Does Abenomics Work? - The Doubts Grow

Is something in the air? Do I detect a change in consensus on the way things are going in Japan? Certainly a slew of articles have been published in the financial press over the last month questioning where the Abenomics experiment is headed for. The general conclusion seems to be that wherever it is it is certainly not the originally designated endpoint. Thus the Economist.

"It is crisis mode in the Kantei, the office of Shinzo Abe, Japan’s prime minister. A succession of awful data has pummelled his economic programme, which consists of three “arrows”: a radical monetary easing, a big fiscal stimulus and a series of structural reforms. On September 8th revised figures showed that GDP shrank by 1.8% in the second quarter, or by 7.1% on an annualised basis, even worse than the initial estimate of 1.7%."

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Secular Stagnation Part III - The Expectations Fairy

The classic solution to the problem posed by a demand slump when monetary policy becomes ineffective due to the operation of a liquidity trap is a credible commitment to future inflation (see for example Paul Krugman's 1998 Japan's Trap). This commitment reduces the real interest rate despite the presence of a zero bound and thus stimulates spending, and it does so through the impact of the commitment on expectations about future inflation.

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Secular Stagnation Part II - On Bubble Business Bound

"I now suspect that the kind of moderate economic policy regime...... that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable."
Paul Krugman - The Instability of Moderation

"Conventional macreconomic theory leaves us in a very serious problem, because we all seem to agree that whereas you can keep the federal funds rate at a low level forever it's much harder to do extraordinary measures that go beyond that forever. But the underlying problem may be there forever. It's much more difficult to say, well we only needed deficits during the short period of the crisis if equilibrium interest rates can't be achieved given the prevailing rate of inflation."
Larry Summers - IMF 14th Annual Research Conference In Honor Of Stanley Fisher

Read more here.

The Italian Runaway Train

There has been lot's of debate in the press and in academic circles over the last week or so about whether Italy's latest contraction constitutes a triple dip recession or simply a continuation of what's been going on over many many years. This is an interesting theoretical nicety, but in fact what is happening in Italy at the moment goes a lot further than problems faced by a recession dating committee. The real issue that arises in the context of the Euro Area at the moment is a far more specific one. Will the ECB do QE? And if it does when will it push the button? And what could happen if it doesn't. Perhaps a case study of the Italian case is worth the effort here. What is likely to happen to Italian debt if there is no ECB intervention soon? Let's take a look at the dynamics.

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What Is The Risk The Euro Crisis Will Reignite?

The euro zone crisis is not back -- at least not yet.

Recent movements in global markets following concerns about Portugal’s Banco Espirito Santo really had as much to do with market nerves after a long spell of repressed volatility as it did with the state of the bank’s balance sheet. Despite the current calm, everyone knows that volatility will return one day, and no one wants to be caught on the back foot when it does arrive. So the initial response is to hit the “sell” button and then ask questions.

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Secular Stagnation Part 1 - Paul Krugman's Bicycling Problem

"What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese."
Paul Krugman - For Bonds, This Time is Different

Ever since Larry Summers gave his game-changing speech at last autumn's IMF research conference the back-and-forth flow of arguments about secular stagnation has been almost non-stop (indeed Larry himself now has a webpage dedicated to the topic). First to dive into the swimming pool after the sounding of the starting pistol was Paul Krugman, with a series of blogposts and NYT articles (here, here, here, here, here, here, and here).  These were followed/accompanied by a series of commentaries (both for and against), and then finally we got to one of the potential end points of the argument, the "negative natural interest rates for ever and ever" model produced by Gauti Eggertsson and Neil Mehrotra (here) - summarised by Krugman in his memorable "Stagnation Without End, Amen" post.   A fuller bibliography of major milestones in the secular stagnation issue can be found at the foot of this post, but I'm going to eat up most of the column space here looking at just one Krugmans arguments - the one contained in Demography and the Bicycle Effect - since in many ways in goes right to the nub of the issue.

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Spain and the IMF: Round the Bend or Out of the Woods?

"Spain has turned the corner". With this stark statement the IMF opened it's annual Article IV consultation report for 2014. Naturally the statement rankled, with this author among others, because at first sight it seems to be saying something which on closer reading of the report you find it isn't. At best it's misleading, possibly from a PR point of view intentionally so, but then Article IV reports are supposed to be more sober, measured assessments.

