic policy in the past generation. Let us therefore be clear at the outset. We believe emphatically that economic policy matters, and our formal econometric results show that to be true, a point we have also made in related recent studies (especially Sachs and Warner, 1997) We nonetheless focus most of our attention on geography for three reasons. First, there is little to be gained from yet another recitation of the damage of statism, protectionism, and corruption on African economic performance. Amen. Second, most economists are woefully neglectful of the forces of nature in shaping economic performance, in general and in Africa in particular. They treat economies as blank slates, upon which another region's technologies and economic history may be grafted. Our profession's formal models tend to be like that; so do our profession's standard statistical analyses of cross-country growth....Third, and perhaps most importantly, good policies must be tailored to geographical realities.If agricultural productivity is very low in Africa for climatological reasons, perhaps the real lesson is that growth should be led much more by outward-oriented industry and services, rather than yet another attempt to blindly transplant "integrated rural development" strategies from other parts of the world that are not customized to Africa’s unique conditions."
OK, now let me tailor this a little bit to my own situation:
My arguments could well be misunderstood. Some will regard them as a new case of "population determinism.". Let me therefore be clear at the outset. I believe emphatically that economic policy matters. I nonetheless focus most of my attention on demography for three reasons. First, there is little to be gained from yet another recitation of the fact that In euro area countries and Japan, the key contribution to help ensure an orderly reduction in global imbalances is through measures to boost growth and domestic demand ( Laxton and Milesi-Ferretti). Amen. Second, most economists are woefully neglectful of the forces of demography in shaping economic performance, in general and in the OECD world in particular. They treat economies as blank slates, upon which another region's structural policies and economic and social model may simply be grafted. Our profession's formal models tend to be like that; so do our profession's standard statistical analyses of cross-country growth....Third, and perhaps most importantly, good policies must be tailored to demographic realities.If domestic demand growth is very low in Germany and Japan for sound demographic reasons, perhaps the real lesson is that growth should be led much more appropriate demographically related structural policies, rather than yet another attempt to blindly transplant "structural reform" strategies from other parts of the world that are not customized to the unique conditions of rapidly ageing societies.
Am I making sense?
Incidentally, if you want to know what the relevance of this linked paper is to the demographic transition age structure argument, read section III which begins on page 22. Sachs is one of the crew.
I have come to a very interesting extract. They wish to defend themselves from the charge of being 'geographic determinists'. They state the following:
"Our paper could well be misunderstood. Some will regard it as a new case of "geographic determinism," that Africa is fated to be poor because of its geography. Some will regard it as a distraction from the important truth that geographic difficulties or not, African governments seriously mismanaged economic policy in the past generation. Let us therefore be clear at the outset. We believe emphatically that economic policy matters, and our formal econometric results show that to be true, a point we have also made in related recent studies (especially Sachs and Warner, 1997) We nonetheless focus most of our attention on geography for three reasons. First, there is little to be gained from yet another recitation of the damage of statism, protectionism, and corruption on African economic performance. Amen. Second, most economists are woefully neglectful of the forces of nature in shaping economic performance, in general and in Africa in particular. They treat economies as blank slates, upon which another region's technologies and economic history may be grafted. Our profession's formal models tend to be like that; so do our profession's standard statistical analyses of cross-country growth....Third, and perhaps most importantly, good policies must be tailored to geographical realities.If agricultural productivity is very low in Africa for climatological reasons, perhaps the real lesson is that growth should be led much more by outward-oriented industry and services, rather than yet another attempt to blindly transplant "integrated rural development" strategies from other parts of the world that are not customized to Africa’s unique conditions."
OK, now let me tailor this a little bit to my own situation:
My arguments could well be misunderstood. Some will regard them as a new case of "population determinism.". Let me therefore be clear at the outset. I believe emphatically that economic policy matters. I nonetheless focus most of my attention on demography for three reasons. First, there is little to be gained from yet another recitation of the fact that In euro area countries and Japan, the key contribution to help ensure an orderly reduction in global imbalances is through measures to boost growth and domestic demand ( Laxton and Milesi-Ferretti). Amen. Second, most economists are woefully neglectful of the forces of demography in shaping economic performance, in general and in the OECD world in particular. They treat economies as blank slates, upon which another region's structural policies and economic and social model may simply be grafted. Our profession's formal models tend to be like that; so do our profession's standard statistical analyses of cross-country growth....Third, and perhaps most importantly, good policies must be tailored to demographic realities.If domestic demand growth is very low in Germany and Japan for sound demographic reasons, perhaps the real lesson is that growth should be led much more appropriate demographically related structural policies, rather than yet another attempt to blindly transplant "structural reform" strategies from other parts of the world that are not customized to the unique conditions of rapidly ageing societies.
Am I making sense?
Incidentally, if you want to know what the relevance of this linked paper is to the demographic transition age structure argument, read section III which begins on page 22. Sachs is one of the crew.
Jeffrey Sachs and David Bloom
Something which I don't think is very widely appreciated is the fact that Jeffrey Sachs also worked with David Bloom, and forms part of the 'age structure does matter' group. For example this paper or this one "Economic Growth in Asia" by Radelett, Sachs and Lee.
