Just another stat for the Japan inventory. Higher oil import costs outweighed encouraging export growth and sent Japan’s trade surplus reeling downwards - an 80% drop in August y-o-y. Hrad to know how to read this yet. My advice: await more data.
The sharp fall shows the impact higher oil prices could have on Japan’s economy in spite of its relative energy efficiency. It was the fifth straight monthly contraction in the trade surplus.
Economic officials have consistently warned in recent weeks that continued high oil prices pose one of the main threats to Japan’s sustained but fragile recovery.
Thursday, September 22, 2005
Monday, September 19, 2005
Angus Deaton on Saving in Taiwan
Another interesting and relevant paper: Growth, demographic structure, and national saving in Taiwan by Angus Deaton and Christina Paxson (this paper goes back to 1968). As the authors say:
This paper is concerned with the effects that changes in demographic structure have had on Taiwan's national saving rate, and how coming changes in its age structure—notably population aging—will affect the future saving rate. We examine this topic within the framework of the life-cycle hypothesis (LCH).
In doing this they present a very important argument:
"A related implication of the LCH is that changes in the rate of growth of per capita income affect saving: higher rates of economic growth increase the life-time wealth of the young relative to the old, and the effects on saving of higher growth are much the same as the effects of increasing the numbers of young relative to the old."
This indicates a kind of positive-feedback, negative-feedback situation. Relatively younger societies (like the US now) have higher growth rates, that raises the expectation of continuing higher growth rates and raise the economic weight of the young vs the old (mainly via the credit/willingness to borrow channel).
"Asian Development Bank (1997), attribute about a third of East Asia’s recent growth performance to the increases in saving and in labor supply relative to population provided by the “demographic gift” of low fractions of children and the elderly associated with post-war baby booms and the rapid subsequent drops in fertility. Since the “gift” will have to be repaid as the baby-boomers age, once again there are concerns for the future, not only for saving rates, but also for growth."
If saving rates are negatively correlated with age - as in the simplest saving for retirement model - higher growth redistributes resources towards high savers, and will increase saving. In Paxson (1996) and Deaton and Paxson (1997, 1998), we find that age-saving profiles for Taiwan, Thailand, Indonesia, the United States, and Britain show little negative correlation with age, which implies little effect of growth on aggregate household saving. These results also have implications for the relationship between demographic structure and saving. Because our estimated age profiles of saving are uncorrelated with age, changes in the rate of population growth have little or no effect on aggregate saving, at least for comparisons between demographic equilibria. The absence of such equilibrium effects for Taiwan (and other countries) is documented in Deaton and Paxson (1997). However, the changes in demographic structure that take place during a demographic transition are quite distinct from differences in structure across demographic equilibria with different fertility rates, so that the absence of an effect of population growth rates on aggregate savings does not imply that there will be no effects of demographic structure on saving during a transition. In consequence, our earlier results are not necessarily inconsistent with either those of Higgins and Williamson’s (from macroeconomic cross-country evidence) or those of Lee, Mason, and Miller (from simulations.
In this paper, we use improved techniques and updated data from Taiwan to see if, after all, it is possible to tell a story in which demographic change has large effects on saving. We do this not because we have any reason to revise our previous empirical results—indeed they are replicated on the most recent data—but because our previous work paid too little explicit attention to demographic factors, and because our results looked only at demographic structures in equilibrium, rather than at the actual transition. Furthermore, our previous work relied on information about households, and on how saving rates vary over the household life-cycle, where the latter is defined by the age of the household head.
This approach, which is dictated by the data, poses problems when we try to translate demographic change, which makes predictions about people, into predictions about households, whose saving is what we know about from the data. It is far from obvious how changes in the age structure of population translate into changes in the age structure of household heads, and whether the age-profiles of saving by head’s age can be expected to be invariant to changes in demographic structure. In consequence, results about growth and saving are determined as much by assumptions about household structure as by our measurements of the age profiles of saving.
