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Since Japan’s latest growth report was apparently disappointing, analysts are fretting over whether Abenomics is “working.” There was an archetypal report this morning on NPR that I cannot find a link to, sadly, but this screenshot from Google News aptly summarizes the zeitgeist:

if only the boj could print bitcoin...


But is this conclusion justified? Let’s ask FRED; here’s the log of Japanese NGDP-per-working-age-person (15-64):

up up and away

Hey – that looks pretty good! That’s 3.5% nominal growth over the past year, which is not explosive, but at least pretty OK. But why does this look so different than the topline number? Because of reasons; demographic ones, specifically:

And the best thing, the very best thing of all, is there's time now... there's all the time I need and all the time I want. Time, time, time. There's time enough at last.

Japan is shrinking, and shrinking pretty quickly, in the non-retiree department, and therefore if productivity-per-worker in Japan remained constant, we would see declining topline growth numbers. Not that the actual facts on the ground are good news for Japan, per se; they’re just different news than “Abenomics isn’t working.”

Moral of the story – always try weighting economic data demographically to get actual insights. Especially Japanese data.


Mrs. Rooted is an erstwhile national champion figure skater, so of course we are quite deep into these 22nd Winter Olympic Games. After watching just about everything NBC felt like broadcasting over the past week, she posed me a very good question: are most of these athletes from just a few countries?

Indeed, if it seems to you as though a handful of countries at the intersections of Rich and Northern have provided most of the competitors at these games, you wouldn’t be wrong. Using data from Wikipedia, I mapped the origins of this year’s Olympians:

cutting costs on the flag assembly line

So if you’re watching the games and wondering why it looks like everyone is from the same few countries over and over again…you’re right!All data from the Oracle; note that due to the limitation of the shapefile I was working with, the three athletes from Tai…er, Chinese Taipei and the one from Hong Kong were combined with China’s 66, and Serbia’s 8 were combined with Montenegro’s 2. As you can see, a relatively small handful of countries are producing vast numbers of Winter Olympians while most countries produce little or none. In fact this map may even understate the lopsidedness; the top five countries by size of team – the United States, Russia, Canada, Switzerland, and Germany, respectively – comprise 35% of the entire Olympic field, and the top ten – adding Norway, Austria, Italy, Japan, and Sweden, respectively – accounts for 56% of the entire field! To put it as nerdily as possible, it’s almost a classic power-law distribution, with 20% of the countries providing 75% of the athletes.

Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.

Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!

Wait, let’s start over.

The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).

Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.

Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.

And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.

So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.

But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:

Inline image 1

So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.

So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.

Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.

Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.

And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?

So I’m listening to the latest Planet Money, re: Bitcoin, and lately I’ve also been listening to FT’s Hard Currency podcast, and I’ve just got to say: foreign exchange markets are really, really weird. And there’s a reason for that – unlike other asset markets, the point of currencies is not to become more valuable, ceteris paribus. Usually, if your currency becomes more valuable it is a signal that good things are happening in the relevant political unit (if there is one), but the direction of causality here is important. Stocks are supposed to become more valuable, as are bonds, etc. But currencies are supposed to be stable. They are supposed to make all the other stuff in the economy possible.

So it’s odd to hear things like "which currency had a good year?" or "I’m long that currency" or other things like that. Forex traders serve an extremely valuable role in ensuring exchange rates reflect social information, but the mindset that leads to is in-and-of-itself a strange one. If Japanese folks decided to buy more Swiss chocolate and Americans decided to buy exactly the same amount less, the Swiss franc would appreciate against the yen and depreciate against the dollar and then the dollar would appreciate against the yen to exactly the amount that would forestall arbitrage and then Swiss and American consumers might decide to buy more Japanese stuff than they did before and so on and so forth until you get to "general equilibrium" (whatever that is) but the whole point is that if the central banks were targeting, oh, say, the level of nominal gross domestic product, none of these secular changes in consumer preferences (unless they were really huge) would have any effect on the overall level of economic output in any of these countries.

The fact that some currency goes up or down against another doesn’t really tell you anything about relative levels of inflation or prosperity. So there’s no underlying normative preference for one direction in exchange rate fluctation over another. I’m going to Turkey and Germany in September, so I really hope the dollar appreciates against the euro and the lira between now and then but if in October I get hired by a company that exports a lot to Germany then boy do I hope the dollar depreciates againts the euro. But there’s no reason to prefer one over the other from the standpoint of the overall national interest unless you’re super-dependent on a certain kind of international trade pattern.