Just pointing it out :).
Just pointing it out :).
Bo Malmberg and Gunnar Myrdal
This post is prompted by a new paper by Bo Malmberg (with Thomas Lindh and Joakim Palme) entitled : Generations at War or Sustainable Social Policy in Aging Societies? The paper is to be published in the Journal of Political Philosophy this month.
The paper is an excellent revue of the issues which surround the pyramid inversion and how questions of inter-generational justice may be addressed. It is also of interest since it draws our attention to the way in which Swedish social theorist Gunnar Myrdal was an early pioneer of many of the ideas of which I have recently begun to think about myself (in fact reading Myrdal's lectures I am amazed at how he seems to have gotten through to thinking about just the same issues (like ageing and productivity) which are worrying me right now).
In fact Myrdal seems to have:
1/ Had a major role role in the history of the debate about race relations in the US
2/ With his wife Alva (the mother of modern feminism?) pushed for a series of gender and child friendly policies in Sweden which seem to have given a lot of impetus to the so called 'Swedish model'.
3/ Been the first modern economist to raise the issue that the neo-Malthusians had it wrong about population (in this case the neo-Malthusian Knut Wicksell) and that number wasn't the important issue, but that structure and momentum were.
Myrdal made his population 'discoveries'in the 1930s for the purely conjunctural reason that Sweden was then already suffering from low fertility. As he points out, this was partly a 'structural shock' produced by economic recession and out-migration. But Sweden did have a very early move to the second phase of the demographic transition (the one were birth rates fall below replacement). Sweden's population dynamic has in fact held up fairly well over the last 60 odd years, partly due to inward migration and partly due to child friendly policies. But the long run tendency is making itself felt even in Sweden now.
Here is what Malmberg and company have to say:
"In the early twentieth century, Swedish birth rates fell sharply, reaching record low levels in the 1930s. Population growth could no longer be taken for granted. Instead, the prospect of a population decline had to be seriously considered. This demographic shift precipitated new interest in the population problem and opened up room for radical rethinking. A leading exponent of the new ideas was Gunnar Myrdal, a young Swedish economist soon to become responsible for the major study of racial relations in the US that would result in the book An American Dilemma. In 1940, he published his views on the population question in Population: A Problem for Democracy, based on his Godkin lectures at Harvard, making this not only a Swedish story but also an American one."
"Myrdal’s argument is based on the premise that the standard of living will be lower in a declining population than in a stationary population. His argument for this view was primarily that investment demand will be lower in a delining population and that this will lead to a deflationary situation with a demand shortfall. According to the Keynesian paradigm this would result in a low rate of economic progress. Myrdal’s argument carried substantial weight when presented to an American audience in 1938 with the depression experience fresh in its memory. It was taken up by Alvin Hansen in his 1939 presidential address to the American Economic Association and, in the same year, also by John Maynard Keynes in his famous Galton Lecture."
In one of those strange coincidences we find in life, last Saturday I was explaining to fellow Afoe blogger Tobias - wandering somewhere near the centre of the Gamla stan in Stockholm - that while some version of the Keynesian propensity to consume is in principle OK, what I now think is that this is not only a class phenomenon, but also an age phenomenon, and as median age rises then the proportion of extra income spent can change (as we can see in a 'middle aged' society like the US this relationship - via credit - may even become negative). Well, it now appears that the Swede Myrdal (who must himself have often walked those very streets) was the first to get through to this part of the argument. In some ways this makes him more of a visionary than Keynes, since Ks arguments are only part of the picture, Myrdal was moving us towards the bigger picture.I will try and develop this argument in subsequent posts.
Unfortunately "Population: A Problem for Democracy" (The Godkin Lectures) is not available online, it is however avalable here, at a new online library (subscription based) called questia. Now by one of those rare coincidences the very morning after I was searching for this book in Questia (you can read a few pages for free) they actually wrote to me offering me - as an economics blogger - a free three month subscription, so I have now read the whole thing, and will post more fully on another occasion.
Now for any who have had their appetite whetted by all this talk of Myrdal, can I recommend this paper, which apart from containing a lot of fascinating anecdotal detail does make a comparison of Myrdal's theory of fertility with Gary Becker's one.
Also another nice paper on the theoretical problems of the idea "demographic transition"(including an explanation of why the Swedish data playes such an important role in all these debates can be found here.
The paper is an excellent revue of the issues which surround the pyramid inversion and how questions of inter-generational justice may be addressed. It is also of interest since it draws our attention to the way in which Swedish social theorist Gunnar Myrdal was an early pioneer of many of the ideas of which I have recently begun to think about myself (in fact reading Myrdal's lectures I am amazed at how he seems to have gotten through to thinking about just the same issues (like ageing and productivity) which are worrying me right now).
In fact Myrdal seems to have:
1/ Had a major role role in the history of the debate about race relations in the US
2/ With his wife Alva (the mother of modern feminism?) pushed for a series of gender and child friendly policies in Sweden which seem to have given a lot of impetus to the so called 'Swedish model'.