In this paper, we follow the more recent approach of Deaton and Paxson (1998), and construct lifecycle saving profiles for individuals, not households. This new approach, like the household approach, makes its own assumptions, and requires its own suspensions of disbelief. But the assumptions and suspensions are different, and it turns out that the new approach gives different results. Specifically, our estimated life-cycle saving profile for Taiwan has a pronounced “hump” shape that is consistent with the hypothesis that greater old-age and youth dependency rates depress saving. These negative effects of children and the elderly on saving are masked when working at the level of the household, since few elderly and virtually no children live in independent households.Given the hump-shaped age-saving profile we estimate, the LCH implies that increases in the rate of population growth can either increase or reduce the aggregate saving rate. At higher rates of population growth, there will be fewer elderly dissavers relative to middle-aged savers, and this will cause the saving rate to rise. However, children will make up a greater fraction of the population, and this will depress the saving rate. Which effect dominates depends on the rate of economic growth. At very high rates of per capita income growth—in excess of six percent per annum—the life-time wealth of the elderly is small relative to those who are younger, and their dissaving contributes little to the aggregate saving rate. In this case, the depressing effect on saving of relatively more children predominates, and increases in the rate of population growth are predicted to reduce the aggregate saving rate. Conversely, at slow rates of economic growth—in the range of zero to three percent per annum—the life-time wealth of the elderly is relatively large, as is their (negative) contribution to aggregate saving. Increases in the rate of population growth that reduce the fraction of the population that is elderly increase the aggregate saving rate.
Woo Hoo. I was debating indirectly China this morning with Brad Setser. I think the argument I've just cited from Deaton helps a lot in understanding China.
This paper is concerned with the effects that changes in demographic structure have had on Taiwan's national saving rate, and how coming changes in its age structure—notably population aging—will affect the future saving rate. We examine this topic within the framework of the life-cycle hypothesis (LCH).
In doing this they present a very important argument:
"A related implication of the LCH is that changes in the rate of growth of per capita income affect saving: higher rates of economic growth increase the life-time wealth of the young relative to the old, and the effects on saving of higher growth are much the same as the effects of increasing the numbers of young relative to the old."
This indicates a kind of positive-feedback, negative-feedback situation. Relatively younger societies (like the US now) have higher growth rates, that raises the expectation of continuing higher growth rates and raise the economic weight of the young vs the old (mainly via the credit/willingness to borrow channel).
"Asian Development Bank (1997), attribute about a third of East Asia’s recent growth performance to the increases in saving and in labor supply relative to population provided by the “demographic gift” of low fractions of children and the elderly associated with post-war baby booms and the rapid subsequent drops in fertility. Since the “gift” will have to be repaid as the baby-boomers age, once again there are concerns for the future, not only for saving rates, but also for growth."
If saving rates are negatively correlated with age - as in the simplest saving for retirement model - higher growth redistributes resources towards high savers, and will increase saving. In Paxson (1996) and Deaton and Paxson (1997, 1998), we find that age-saving profiles for Taiwan, Thailand, Indonesia, the United States, and Britain show little negative correlation with age, which implies little effect of growth on aggregate household saving. These results also have implications for the relationship between demographic structure and saving. Because our estimated age profiles of saving are uncorrelated with age, changes in the rate of population growth have little or no effect on aggregate saving, at least for comparisons between demographic equilibria. The absence of such equilibrium effects for Taiwan (and other countries) is documented in Deaton and Paxson (1997). However, the changes in demographic structure that take place during a demographic transition are quite distinct from differences in structure across demographic equilibria with different fertility rates, so that the absence of an effect of population growth rates on aggregate savings does not imply that there will be no effects of demographic structure on saving during a transition. In consequence, our earlier results are not necessarily inconsistent with either those of Higgins and Williamson’s (from macroeconomic cross-country evidence) or those of Lee, Mason, and Miller (from simulations.
In this paper, we use improved techniques and updated data from Taiwan to see if, after all, it is possible to tell a story in which demographic change has large effects on saving. We do this not because we have any reason to revise our previous empirical results—indeed they are replicated on the most recent data—but because our previous work paid too little explicit attention to demographic factors, and because our results looked only at demographic structures in equilibrium, rather than at the actual transition. Furthermore, our previous work relied on information about households, and on how saving rates vary over the household life-cycle, where the latter is defined by the age of the household head.
This approach, which is dictated by the data, poses problems when we try to translate demographic change, which makes predictions about people, into predictions about households, whose saving is what we know about from the data. It is far from obvious how changes in the age structure of population translate into changes in the age structure of household heads, and whether the age-profiles of saving by head’s age can be expected to be invariant to changes in demographic structure. In consequence, results about growth and saving are determined as much by assumptions about household structure as by our measurements of the age profiles of saving.