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Japan Inflation At A 32 Year High?

Just in case anyone was in any doubt last weeks newspaper  headlines blared it out for us loud and clear - Japanese inflation is back, and has even hit levels last seen in 1982.

In fact consumer prices in Japan rose at an annual rate of 3.4% in May according to the Bank of Japan's preferred measure, driven higher from one month to another by the growing impact of the April sales tax hike. The May surge in inflation follows a previous jump to 3.2%  in April, up from 1.3% in March. Apart from the tax hike, the delayed impact of last years yen devaluation is still being felt: electricity charges rose 11.4% year on year in May, gasoline was up 9.6%, while fresh seafood prices climbed 14.3%.

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Will Japan Re-enter Deflation in April 2015?

Reading the most recent statements from Bank of Japan Governor Haruhiko Kuroda or Finance Minister Taro Aso you would get the impression that the days of deflation are now well and truly numbered in Japan. Martin Schulz, economist at Fujitsu Research Institute in Tokyo, goes even further. “Deflation is over in Japan,” he told Bloomberg Television First Up’s Angie Lau . Even Japan’s industrial leaders now believe inflation is here to stay: the country’s inflation rate will be 1.5 percent in the spring of 2015, and 1.7 percent in 2017, according to average forecasts in a Bank of Japan survey conducted in March this year.

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My Spain Book Presentation

For more on this presentation see here.

The A-b-e Of Economics

And the world said "Let Shinzo Abe be", and all was light.

A new craze is sweeping the planet. The image I have in mind isn't exactly that of the community of central bankers all dancing the Harlem Shake in unison, but for all the economic sense it has it might as well be. In fact the craze is called "Abenomics" and it is gathering adepts in financial markets across the globe. A precursor in Japanese history has already been found for the movement, Korekiyo Takahashi, who was the country's finance minister during the key years of the 1930s depression. Even a book has been written to extol his virtues entitled “From Foot Soldier to FinanceMinister: Takahashi Korekiyo, Japan’s Keynes." Unsurprisingly it was an immediate hit with Japanese academics when it came out in 2010.

Read more about my new Japan book......

The "Hot Labour" Phenomenon

Strong growth. Rising real estate prices. Rapid job creation. Surging immigration. This list sums up the Switzerland of 2014 down to a tee. However, it also sounds like a description of what things were like in Spain in 2007 - shortly before the country's economy fell off a cliff. What follows is a conversation between financial journalist Detlef Gürtler and economist and crisis expert Edward Hugh about possible parallels and differences between the two booms, and the role of a new phenomenon which Hugh describes as "Hot Labour".

Hugh argues that this is a new phenomenon, and on the increase as a result of central bank bubble inducing activity. While immigration is a vital tool aiding economies to manage the population ageing process, it is important that economic activities be balanced. Immigration fueling boom/bust cycles is far from innocuous, and harm a country just as much as a sudden stop in capital flows if the immigration is followed by emigration.   

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As Good As It Gets In Latvia?

For Maurice Pialat, champion of the marginal centre.

"This raises a final question, which, while not central to the issues of this paper, is nevertheless intriguing: How can a country with a low minimum wage, weak unions, limited unemployment insurance and employment protection, have such a high natural rate [of unemployment]?"

"To summarize, the actual unemployment rate is still probably higher than, but close to the natural rate of unemployment. Latvia may well want to take measures to reduce its natural rate, but the recovery from the slump is largely complete."
Boom, Bust, Recovery Forensics of the Latvia Crisis, Olivier Blanchard, Mark Griffiths and Bertrand Gruss

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The Czech Economy That Didn't Bounce?

The Czech republic has been making the news recently. On the one hand the country has been on the receiving end of massive, devastating floods, while on the other the country's government was brought to the brink of collapse (and beyond)  by the resignation  of Prime Minister Petr Necas following the arrest of one of his most trusted aides on corruption charges. After the deluge I suppose.

Curiously both these events serve to highlight one important underlying reality - Czech voters are deeply dissatisfied and in a highly skeptical mood, since following seven quarters without growth the country's economy is evidently stuck in the doldrums. The worst part is things look highly unlikely to improve anytime soon.