3/ Been the first modern economist to raise the issue that the neo-Malthusians had it wrong about population (in this case the neo-Malthusian Knut Wicksell) and that number wasn't the important issue, but that structure and momentum were.
Myrdal made his population 'discoveries'in the 1930s for the purely conjunctural reason that Sweden was then already suffering from low fertility. As he points out, this was partly a 'structural shock' produced by economic recession and out-migration. But Sweden did have a very early move to the second phase of the demographic transition (the one were birth rates fall below replacement). Sweden's population dynamic has in fact held up fairly well over the last 60 odd years, partly due to inward migration and partly due to child friendly policies. But the long run tendency is making itself felt even in Sweden now.
Here is what Malmberg and company have to say:
"In the early twentieth century, Swedish birth rates fell sharply, reaching record low levels in the 1930s. Population growth could no longer be taken for granted. Instead, the prospect of a population decline had to be seriously considered. This demographic shift precipitated new interest in the population problem and opened up room for radical rethinking. A leading exponent of the new ideas was Gunnar Myrdal, a young Swedish economist soon to become responsible for the major study of racial relations in the US that would result in the book An American Dilemma. In 1940, he published his views on the population question in Population: A Problem for Democracy, based on his Godkin lectures at Harvard, making this not only a Swedish story but also an American one."
"Myrdal’s argument is based on the premise that the standard of living will be lower in a declining population than in a stationary population. His argument for this view was primarily that investment demand will be lower in a delining population and that this will lead to a deflationary situation with a demand shortfall. According to the Keynesian paradigm this would result in a low rate of economic progress. Myrdal’s argument carried substantial weight when presented to an American audience in 1938 with the depression experience fresh in its memory. It was taken up by Alvin Hansen in his 1939 presidential address to the American Economic Association and, in the same year, also by John Maynard Keynes in his famous Galton Lecture."
In one of those strange coincidences we find in life, last Saturday I was explaining to fellow Afoe blogger Tobias - wandering somewhere near the centre of the Gamla stan in Stockholm - that while some version of the Keynesian propensity to consume is in principle OK, what I now think is that this is not only a class phenomenon, but also an age phenomenon, and as median age rises then the proportion of extra income spent can change (as we can see in a 'middle aged' society like the US this relationship - via credit - may even become negative). Well, it now appears that the Swede Myrdal (who must himself have often walked those very streets) was the first to get through to this part of the argument. In some ways this makes him more of a visionary than Keynes, since Ks arguments are only part of the picture, Myrdal was moving us towards the bigger picture.I will try and develop this argument in subsequent posts.
Unfortunately "Population: A Problem for Democracy" (The Godkin Lectures) is not available online, it is however avalable here, at a new online library (subscription based) called questia. Now by one of those rare coincidences the very morning after I was searching for this book in Questia (you can read a few pages for free) they actually wrote to me offering me - as an economics blogger - a free three month subscription, so I have now read the whole thing, and will post more fully on another occasion.
Now for any who have had their appetite whetted by all this talk of Myrdal, can I recommend this paper, which apart from containing a lot of fascinating anecdotal detail does make a comparison of Myrdal's theory of fertility with Gary Becker's one.
Also another nice paper on the theoretical problems of the idea "demographic transition"(including an explanation of why the Swedish data playes such an important role in all these debates can be found here.
Spain's Demographic Transition
Well, not really. This post is just an excuse to put up a couple of links. Firstly this one on "The regularisation of undocumented migrants as a mechanism for the ‘emerging’ of the Spanish underground economy" by Francisco Javier Moreno Fuentes. Actually the paper is about undocumented migrants, and it is also about theunderground economy (see the incredible graph on page 9 which shows the evolution of Spain's underground economy since the late 70s), but I am not convinced that they demonstrate that the recent amnesty is an emerging of the submerged economy rather than the transition of some irregulars from the underground to the official one.
Interestingly the author is under no illusion as to why immigration is such a maasive phenomenon in Spain today:
The publication of a report by the population division of the UN, pointing at the ageing and decline of the Spanish (and European) population was the starting point for a debate that tried to reflect on the consequences of having one of the lowest fertility rates in the planet6. According to the UN projections, in the year 2050 Spain would have the oldest population in the world, and it would need some 12 million immigrants to keep the actual ratio of 4 workers for every retired person7. Although UN experts recognised that the levels of migration predicted by that report would be socially and politically unthinkable in Europe, they stressed the importance of those demographic trends and pointed out that substitution migration will be a reality in Western Europe in the near future.
Actually the situation he documents wil reveal that Bryant and de Fleurieu aren't exactly spot on when they say:
"In fact, immigration policies are a more significant determinant of migration than the willingness of individuals to migrate. Large movements of people across borders
in the coming decades are thus unlikely - under current policies - to significantly mediate the macroeconomic effects of asymmetric demographic transitions."