In this paper, we follow the more recent approach of Deaton and Paxson (1998), and construct lifecycle saving profiles for individuals, not households. This new approach, like the household approach, makes its own assumptions, and requires its own suspensions of disbelief. But the assumptions and suspensions are different, and it turns out that the new approach gives different results. Specifically, our estimated life-cycle saving profile for Taiwan has a pronounced “hump” shape that is consistent with the hypothesis that greater old-age and youth dependency rates depress saving. These negative effects of children and the elderly on saving are masked when working at the level of the household, since few elderly and virtually no children live in independent households.Given the hump-shaped age-saving profile we estimate, the LCH implies that increases in the rate of population growth can either increase or reduce the aggregate saving rate. At higher rates of population growth, there will be fewer elderly dissavers relative to middle-aged savers, and this will cause the saving rate to rise. However, children will make up a greater fraction of the population, and this will depress the saving rate. Which effect dominates depends on the rate of economic growth. At very high rates of per capita income growth—in excess of six percent per annum—the life-time wealth of the elderly is small relative to those who are younger, and their dissaving contributes little to the aggregate saving rate. In this case, the depressing effect on saving of relatively more children predominates, and increases in the rate of population growth are predicted to reduce the aggregate saving rate. Conversely, at slow rates of economic growth—in the range of zero to three percent per annum—the life-time wealth of the elderly is relatively large, as is their (negative) contribution to aggregate saving. Increases in the rate of population growth that reduce the fraction of the population that is elderly increase the aggregate saving rate.
Woo Hoo. I was debating indirectly China this morning with Brad Setser. I think the argument I've just cited from Deaton helps a lot in understanding China.
Prudence From The MPC
Members of the Bank of England Monetary Policy Committee seem (wisely) to be hedging their bets.Last Friday committee member David Walton expressed reservations about the recent BoE economic forecasts and today it is the turn of Stephen Nickel in an interview with the Financial Times. He warns that there is a “serious risk” that economic growth will fall short of the Bank of England's forecast, forcing further interest rate cuts.
In an interview Mr Nickell said consumer expenditure growth was being curtailed by high oil prices, increasing slack in the labour market and high levels of household debt. There was also a possibility that household savings rates would rise, denting consumption growth
Guess what? He's right, these are the problems. I'm sure New Economist will also be ruminating carefully on what may or may not be about to happen next.
In an interview Mr Nickell said consumer expenditure growth was being curtailed by high oil prices, increasing slack in the labour market and high levels of household debt. There was also a possibility that household savings rates would rise, denting consumption growth
Guess what? He's right, these are the problems. I'm sure New Economist will also be ruminating carefully on what may or may not be about to happen next.
Sunday, September 18, 2005
More From Kotlikoff et Al
I've just dug out another one: The role of immigration in dealing with world’s demographic transition' by Fehr, H., Jokisch, S. & Kotlikoff, L.. This seems to be a prelude to the paper mentioned in my last post, and in some ways gives the theoretical underpinnings to the immigartion conclusions. I smell a rat.
"Can immigration alleviate these stresses? A priori, the answer is unclear. On the one hand, more immigrants increase the number of workers and, therefore, the taxable wage base. On the other hand, more immigrants increase total labor supply, reduce real wages, and, thereby, reduce the taxable wage base. On the other, other hand, immigrants arrive with some capital and can accumulate more capital as they age. This increases the relative scarcity of labor and, thus, the demand for labor, putting upward pressure on real wages. Hence, the precise net impact of expanded immigration on payroll and income tax revenues is unclear. Moreover, immigrants, like natives, require public goods and become eligible for government pension, health care benefits, and other transfer payments. Fiscally speaking, how much one ”earns” from a new immigrant depends on the immigrant's skill level, which, in turn, determines the immigrant’s level of earnings. The reason is that taxes and transfer payments are, in general, collected and distributed on a progressive basis. Consequently, high-skilled immigrants deliver a larger bang for the buck when it comes to paying net taxes (taxes paid net of transfer payments received). Our model confirms this point. Nonetheless, its findings, even with respect to high-skilled immigration, which we investigate in detail in this paper, are not pretty. It shows that a significant expansion of immigration, whether across all skill groups or among particular skill groups, will do remarkably little to alter the major capital shortage, tax hikes, and reductions in real wages that can be expected along the demographic transition."
Even relatively highly-skilled migrants! I find that hard to swallow. This is like saying that thickening your cohorts will bright people does very little. The problem has to be somewhere in the methodology. When I have time I will dig it out.