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The Suitcase Mood

Suitcase mood is a Russian website with travel and tourism content. The term is also a popular expression widely used within Russian culture to describe the state of mind which grips a voyager on the brink of a journey. The mood is often associated with a ritual which involves the departing person sitting, sometimes accompanied by family or friends, in the vicinity (when not actually on top of) the packed suitcase, ostensibly to try to remember if there is anything they have forgotten to take and bid loved ones farewell. Sometimes, however,  the phrase can take on a different, and rather darker, meaning. It can be used to describe someone who is fed up with the status quo, has become footloose and decided they simply want out. "This will never change," might be the thought, "I'm leaving". In my mind's eye I even see the person having the thought seated on their suitcase adopting the posture of Rodin's thinker, turning over and over again whether they are doing the right thing, even while those around them vent their sadness in a bath of tears and alcohol. Or maybe I have just been watching too many Russian movies.

Naturally such a custom does not exist along Europe's Southern fringe, which doesn't mean it couldn't be invented since the young and educated are increasingly leaving much to the chagrin of those they leave behind.

But the "packing up and leaving" variant has now become the predominant one in another country suffering brain flight, one which has does have significant historical associations with traditional Russian culture: Ukraine. The suitcase mood is alive and well among a growing number of young Ukrainians, as journalist Vitaly Haidukevych discovered when he conducted an online survey on the subject via his facebook page,

"The suitcase mood is there. [...] Young, promising people have it. [...] Since they are young, they are leaving not for the sake of immediate earnings [...], but to grow roots for the future. [...] I assume that these people asked themselves whether it was possible to change the state of things in the country – and the answer was ‘no'. [...] Some are leaving for exactly the same reason others are reluctant to join [the anti-regime] protests – they care about themselves, their families and their future. [...] “what are those rapid movements for, you've got kids, think about them” – this is what those who've stayed think. And those who are leaving [...] do not want to wait for the tax authorities to come and take away their last pair of underpants. [...]"

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The Great Portuguese Hollowing Out

With every passing day Portugal has less and less economy left, while fewer and fewer people remain to try to pay down the debt.

As Portuguese President Aníbal Cavaco Silva once put it, "A country without children is a nation without a future." He was, of course, referring to his country’s ultra-low birth rate, which is just over 1.3 (Tfr) and has been below replacement level (2.1Tfr) since the early 1980s. In 2012 only just over 90,000 children were born in the country, the lowest number in more than a century – you need to go back to the nineteenth century to find numbers like the ones we have been seeing since the crisis really took hold.

But added to this longstanding, yet unaddressed, problem there is now another, just as dangerous, one. High unemployment levels and the lack of job opportunities are leading an ever increasing number of young Portuguese to emigrate. The numbers are large, possibly a million over the last decade, victims of the country’s ridiculously low growth rate – under 1% a year. And the departures are accelerating. Jose Cesario, secretary of state for emigrant communities, estimated recently that up to 240,000 people may have left since the start of 2011.

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The Shortgage of Bulgarians Inside Bulgaria

According to Angela Merkel, speaking in the German city of Mainz in mid February,  European countries struggling with the fallout of the euro-area debt crisis have much to learn from East Germany’s experience with economic overhaul following the fall of the Berlin Wall. In the main she was speaking about the need for reform, something on which we can all agree. “At the beginning of the 21st century", she said, "Germany was the sick man of Europe and that we are where we are today also has to do with reforms we carried out in the past. That’s why we can say in Europe that change can lead to good.”

But there was one tiny little detail she forgot to mention. During the post unification period East Germany's population went into melt-down mode. New York Times Columnist Nicholas Kulish put it like this:

Unemployment in the former East Germany remains double what it is in the west, and in some regions the number of women between the ages of 20 and 30 has dropped by more than 30 percent. In all, roughly 1.7 million people have left the former East Germany since the fall of the Berlin Wall, around 12 percent of the population, a continuing process even in the few years before the economic crisis began to bite.

And the population decline is about to get much worse, as a result of a demographic time bomb known by the innocuous-sounding name “the kink,” which followed the end of Communism. The birth rate collapsed in the former East Germany in those early, uncertain years so completely that the drop is comparable only to times of war, according to Reiner Klingholz, director of the Berlin Institute for Population and Development. “For a number of years East Germans just stopped having children,” Dr. Klingholz said.