Well no. Spain is a good counter example here. You need to distinguish - as in other cases like the US, France, Belgium - between official and unofficial government policies, and at the present time a large flow of people into Spain is constuting a demographic shock which is mediating the macro-economic effects of the demographic transition here. Of course, it is a moot point to what extent all this is being driven by a monetary shock from the ECB which is providing negaive interest rates to fuel what must be the planets (proportionately) biggest housing boom.
And if you want to know more about submerged economies, and just how to measure them, then this paper is just what you are looking for.
Interestingly the author is under no illusion as to why immigration is such a maasive phenomenon in Spain today:
The publication of a report by the population division of the UN, pointing at the ageing and decline of the Spanish (and European) population was the starting point for a debate that tried to reflect on the consequences of having one of the lowest fertility rates in the planet6. According to the UN projections, in the year 2050 Spain would have the oldest population in the world, and it would need some 12 million immigrants to keep the actual ratio of 4 workers for every retired person7. Although UN experts recognised that the levels of migration predicted by that report would be socially and politically unthinkable in Europe, they stressed the importance of those demographic trends and pointed out that substitution migration will be a reality in Western Europe in the near future.
Actually the situation he documents wil reveal that Bryant and de Fleurieu aren't exactly spot on when they say:
"In fact, immigration policies are a more significant determinant of migration than the willingness of individuals to migrate. Large movements of people across borders
in the coming decades are thus unlikely - under current policies - to significantly mediate the macroeconomic effects of asymmetric demographic transitions."
Well no. Spain is a good counter example here. You need to distinguish - as in other cases like the US, France, Belgium - between official and unofficial government policies, and at the present time a large flow of people into Spain is constuting a demographic shock which is mediating the macro-economic effects of the demographic transition here. Of course, it is a moot point to what extent all this is being driven by a monetary shock from the ECB which is providing negaive interest rates to fuel what must be the planets (proportionately) biggest housing boom.
And if you want to know more about submerged economies, and just how to measure them, then this paper is just what you are looking for.
Bryant and de Fleurieu In The IMF WEO Again
The latest issue of the IMF World Economic Outlook is out. Perhaps the most interesting part is Chapter 2: Global Imbalances: A Saving and Investment Perspective. What is clear is that people have twigged that a glut of savings is relative to something (because one couldn't simply exist per-se, that's Econ 101), and that something is, of course, an investment opportunity dearth (again more Econ 101). The interesting question, the one which should have economists sitting up in their seats is why this state of things might have come to be. Here however the 'experts' are rather less forthcoming. Unless that is, you go look at Chap 2 box 2.3 Impact of Demographic Change on Saving, Investment, and Current Account Balances, prepared of course by non other than Ralph Bryant and Marc de Fleurieu.
How what they have to say relates to the rest of what goes on around them I leave to the discerning reader to decide.
Interestingly they do say this:
There remain, however, some uncertainties about saving behavior in the later stages of the life cycle. Studies based on macroeconomic data generally support the predictions of life-cycle approaches (for example, an increase in the elderly dependency ratio - which shows the population aged 65 and older as a share of the working-age (age 15–64) population reduces saving). Studies based on microeconomic data,however, have cast some doubt on the extent to which the elderly dissave (Poterba, 2004). This may be because simplified applications of the life-cycle approach do not adequately take into account the desire of the elderly to leave bequests, or their uncertainties about their lifespan after retirement and the financial support they will need. Some empirical studies based on household survey data do not adequately incorporate the public-pension portion of elderly incomes, and this is why they may appear at odds with life-cycle behavior (Miles, 1999).
I think they are getting to the heart of the matter here. This is not a theoretical issue, but rather an empirical one. And the model needs a lot better specification in this area.
But, dear, oh, deary me. All this does put me at some odds it seems with Brad Setser and Nouriel Roubini.
How what they have to say relates to the rest of what goes on around them I leave to the discerning reader to decide.
Interestingly they do say this:
There remain, however, some uncertainties about saving behavior in the later stages of the life cycle. Studies based on macroeconomic data generally support the predictions of life-cycle approaches (for example, an increase in the elderly dependency ratio - which shows the population aged 65 and older as a share of the working-age (age 15–64) population reduces saving). Studies based on microeconomic data,however, have cast some doubt on the extent to which the elderly dissave (Poterba, 2004). This may be because simplified applications of the life-cycle approach do not adequately take into account the desire of the elderly to leave bequests, or their uncertainties about their lifespan after retirement and the financial support they will need. Some empirical studies based on household survey data do not adequately incorporate the public-pension portion of elderly incomes, and this is why they may appear at odds with life-cycle behavior (Miles, 1999).
I think they are getting to the heart of the matter here. This is not a theoretical issue, but rather an empirical one. And the model needs a lot better specification in this area.
But, dear, oh, deary me. All this does put me at some odds it seems with Brad Setser and Nouriel Roubini.
Friday, September 16, 2005
This Is Probably Nearer The Truth
Despite the fact that the IMF is rumoured today to be holding firm on the probability of a sustained Japan recovery, Edward is holding firm on his scepticism. Backing for this comes today from a Bank of Japan survey on public expectations made available in English yesterday.