"Can immigration alleviate these stresses? A priori, the answer is unclear. On the one hand, more immigrants increase the number of workers and, therefore, the taxable wage base. On the other hand, more immigrants increase total labor supply, reduce real wages, and, thereby, reduce the taxable wage base. On the other, other hand, immigrants arrive with some capital and can accumulate more capital as they age. This increases the relative scarcity of labor and, thus, the demand for labor, putting upward pressure on real wages. Hence, the precise net impact of expanded immigration on payroll and income tax revenues is unclear. Moreover, immigrants, like natives, require public goods and become eligible for government pension, health care benefits, and other transfer payments. Fiscally speaking, how much one ”earns” from a new immigrant depends on the immigrant's skill level, which, in turn, determines the immigrant’s level of earnings. The reason is that taxes and transfer payments are, in general, collected and distributed on a progressive basis. Consequently, high-skilled immigrants deliver a larger bang for the buck when it comes to paying net taxes (taxes paid net of transfer payments received). Our model confirms this point. Nonetheless, its findings, even with respect to high-skilled immigration, which we investigate in detail in this paper, are not pretty. It shows that a significant expansion of immigration, whether across all skill groups or among particular skill groups, will do remarkably little to alter the major capital shortage, tax hikes, and reductions in real wages that can be expected along the demographic transition."
Even relatively highly-skilled migrants! I find that hard to swallow. This is like saying that thickening your cohorts will bright people does very little. The problem has to be somewhere in the methodology. When I have time I will dig it out.
Generational Storm
Here's a paper from Laurence Kotlikoff, Hans Fehr and Sabine Jokisch published last February: Aging, the World Economy and the Coming Generational Storm. I'm just really bookmarking this at present. They seem even more scare and doomy than I do. Their big question is:
"What can be done to avoid a very unpleasant future?"
I certainly wouldn't go this way. Apart from anything else I think this dramatisation is counter productive (I am learning).
So I would avoid this:
"The developed world is about to experience an unprecedented demographic change. In virtually all developed countries, people are getting older — a lot older. And everywhere the reason is the same — a dramatic baby boom followed by an equally dramatic baby bust, all accompanied by a remarkable increase in life expectancy. Over the next 30 years, the number of elderly in the United States, Europe and Japan will more than double. At the same time, the number of workers available to pay the elderly’s governmentguaranteed pension and health care benefits will rise by less than 10 percent. The fiscal implications of these two demographic trends are alarming."
However it is important to note that they make some very conservative assumptions:
"In making these estimates, we assume that the fall in fertility rates will reverse over time and that women will eventually have enough children to replace the current population - the exact opposite of recent trends. We also assume that the growth of health care costs per beneficiary will match the rate of growth of per capita real wages - even though they have grown many times faster in recent years. As a result of these very conservative modeling assumptions, the results reported here err on the side of optimism. Reality is likely to be far worse."
Here I agree, especially on the fertility issue in very low fertility countries, where I think we are much more locked-in to low levels over a long horizon than people imagine. Anyway, one to go over with a fine toothcomb, especially the immigartion section, which looks problematic to me at first glance.
"What can be done to avoid a very unpleasant future?"
I certainly wouldn't go this way. Apart from anything else I think this dramatisation is counter productive (I am learning).
So I would avoid this:
"The developed world is about to experience an unprecedented demographic change. In virtually all developed countries, people are getting older — a lot older. And everywhere the reason is the same — a dramatic baby boom followed by an equally dramatic baby bust, all accompanied by a remarkable increase in life expectancy. Over the next 30 years, the number of elderly in the United States, Europe and Japan will more than double. At the same time, the number of workers available to pay the elderly’s governmentguaranteed pension and health care benefits will rise by less than 10 percent. The fiscal implications of these two demographic trends are alarming."
However it is important to note that they make some very conservative assumptions:
"In making these estimates, we assume that the fall in fertility rates will reverse over time and that women will eventually have enough children to replace the current population - the exact opposite of recent trends. We also assume that the growth of health care costs per beneficiary will match the rate of growth of per capita real wages - even though they have grown many times faster in recent years. As a result of these very conservative modeling assumptions, the results reported here err on the side of optimism. Reality is likely to be far worse."
Here I agree, especially on the fertility issue in very low fertility countries, where I think we are much more locked-in to low levels over a long horizon than people imagine. Anyway, one to go over with a fine toothcomb, especially the immigartion section, which looks problematic to me at first glance.
Japan Is Moving
Yes that's right, on the fertility question Japan Is Moving, although it could well be a case of too little too late. I'm having a do it yourself policy wonk-in this afternoon while I await the German election results (and the evenings Barça-related football).