The newspaper Frankfurter Allgemeine Zeitung reported recently that although 14,000 young people would earn their high school diplomas this year in Saxony, only 7,500 would do so next year. Since 1989, about 2,000 schools have closed across the former East Germany because of a scarcity of children.

Now this situation is quite serious, and needs a long term solution, but it is not as serious as what is currently happening to Latvia, or Bulgaria, or a number of the other former communist states. Unless, of course, the lesson Angela would like to draw our attention to is that East Germany managed to salvage something from what would otherwise be population wreckage by sneaking in under the shelter of another state, with a centralized system of support for pensions and health care. Somehow I doubt it, but perhaps this is what we need to think more about. The EU needs a pan European health and pension system, to distribute the burden equitably. This is the conclusion I reached during my last visit to Riga. It isn't just a Euro related issue, it is to do with having a unified labour market, with people able to move to where the jobs exist, and the pay is better. For years people complained about the absence of labour mobility in the EU. Now we have it, the flaw in the institutional infrastructure is obvious.

Read more here.

Portugal - Please Switch The Lights Off When You Leave!

The recent decision by the Portuguese constitutional court to unwind public sector salary cuts included by the government in its austerity measures has once more given rise to speculation  the country may not meet it's 4.5% deficit target for 2012. The court  - which ruled the non-payment of the two traditional Christmas and Summer salary payments  for the years 2012 through 2014 was unconstitutional -  took the view that since the measure did not also apply to the private sector, it was discriminatory. Whatever view we may take on how the Portuguese Constitution defines "discrimination" the important detail to note is that  the decision will not apply to 2012, and will hence only have the impact of forcing the government to find additional adjustments for 2013 and 2014, or at least a new formulation which allows them to constitutionally cut public sector pay.

Nonetheless, despite the fact it will  not affect this years fiscal effort the coincidence of the timing of the court decision with the appearance of a report from the parliamentary commission responsible for monitoring the execution of this years budget only served to heighten nervousness about the possibility that, with unemployment rising more sharply than anticipated and the economic recession still accelerating, this years deficit numbers may not add up as planned.

The country is facing a deep ongoing recession with a contraction of the order of 3.5% expected  this year, and the outlook for the second half of the year is no shaping up as though it may well be tougher than the first half. In addition, with the European sovereign debt crisis threatening to cast its long shadow right across next year, it looks increasingly unlikely that the country will be able to go back to the bond markets in September 2013 as planned. So September may well be a good month to make some needed revisions to the existing IMF programme.
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Portugal is making progress in reducing its fiscal deficit, even if it may fail to precisely meet this years target. But it is not making sufficient progress in reducing external imbalances, and in achieving international competitiveness. As a result sustainable economic growth and stable job creation still seem some years away. In the meantime young educated Portuguese are increasingly upping and leaving the country in the search for a better life elsewhere. This negative dynamic needs to be broken, and Troika representatives instead of repeating the same old policy errors need to take a fresh look, and with an open mind, at the situation.

Auditors Forum Sitges 2014

¿Adiós a la Crisis?

España – ¿Qué clase de Recuperación Económica? Introducción

Es evidente que la economía española da muchas señales de estar en mejores condiciones que hace un año. Pero ¿hacia dónde vamos? ¿Qué tipo de crecimiento económico nos espera realmente?

¿Es cierto que hemos superado la crisis…, que ha pasado lo peor…, o simplemente estamos delante de otra decepción, de otra salida en falso? Es evidente que habrá un antes y un después del año 2008, pero ¿exactamente que es lo que podemos esperar del futuro próximo? Este libro intenta ir más allá de los tópicos del tipo “estirábamos más el brazo que la manga” buscando las raíces de los problemas que caracterizan la situación actual para intentar dar una respuesta que ayude al lector a orientarse en el nuevo mundo hacia el cual estamos ineluctablemente caminando.

La economía española ha vuelto a la senda de crecimiento, por frágil que sea su trayectoria actual. El sector de exportaciones tira como nunca, el balance de comercio está registrando números positivos y el déficit en cuenta corriente ya es historia. El mercado laboral se ha estabilizado. Quizás la economía no genere muchos nuevos puestos de trabajo, y mucho menos en forma de contratos fijos, pero por lo menos el paro ya ha dejado de subir.