The survet showed that 73 per cent of those questioned thought the economy would be unchanged in a year's time, and that 58 per expected incomes to be unchanged a year from now. More to the point, despite the fact that consumer spending has risen recently, a majority of those surveyed said they had cut spending because they were worried about a future cut in their incomes, a reduction in social security or pension payments, and tax increases. Just 1.3 per cent had plans to increase spending in the next 12 months.This is the harsh underlying reality behind Japan's comeback: the common knowledge that even the most tepid recovery will simply trigger a wave of measures to address the massive government debt issues which have accumulated over the last 15 years. So with the income flow from the state threatened, individuals of all ages have no alternative but to save more. This is why I don't see the 'self sustaining recovery' argument that we were getting from Iwata yesterday.
One of the keys to hauling Japan out of the mud are property prices, the report tells us, however, 92 per cent said they had no plans to purchase a house for the first time or sell their house and buy another. One 'expert'- Paul Sheard, economist at Lehman Brothers - quoted by the FT, had this to say:
"This is the result of the trauma of 10 to 15 years of deflation and falling assets prices. There has been a general loss of confidence in Japan, a loss of the feel good factor and an insecurity about the future...For all the talk about things getting better, Japan is not out of deflation and the Bank of Japan is not out of its quantitative easing policy. If there is a downturn, the BOJ has nowhere to go,"
I entirely agree. OK, now the money is on the table, lets see what happens.
The survet showed that 73 per cent of those questioned thought the economy would be unchanged in a year's time, and that 58 per expected incomes to be unchanged a year from now. More to the point, despite the fact that consumer spending has risen recently, a majority of those surveyed said they had cut spending because they were worried about a future cut in their incomes, a reduction in social security or pension payments, and tax increases. Just 1.3 per cent had plans to increase spending in the next 12 months.This is the harsh underlying reality behind Japan's comeback: the common knowledge that even the most tepid recovery will simply trigger a wave of measures to address the massive government debt issues which have accumulated over the last 15 years. So with the income flow from the state threatened, individuals of all ages have no alternative but to save more. This is why I don't see the 'self sustaining recovery' argument that we were getting from Iwata yesterday.
One of the keys to hauling Japan out of the mud are property prices, the report tells us, however, 92 per cent said they had no plans to purchase a house for the first time or sell their house and buy another. One 'expert'- Paul Sheard, economist at Lehman Brothers - quoted by the FT, had this to say:
"This is the result of the trauma of 10 to 15 years of deflation and falling assets prices. There has been a general loss of confidence in Japan, a loss of the feel good factor and an insecurity about the future...For all the talk about things getting better, Japan is not out of deflation and the Bank of Japan is not out of its quantitative easing policy. If there is a downturn, the BOJ has nowhere to go,"
I entirely agree. OK, now the money is on the table, lets see what happens.
Thursday, September 15, 2005
UK Retail Sales Disappoint
Here's one for our New Economist. UK retail sales were flat in August and at the same time the July numbers were also revised downwards:
U.K. retail sales stagnated in August after dropping more than previously estimated in July as consumers spent less in food stores.
Sales were unchanged from July, when the drop was revised down to 0.6 percent, the Office for National Statistics said in London today. Economists had predicted a gain of 0.3 percent, according to the median of 34 estimates in a Bloomberg survey. Annual sales growth slowed to 0.8 percent, from a revised 1.3 percent.
Consumers have been curbing spending this year as record oil prices push up household bills and house prices stagnate. The central bank reduced its benchmark interest rate for the first time in two years in August after growth slowed to an annual 1.8 percent, the lowest since the first three months of 2002.
This follows the news yesterday that unemployment continues (slowly) to rise. This is hard to read since the numbers employed (aha, demography again) actually went up:
The labour market continued to tread water over the summer with another small rise in unemployment, a modest rise in the size of the workforce and bonuses pushing up average earnings, official figures showed on Wednesday.
The claimant count, which measures unemployment by totting-up those out of work and claiming benefit, increased by 1,600 to 866,000, the seventh month in a row that it has edged higher.
As the FT also points out the proportion of people of working age who wanted to work rose to an impressive 78.6 per cent between April and July, so with such comparatively low unemployment the general picture is that the UK has a very well-functioning labour market. However the fact that wages rose while spending didn't needs to be watched. I suspect this reflects a decrease in the rate of increase in new demand for credit, something which could be associated with the end of the housing boom.
Bottom line: nothing dramatic, but this sure needs watching carefully. Even the US 'long boom' of the ninetees did eventually come to an end.
U.K. retail sales stagnated in August after dropping more than previously estimated in July as consumers spent less in food stores.
Sales were unchanged from July, when the drop was revised down to 0.6 percent, the Office for National Statistics said in London today. Economists had predicted a gain of 0.3 percent, according to the median of 34 estimates in a Bloomberg survey. Annual sales growth slowed to 0.8 percent, from a revised 1.3 percent.
Consumers have been curbing spending this year as record oil prices push up household bills and house prices stagnate. The central bank reduced its benchmark interest rate for the first time in two years in August after growth slowed to an annual 1.8 percent, the lowest since the first three months of 2002.
