Wednesday, February 22, 2017

Always dig deeper

From Some recent economic developments in Japan by David Andolfatto. It is easy to fall into habits of mind which are, while accurate, also incomplete. In this instance, Andolfatto observes:
Most economic commentators seem to agree that the Japanese economy has been languishing for a very long time. What is it about Japan that gives this impression? In this post, I suggest that while Japan certainly has its share of difficulties, the common impression of stagnant economic performance seems overstated.

For some people, almost everything you need to know about Japanese macroeconomic performance is encapsulated in this diagram:

This chart tells us that the Japanese economy produced about the same total yen value of goods and services in 2016 as it did in 2000. By way of contrast, the U.S. economy increased the total dollar value of its production by 80% over the same period of time.
Yep. That's pretty much the heuristic I have carried in my mind. While clear and easy to understand, it is also incomplete.

Andolfatto perfectly correctly observes that this easy and accurate picture is not the whole story. You have to incorporate inflation and you have to incorporate population growth. When you do, the story is quite different than that presented above.
But there's something else to consider as well. The total income of a country also depends on population size. How much of the difference above is accounted for by different population growth rates? The following diagram provides the answer:

Real per capita income in both the U.S. and Japan is up about 13% and 10%, respectively, since 2000. That's not a highly significant difference in my books, especially if we take the following into consideration. First, the recession in 2009 seems to have hit Japan much harder than the U.S. Second, in the middle of a sharp recovery dynamic from the 2009 recession, Japan suffered a severe earthquake/tsunami shock in April 2011. And third, just as the economy appeared to be recovering from this latter disaster, the Japanese government increased the consumption tax in April 2014.
Serves as a great reminder that useful and accurate tropes can also be misleading. Always dig deeper.

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