Además el gobierno no tiene dificultades para financiarse y la prima de riesgo ha bajado considerablemente. Las reformas son constantes y la confianza ha vuelto a los mercados y a las empresas. Entonces todo va bien, ¿o no?

Debajo de esa capa de alegría queda una realidad que no ha cambiado sustancialmente en el último año. Esa realidad se encuentra en la vida cotidiana de la gran mayoría de españoles y españolas donde se presentan las mismas dificultades como antes y donde todavía se mira el futuro con cierta aprehensión. Y no hay de olvidar que ese intento de salir adelante no es la primera vez que lo hacemos, en 2009 algunos vislumbraban unos primeros brotes verdes y de hecho en 2010 salimos de la primera y grande recesión solo para recaer en la segunda en 2011. Mientras podemos estar seguros que hemos salido de la última recesión, no podemos ser tan seguros que no hay otra, la tercera, esperándonos a la vuelta de la próxima esquina.

1/ Sin Rescate Pero Todavía En Crisis

Desde que Mario Draghi anunció su programa OMT, la crisis de la zona Euro ha ido de más a menos. Las primas de riesgo han bajado en toda la periferia, y a fecha de hoy nadie sugiere que ni la economía italiana ni la española necesiten rescates. Pero ¿esa tregua frágil que hay con los mercados durará para siempre? Al final ¿no acabaran saliendo uno o más países de la moneda común? Y España, ¿tiene que salir?

Se ha hablado mucho de que el mundo no volverá a ser nunca como aquello que hemos conocido en los primeros años de este siglo. Los países desarrollados no pueden mantener las mismas expectativas por varias razones. En primer lugar, los países emergentes están ganando terreno y generando competencia, y lo están haciendo cada día con más insistencia. Además, nuestras sociedades tienen una herencia de deuda que representa un lastre para el consumo y que costará a bajar. Y por si estos dos factores fueran poco, tenemos por delante unos cambios demográficos que serán, por no decir más, inauditos.

La confluencia de estas circunstancias ha llevado a algunos economistas a hablar de un “nuevo normal”, un listón diferente para medir nuestro progreso económico. En esta línea cabe la idea de que la palabra recuperación ya tiene otro significado, igual que la palabra recesión. Según este argumento en el futuro las expansiones serán más débiles y más cortas, mientras las recesiones serán más frecuentes y a menudo más fuertes.

Entonces se planea la pregunta sobre España - ¿Existe la posibilidad que el país vuelve a caer?

La duda parece más que razonable porque a pesar de la acumulación de señales esperanzadoras todavía queda indicadores que tozudamente resisten la tónica positiva – el paro, el precio de la vivienda, la morosidad en los bancos, el número de desahucios y sobre todo en la tendencia negativa consumo interno. La sociedad española conjunto no tiene la sensación de estar ante un nuevo renacimiento, sus instituciones más bien desprenden un aire de estancamiento y de decadencia, hasta el punto que incluso el número de habitantes del país está bajando. Porque este ambiente de crisis resiste tanto?

2/ ¿Es Verdad Que Hay Que Bajar Los Salarios un Diez Por ciento?

Raras veces una propuesta ha unido todos los componentes de la sociedad española en contra y con una sola voz, pero la propuesta del ultimo informo del fondo monetario sobre el país lo ha conseguido. La idea de que España tenía que hacer una esfuerza más para lograr la generación de empleo a través de una reducción sistemática de salarios ha generado una rechazo colectivo, a la vez que generar un alud de críticas sobre la institución multilateral. Debe ser que ha tocado un punto muy sensible. ¿Pero porque? Y ¿porque El Fundo ha empeñado en hacer una propuesta tan controvertida da si era evidente que la medida era de tan poca monta? Para entender esta verdadera rompecabezas hay que remontar un poco en la historia de la crisis que afecta a España.



3/ ¿Si Los Bancos Están Bien Capitalizados, Porque No Hay Crédito? A pesar de un sinfín de reformas el sistema financiero todavía no dispone de toda esa excelente salud que muchos han siempre revindicado. El sistema parece bien capitalizado de momento, pero la morosidad sigue creciendo y el crédito o bien no fluye, o cuando fluye resulta caro. Entonces,¿ que hay que hacer para que la economía disfrute de un sistema financiero que funcione como Dios manda?