This follows the news yesterday that unemployment continues (slowly) to rise. This is hard to read since the numbers employed (aha, demography again) actually went up:
The labour market continued to tread water over the summer with another small rise in unemployment, a modest rise in the size of the workforce and bonuses pushing up average earnings, official figures showed on Wednesday.
The claimant count, which measures unemployment by totting-up those out of work and claiming benefit, increased by 1,600 to 866,000, the seventh month in a row that it has edged higher.
As the FT also points out the proportion of people of working age who wanted to work rose to an impressive 78.6 per cent between April and July, so with such comparatively low unemployment the general picture is that the UK has a very well-functioning labour market. However the fact that wages rose while spending didn't needs to be watched. I suspect this reflects a decrease in the rate of increase in new demand for credit, something which could be associated with the end of the housing boom.
Bottom line: nothing dramatic, but this sure needs watching carefully. Even the US 'long boom' of the ninetees did eventually come to an end.
German Elections and the Euro
There are a lot of good posts being written over at a Fistful of Euros on the German elections (here, here, here and here). The outlook is very uncertain. Personally my money would be on the grand coalition idea (CDU/SPD) with Merkel winning the election *without* the necessary absolute majority.
This is starting to lead to 'euro speculation':
The euro fell against the dollar in Asia for a third day this week on concern economic growth in Europe will be worse than that of the U.S.
The European currency also fell after polls showed German opposition leader Angela Merkel may be forced to share power with Chancellor Gerhard Schroeder's party. Merkel is promising cuts in welfare spending and a loosening of labor laws in Germany that if implemented would likely help economic expansion in the country.
I'm very sceptical about the importance of this phenomenon in relation to the German elections. I think the *euro* is overvalued relative to the USD given the relative strengths of the eurozone and US economies, I don't think Germany (any more than Japan) will have a 'miracle recovery' (although companies from both countries will give their US rivals a real run for their money in third country export markets).
At the end of the day, my feeling is that the financial markets are 'in over their heads' on both the outlook for the German and the Japanese economy, although the extent to which this excessive exposure is 'spin driven' or simply a structural product of inbuilt hedging I couldn't say.
And btw, it's all very quiet about Italy at the moment, but that only means that it's off the radar, not that the economic problems have magically gone away. Just keep watching.
And finally, finally, look at how differently Bloomberg spins the earlier referred to BoJ story.There is one nice quote from Iwata though:
``The economy is returning to a phase of a moderate but lasting and self-sustaining recovery.''
This is the point. This is what isn't happening, not in this, or in any other conceivable possible world. It's the self-sustaining bit that is now just impossible.
This is starting to lead to 'euro speculation':
The euro fell against the dollar in Asia for a third day this week on concern economic growth in Europe will be worse than that of the U.S.
The European currency also fell after polls showed German opposition leader Angela Merkel may be forced to share power with Chancellor Gerhard Schroeder's party. Merkel is promising cuts in welfare spending and a loosening of labor laws in Germany that if implemented would likely help economic expansion in the country.
I'm very sceptical about the importance of this phenomenon in relation to the German elections. I think the *euro* is overvalued relative to the USD given the relative strengths of the eurozone and US economies, I don't think Germany (any more than Japan) will have a 'miracle recovery' (although companies from both countries will give their US rivals a real run for their money in third country export markets).
At the end of the day, my feeling is that the financial markets are 'in over their heads' on both the outlook for the German and the Japanese economy, although the extent to which this excessive exposure is 'spin driven' or simply a structural product of inbuilt hedging I couldn't say.
And btw, it's all very quiet about Italy at the moment, but that only means that it's off the radar, not that the economic problems have magically gone away. Just keep watching.
And finally, finally, look at how differently Bloomberg spins the earlier referred to BoJ story.There is one nice quote from Iwata though:
``The economy is returning to a phase of a moderate but lasting and self-sustaining recovery.''
This is the point. This is what isn't happening, not in this, or in any other conceivable possible world. It's the self-sustaining bit that is now just impossible.
Whither Oil?
Most of the recent discussion about oil prices has focussed on short-term Katrina-related issues. Given the release of additional gasoline and crude supplies from IEA stocks the gas-spike has proved to be very short term and crude prices have dipped significantly. But all of this only serves to mask further the fact that we really don't know where we are headed from here on in. This article is pretty typical in this sense:
Crude oil rose a second day in New York after a report showed Hurricane Katrina caused a larger-than- expected decline in U.S. inventories.
Stockpiles fell 6.6 million barrels last week, the Energy department said yesterday, three-times the drop forecast in a Bloomberg survey of analysts. More than half of U.S. Gulf oil output remains shut after last month's storm damaged platforms in an area accounting for 30 percent of U.S. production.
``There isn't any chance of oil prices falling for now,'' said P.K. Goyal, executive director at Indian Oil Corp., the nation's largest refiner. ``With the current supply and winter demand nearing, prices will stay at these levels. If there is any disruption in supplies, prices will rise.''
and don't miss this:
Crude-oil prices may rise through 2007 because of growing demand and limits to increasing supply capacity, said UBS AG, Europe's biggest bank by assets.