Anyway:
In June 2004, the cabinet passed a resolution entitled, “Framework of Measures to Cope with Declining Fertility Society.” This was followed in December 2004 by the New-New Angel Plan, which fleshed out key aspects of the framework. Then in March 2005, businesses confronted the deadline to formulate action plans under the Law for Measures to Support the Development of the Next Generation. As these events show, policies to counter the declining fertility rate have reached a turning point in Japan. In this paper, we examine the significance and implications of the new policy approach.
Well worth a quick read:
In 2003, two more laws were enacted: the Law for Basic Measures to Cope with Declining Fertility Society, and the Law for Measures to Support the Development of the Next Generation. The Next Generation Law recognizes the pervasive impact of declining fertility on the nation’s economy and society, and mobilizes national and local governments and businesses to cooperate in supporting education for the next generation. This development is important for two reasons. First, while previous policies had a quantitative goal of trying to raise the birthrate, the Next Generation Law addresses qualitative issues—how to better nurture the next generation and create a sustainable society. Second, whereas previous policy focused on measures for parents, the Next Generation Law directly targets children and members of society. The Next Generation Law thus represents the beginning of a new era for Japan’s social policy - the socialization of child-raising.
Among issues they arise is this:
In the past, declining fertility was attributed to the declining marriage rate. Marriage was thought to offer fewer psychological and financial benefits, and to represent a rising opportunity cost for women as more of them pursued an advanced education. A new factor that has attracted attention is the deteriorating job environment for young persons. Unemployment among young persons is rising, while more are joining the ranks of the NEET (persons not in employment, education or training). In addition, companies are restructuring andreducing regular employment, and increasing non-regular and part-time employment of young persons. As young persons face an increasingly unstable job environment and livelihood, their aspirations have diminished, causing them to think twice about marriage. This is thought to further aggravate the decrease in birthrate.
This seems to be one more argument about how fertility decline gets endogenously locked-in. If part of the problem is rising marriage ages, and the structural reforms push up the ages, well, I'm not a dutchman!
Meantime I'm wonking away at a furious rate. This afternoons most important discovery is undoubtedly the French based Ingenue group, and their latest offering: SCENARIOS FOR GLOBAL AGEING. Oh yes, and the Euopean Policy Centre paper: The Nordic model: A recipe for European success?
Whether it's a success or not may depend, at the end of the day, on how much wonking you really want to get into.
Anyway:
In June 2004, the cabinet passed a resolution entitled, “Framework of Measures to Cope with Declining Fertility Society.” This was followed in December 2004 by the New-New Angel Plan, which fleshed out key aspects of the framework. Then in March 2005, businesses confronted the deadline to formulate action plans under the Law for Measures to Support the Development of the Next Generation. As these events show, policies to counter the declining fertility rate have reached a turning point in Japan. In this paper, we examine the significance and implications of the new policy approach.
Well worth a quick read:
In 2003, two more laws were enacted: the Law for Basic Measures to Cope with Declining Fertility Society, and the Law for Measures to Support the Development of the Next Generation. The Next Generation Law recognizes the pervasive impact of declining fertility on the nation’s economy and society, and mobilizes national and local governments and businesses to cooperate in supporting education for the next generation. This development is important for two reasons. First, while previous policies had a quantitative goal of trying to raise the birthrate, the Next Generation Law addresses qualitative issues—how to better nurture the next generation and create a sustainable society. Second, whereas previous policy focused on measures for parents, the Next Generation Law directly targets children and members of society. The Next Generation Law thus represents the beginning of a new era for Japan’s social policy - the socialization of child-raising.
Among issues they arise is this:
In the past, declining fertility was attributed to the declining marriage rate. Marriage was thought to offer fewer psychological and financial benefits, and to represent a rising opportunity cost for women as more of them pursued an advanced education. A new factor that has attracted attention is the deteriorating job environment for young persons. Unemployment among young persons is rising, while more are joining the ranks of the NEET (persons not in employment, education or training). In addition, companies are restructuring andreducing regular employment, and increasing non-regular and part-time employment of young persons. As young persons face an increasingly unstable job environment and livelihood, their aspirations have diminished, causing them to think twice about marriage. This is thought to further aggravate the decrease in birthrate.
This seems to be one more argument about how fertility decline gets endogenously locked-in. If part of the problem is rising marriage ages, and the structural reforms push up the ages, well, I'm not a dutchman!
Meantime I'm wonking away at a furious rate. This afternoons most important discovery is undoubtedly the French based Ingenue group, and their latest offering: SCENARIOS FOR GLOBAL AGEING. Oh yes, and the Euopean Policy Centre paper: The Nordic model: A recipe for European success?
Whether it's a success or not may depend, at the end of the day, on how much wonking you really want to get into.
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