4/ ¿Que Puedo Esperar cobrar en concepto de Pensión?

Otra cosa que no ha quedado claro es el futuro del sistema de pensiones. La sociedad española envejece cada vez más. La tasa de dependencia de las personas con más de 65 años crecerá de forma dramática durante las próximas dos décadas. Antes se veía la inmigración como una forma de sostener el sistema, pero como muchos de estos inmigrantes ya van marchando en busca de trabajo y el número de personas cotizando está muy por debajo del nivel de antes de la crisis, el equilibrio del sistema de pensiones está en peligro. Se ha hecho una reforma del sistema y otra está en preparación, pero ¿qué seguridad tenemos sobre el nivel de pensión que cobraremos?

5/ Mariano Rajoy Puede Bajar Impuestos en 2015

6/ ¿La Deflación Es Un Problema?

7/ ¿Sociedades Sin Crecimiento?

Los ecologistas siempre han soñado en un futuro donde el crecimiento será cero o, mejor todavía, negativo. Ahora parece que ese sueño está a punto de hacerse realidad, pero no de la forma ideada. Lo que era un ideal podría acabar imponiéndose por la fuerza. Después de varias décadas de natalidad muy baja las fuerzas laborales en la mayoría de los países desarrollados han empezado a bajar. Curiosamente, en los países del sur de Europa el punto de inflexión ha coincidido con la llegada de la crisis. En parte esto no es una pura casualidad porque de hecho el crecimiento natural de la población ha estado estancado desde hace años pero la realidad subyacente fue mitigada debido a la llegada de inmigrantes. Ahora, con la falta de oportunidad no solo ha vuelto negativo el saldo de inmigrantes sinó que además una parte de los jóvenes de este país está marchando, poniendo en duda en un caso extremo como es Portugal la sostenibilidad del país en un futuro no muy lejano.

La situación de España no es tan dramática, pero no deja de ser preocupante. Desde 2011 la velocidad de salida de jóvenes está creciendo de forma notable y en 2012 la población del país ha empezado a bajar.

Entonces estas sociedades se enfrentan a un doble dificultad, porque la falta de crecimiento a corto plazo hace que el mercado laboral se estanque, cosa que provoca la salida de capital humano la cual cosa a su vez hace que la tasa potencial de crecimiento a medio plazo se reduzca generando una suerte de circulo vicioso.

El futuro es siempre imprevisible, pero parece lógico que la bajada de números de personas en edades de trabajar se trasladará en algún momento en reducciones en el número de personas trabajando. Según la velocidad de esta bajada, la tasa de crecimiento se puede convertir incluso en negativa.

Japón nos da un ejemplo en este sentido, porque el número de personas en edades de trabajar ha empezado a bajar a partir de 1997 y a pesar del hecho de que muchos japoneses ya trabajan más allá de los setenta años la economía del país sigue experimentando problemas importantes.

La bajada de las poblaciones y la reducción en tamaño de las economías que ellos sustentan, como notaba Keynes en los años treinta del siglo pasado, no necesariamente representa un problema sin solución si se lo gestiona bien, pero si el fenómeno puede convertirse en un problema grave si no lo hacemos así.

8/ ¿Un país para viejos?

La economía española puede crecer un poco más o un poco menos, pero bajar significativamente el paro parece que va a ser una verdadera tarea herculina. Sobre todo en un entorno incapaz de dar lugar a tasas de crecimiento fuertes y donde gran parte del esfuerzo para mejorar vendrá a través de la productividad para ir recuperando competencia.

La necesidad de poner estabilidad en el sistema de pensiones hará que las personas que tengan contratos de larga duración vigentes trabajen hasta edades cada vez más altas. Este fenómeno tratado de esta manera en este momento es equivalente a echar más leña sobre un problema ya en sí mismo gordo.

El país sufre dos problemas graves al mismo tiempo, una cuantidad importante de jóvenes que salen de la escuela sin ningún tipo de titulación, y otra cantidad que salen de la universidad bien preparados pero sin perspectiva de encontrar trabajo. Entonces pasa lo siguiente: los primeros se queden e hinchan los números de parados sin futuro claro mientras que los segundos marchan provocando un mal paso al capital humano del país, dañando así el crecimiento potencial en el futuro.