The bank raised its forecast for the average price of West Texas Intermediate, a U.S. benchmark variety, for 2005, 2006 and 2007. Average prices may climb to $64 a barrel next year and to $66 in 2007, the Zurich-based bank said. Earlier, it expected prices to peak this year.
Of course the truth is no-one really knows, just too many imponderables. Still, one thing is for sure: I never read anyone who suggested increasing uncertainty was a *good* thing.
Crude oil rose a second day in New York after a report showed Hurricane Katrina caused a larger-than- expected decline in U.S. inventories.
Stockpiles fell 6.6 million barrels last week, the Energy department said yesterday, three-times the drop forecast in a Bloomberg survey of analysts. More than half of U.S. Gulf oil output remains shut after last month's storm damaged platforms in an area accounting for 30 percent of U.S. production.
``There isn't any chance of oil prices falling for now,'' said P.K. Goyal, executive director at Indian Oil Corp., the nation's largest refiner. ``With the current supply and winter demand nearing, prices will stay at these levels. If there is any disruption in supplies, prices will rise.''
and don't miss this:
Crude-oil prices may rise through 2007 because of growing demand and limits to increasing supply capacity, said UBS AG, Europe's biggest bank by assets.
The bank raised its forecast for the average price of West Texas Intermediate, a U.S. benchmark variety, for 2005, 2006 and 2007. Average prices may climb to $64 a barrel next year and to $66 in 2007, the Zurich-based bank said. Earlier, it expected prices to peak this year.
Of course the truth is no-one really knows, just too many imponderables. Still, one thing is for sure: I never read anyone who suggested increasing uncertainty was a *good* thing.
Japan Under The Magnifying Glass
There are a couple of interesting Japan-related articles in the press today. Firstly this one in Bloomberg on rising consumer confidence:
Japanese households became less pessimistic in August for a second month as wages rose and job prospects improved, adding to expectations that consumer spending will spur economic growth. Confidence among households with two or more people rose to 48.4 from 48.1 in July, the Cabinet Office said today in Tokyo.
``As long as the labor market in Japan keeps improving as it's likely to do, confidence should keep strengthening,'' said Glenn Maguire, chief economist for Asia at Societe Generale in Hong Kong.The number of jobs available for every 100 applicants rose to 97 in July, the highest in nearly 13 years, according to the latest figures from the Ministry of Health, Labor and Welfare. Wages had the biggest increase in eight months the same month.
Now this is exactly what theory predicts. As I explain here Japans available workforce is now in decline. The first reaction to this is bound to be a tightening in the labour market (exactly the opposite of the softness in the US one, and incidentally the same kind of demographic explanation is being pointed to in the recent weaker-than-expected UK data). This 'tightening' logically produces a positive sensation among those looking for work: jobs are easier to find, and wages begin to drift upwards.
But this is far from where the story ends, and it would be very short-sighted to imagine this was the case. This tightening will continue and continue. So wages will drift upwards. Again theory predicts that this will then lead to 'capital deepening' as companies find it more and more attractive to replace workers with machines where they can. Again, the initial effect of this deepening may be positive, as it in some ways spurs investment. But obviously all of this puts ongoing pressure on costs, so prices drift upwards. But the ability to pass on prices may be limited so we really don't know how all this will work out in practice.
We also don't know what proportion of the extra wages will be spent, and what proportion will be saved. If the modified life cycle model I refer to in my 'New Economist' post is realistic, then we can expect demand growth to lag significantly behind wage growth. Anyway all of this will be interesting to watch, a real 'learning ezperience'.
The second piece that caught my eye was in today's FT:
The Bank of Japan is “very close” to ending its ultra-loose monetary policy, its deputy governor said yesterday, although he stressed that current policy would be maintained until deflationary expectations were eradicated. Kazumasa Iwata, speaking at a cabinet office conference, said that, by some measures, deflation had already been squeezed out of the economy.“I think we are very close to the exit,” he said, referring to an end of the quantitative easing policy introduced in March 2001 by which the bank floods the market with far more liquidity than is needed to drive overnight rates to zero.
To me this looks a bit like a 'leap in the dark', a keeping faith with your own expectations. Clearly the Japanese economy has been doing relatively better during the last 2 or 3 quarters, but the data are not un-ambiguous, and no-one is sure whether or not this is sustainable (see above) so it seems to me that it is a little premature at this stage to be sounding the all clear, and even more premature for an economist like Kazumasa Iwata, who has previously been arguing that the BoJ should not change policy until price rises stabilised at 1-2 per cent.Why the big rush now to change course?
I found this observation interesting, and also possibly revealing:
Masaaki Kanno, chief economist at J P Morgan, said it was not clear what message Mr Iwata was trying to send. Either he had changed his opinion on the need to keep policy intact until prices rose by more than 1 per cent, or he had altered his view on the progress of actual price changes, he said.