Also, I realize I’m pretty down on Bitcoin generally on this blog, so I should say – certain things about Bitcoin are awesome, and I’m certain that whatever money looks like in 10-20 years, it will look more like Bitcoin then it does today. I’m just down on Bitcoin specifically due to Bitcoin-specific issues of trust and governance. I’d gladly use Bitcoins to transact, but I’d also gladly use Paypal or Square and be certain that the ~225 USD I sold my Pebble watch for last week can still be exchanged for the same basket of goods next week or next month or even next year, more or less. If I wanted or had to transact in BTC I’d want to get in and out of having any position in the currency ASAP, but somebody has to hold them and those people either need BTC for transaction-specific reasons or are speculating. I want to be able to hold my money (or deposits denominated in money) for long periods of time without having to feel like I have a position (although I of course do). You’ve got to have some liquidity so if the value of your currency is pretty stable it’s pretty easy to just hold cash or deposits.


Just listened to Planet Money discuss subsidies for having babies, and thought, first of all, since I am now engaged to get married and both the fiancee and I are on the same page re: having a couple kids, I hope the United States institues such a policy! Maybe it could united pro-lifers (incentive to carry pregnancy to term) and progressives (it would largely be a very progressive redistribution of wealth)!

But more importantly the economic logic behind it sort-of-tangentially reminded me of a pet concern of mine:

This can be good for a little while. With a young workforce and fewer babies to take care of, a country can show enormous growth.

But then people start to get old, and governments say uh-oh.

"Who’s going to pay the bills? Who’s going to pay for pensions?" says Patricia Boling, a political scientist at Purdue.

In many countries, including the U.S., workers pay for retirees’ pensions. Fewer kids means fewer workers funding those pensions.

"And in countries that have really low fertility rates, that’s a very extreme problem," Boling says. It "makes what we have in the United States … look like peanuts."

All true! And yet one would think that overall economic growth could fund a higher retiree-to-worker ratio, right?

Here’s my vision for the future of the economy:

  • Robots replace humans at doing some job. A few humans are unemployed, but overall there is a consumer surplus.
  • Repeat.

Here is where my simulation diverges. Essentially, replacing a human worker with a robot is substituting capitol (the machine) for labor (the worker). On a small scale this will simply cause sectoral shifts; if it gets cheaper to buy some tchotchke because a robot made it instead of a human, when I buy the tchotchke I save some money which I will then use to buy coffee and when demand for coffee goes up it causes a commesurate rise in employment in the coffee sector. Yay! But on a sufficiently large scale you are faced with what I like to call the reverse-Ford problem:

Mr. Ford announced that he was doubling the pay of thousands of his employees, to at least $5 a day. With his company selling Model T’s as fast as it could make them, his workers deserved to share in the profits, he said. […]

The mythology around this story holds that Mr. Ford wanted to pay his workers enough so they could afford the products they were making.

In fact, that wasn’t his original reasoning. But others made the point, and, in time, it became part of Mr. Ford’s rationale as well. The idea became a linchpin in an industrial philosophy known as Fordism.

More production could lead to better wages, which in turn would lead to more spending by the public, yet more production and eventually even higher wages.

"One’s own employees ought to be one’s own best customers," Mr. Ford said years later. "Paying high wages," he concluded, "is behind the prosperity of this country."

So what happens to Ford Motors if making the same number of cars requires far less labor input, replaced by less-expensive capitol input? Well you get higher and higher wealth and income inequality as those at the top need not share their profits with a large workforce.

So what happens when there exist enough robots to basically obviate human labor from the fundamentals of the economy?

I see three possible futures:

  • Robot dystopia – a few scions of capitol control all the machines, make vast fortunes, and surrender as little as possible, leaving most of the rest of humanity living at subsistence levels.
  • Robot utopia – socialization of wealth through whatever mechanism, meaning the vast surplus is shared relatively equitably, meaning most people have most of their needs met and are free to pursue higher levels on the Maslow heirarchy.
  • Robot apocalypse – the robots rise as one to destroy us all.

I don’t know what to do about option #3, but I am concerned that ruling that out that option #1 is more likely than option #2. And the reason I think that has to do with, well, baby subsidies. To some extent we are facing a similar problem – the economy is producing more but finding that more and more of the humans in the system don’t have a great deal of utility but still require resources. In theory this shouldn’t be hard, but in practice it’s proving difficult. Even in Japan where they had some nasty economic times they have still passed their original peak GDP and are have a very high GDP per capita, though not nearly as high as the United States. Keep in mind also that a lot of Japan’s troubles here are culturally based; a different country facing similar demographics would probably not have such a difficult time. But looking at the United States where GOP scissors are already being aimed at Social Security despite being projected not to run into any trouble for the next 75 years because raising taxes on wealthier individuals is the dread socialism doesn’t necessarily leave me optimistic that we’ll be able to wrest sufficient control of the Great Robot Surplus from the hands of its nominal owners before they are able to consolidate control.

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