The core CPI, which excludes fresh food, was down 0.2 per cent in July. Japan has been in CPI deflation since 1998. The BoJ has said the CPI is likely to reach equilibrium before the end of the year, as the effect of deregulated prices dropped out of the data.
“Now the BoJ seems to be emphasising that the end of policy could take place in the near term,” said Mr Kanno, setting a less dovish tone than when senior officials were stressing only weeks ago that deflation was “sticky” and not likely to end soon.
Japanese households became less pessimistic in August for a second month as wages rose and job prospects improved, adding to expectations that consumer spending will spur economic growth. Confidence among households with two or more people rose to 48.4 from 48.1 in July, the Cabinet Office said today in Tokyo.
``As long as the labor market in Japan keeps improving as it's likely to do, confidence should keep strengthening,'' said Glenn Maguire, chief economist for Asia at Societe Generale in Hong Kong.The number of jobs available for every 100 applicants rose to 97 in July, the highest in nearly 13 years, according to the latest figures from the Ministry of Health, Labor and Welfare. Wages had the biggest increase in eight months the same month.
Now this is exactly what theory predicts. As I explain here Japans available workforce is now in decline. The first reaction to this is bound to be a tightening in the labour market (exactly the opposite of the softness in the US one, and incidentally the same kind of demographic explanation is being pointed to in the recent weaker-than-expected UK data). This 'tightening' logically produces a positive sensation among those looking for work: jobs are easier to find, and wages begin to drift upwards.
But this is far from where the story ends, and it would be very short-sighted to imagine this was the case. This tightening will continue and continue. So wages will drift upwards. Again theory predicts that this will then lead to 'capital deepening' as companies find it more and more attractive to replace workers with machines where they can. Again, the initial effect of this deepening may be positive, as it in some ways spurs investment. But obviously all of this puts ongoing pressure on costs, so prices drift upwards. But the ability to pass on prices may be limited so we really don't know how all this will work out in practice.
We also don't know what proportion of the extra wages will be spent, and what proportion will be saved. If the modified life cycle model I refer to in my 'New Economist' post is realistic, then we can expect demand growth to lag significantly behind wage growth. Anyway all of this will be interesting to watch, a real 'learning ezperience'.
The second piece that caught my eye was in today's FT:
The Bank of Japan is “very close” to ending its ultra-loose monetary policy, its deputy governor said yesterday, although he stressed that current policy would be maintained until deflationary expectations were eradicated. Kazumasa Iwata, speaking at a cabinet office conference, said that, by some measures, deflation had already been squeezed out of the economy.“I think we are very close to the exit,” he said, referring to an end of the quantitative easing policy introduced in March 2001 by which the bank floods the market with far more liquidity than is needed to drive overnight rates to zero.
To me this looks a bit like a 'leap in the dark', a keeping faith with your own expectations. Clearly the Japanese economy has been doing relatively better during the last 2 or 3 quarters, but the data are not un-ambiguous, and no-one is sure whether or not this is sustainable (see above) so it seems to me that it is a little premature at this stage to be sounding the all clear, and even more premature for an economist like Kazumasa Iwata, who has previously been arguing that the BoJ should not change policy until price rises stabilised at 1-2 per cent.Why the big rush now to change course?
I found this observation interesting, and also possibly revealing:
Masaaki Kanno, chief economist at J P Morgan, said it was not clear what message Mr Iwata was trying to send. Either he had changed his opinion on the need to keep policy intact until prices rose by more than 1 per cent, or he had altered his view on the progress of actual price changes, he said.
The core CPI, which excludes fresh food, was down 0.2 per cent in July. Japan has been in CPI deflation since 1998. The BoJ has said the CPI is likely to reach equilibrium before the end of the year, as the effect of deregulated prices dropped out of the data.
“Now the BoJ seems to be emphasising that the end of policy could take place in the near term,” said Mr Kanno, setting a less dovish tone than when senior officials were stressing only weeks ago that deflation was “sticky” and not likely to end soon.
Wednesday, September 14, 2005
It's All Over Bar the Wording
At least this is the FT's version of where the US Federal Reserve are at right now. The measured pace is set to continue, and it's all down to the wording of the accompanying statement:
The US Federal Reserve is set to press ahead with its campaign of raising interest rates at its meeting next week, in spite of the economic impact of Hurricane Katrina. But there is expected to be intense discussion of whether substantial changes to the wording of the accompanying policy statement are needed.
Fed officials are reasonably relaxed about the hurricane's impact on national measures of production and consumer spending and employment.
A small dip in the second half of the year is expected to be recovered during the reconstruction effort.
Maybe I won't need to eat my hat after all :).
The US Federal Reserve is set to press ahead with its campaign of raising interest rates at its meeting next week, in spite of the economic impact of Hurricane Katrina. But there is expected to be intense discussion of whether substantial changes to the wording of the accompanying policy statement are needed.
Fed officials are reasonably relaxed about the hurricane's impact on national measures of production and consumer spending and employment.
A small dip in the second half of the year is expected to be recovered during the reconstruction effort.
Maybe I won't need to eat my hat after all :).
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