De hecho, el coste de la crisis está muy mal repartido, con una proporción muy alta cayendo sobre unos jóvenes que no entienden que han hecho mal para merecer semejante suerte. Aquí, si el país quiere salvar su futuro algo importante tiene que cambiar. Si no queremos vivir en un país con unos proporciones insostenible de edades los que tenemos más años tenemos que hacer más esfuerzo para que los que tienen menos se quedan. Tenemos que repartir los sacrificios de forma diferente.

9/ España - El Nuevo Alimaña o El Nuevo Japón?

Hay un dicho que sustenta que la única cosa que no tiene solución es la muerte, e incluso eso – en un contexto económico – hay que cualificarlo, porque como el economista Joseph Schumpeter argumentaba a veces solo muriendo se puede seguir viviendo. Es decir, la renovación necesaria para mantener una economía que podía ofrecer un nivel de vida razonablemente bien a los que dependen de ella suele pasar irremediablemente por la muerte continua de algunos de sus componentes, igual que nuestros cuerpos o nuestras sociedades en agregado.

Una de las dificultades mes espinosas que ha enfrontado a la sociedad española durante esa crisis es saber cuándo dejar morir una cosa o cuando intentar recuperarlo. No es para nada que la palabra rescate se ha convertido en una de las más familiares. Esa circunstancia puede presentarse en muchos casos – en una entidad financiero, una empresa grande, un negocio o tienda familiar, o incluso una casa.

Durante los últimos seis años muchas personas han ido luchando para sostener una cosa que si habían sabido lo que saben ahora hubieren dejar morir en su momento, y no después de muchas fuerzas para salvarlo.

Entonces lo que argumenta este libro es que no hay una “solución” en el sentido de una sola cosa (devaluación interna, reforma laboral, impulsar el “business friendly”) que por sí mismo volverá las cosas a su sitio, en parte porque este sitio ya no existe pero también porque no hay una formula mágica. Si salimos adelante esto será debido al esfuerzo, la creatividad y la innovación de muchos actores.

Estamos en un mundo cambiando, y no tenemos elección – hay que adaptarnos. Que la realidad podría haber sido diferente si solo habíamos…. poco importa, lo que tenemos que hacer es trabajar con la realidad que tenemos, por duro que sea.

Lo que sí que hay son soluciones, en minúscula, y las hay en cantidad. En este último capítulo daremos unos cuantos ejemplos, y veremos unos casos de personas que están superando la crisis ya, y como lo están haciendo. No hay una receta, pero sí que hay unas líneas de trabajo, aunque todos y cada uno de ellos pasen per la vía de reconocer las cosas tal y como son.

Two Developed Countries Facing a Lost Decade

A new craze is sweeping the planet. Known by the title "Abenomics" over the last couple of years it has been steadily gathering adepts in financial markets across the globe. Despite the fact Abe's move fits comfortably within the austerity vs growth policy axis, at the heart of the new approach lies not a strategy to directly create growth per se, but rather one to try to induce inflation. For those who have not been following the Japan saga as it has developed over the last twenty odd years this whole debate may seem like a strange way of thinking about things. After all isn't inflation supposed to be a bad thing, one central banks are supposed to combat? And how can a country possibly become more ever more competitive by force-feeding itself inflation?

Of course, falling prices are not necessarily in-and-of themselves a bad thing - as any old consumer will tell you - since products get cheaper and cheaper with each passing day. So the run of the mill consumer might find life in Japan quite a pleasing and desirable thing, especially if that particular consumer happens to be retired and living on a fixed income derived from savings as indeed many contemporary Japanese actually are. Falling prices only really become a problem in a more general macroeconomic sense if they lead people to postpone consumption, and if this postponement becomes self-perpetuating in a way which leads prices to continually fall, as the combination of constant productivity increases and stagnant demand serve to produce perpetual oversupply. Falling prices also represent a nasty headache for policymakers since while prices go down the value of accumulated debt doesn't, and herein lies the rub. So additional "stimulus" which doesn't lead to increasing nominal GDP simply pushes the sovereign debt even farther along an unsustainable trajectory.

As everyone now recognizes and accepts Japan has a rapidly ageing population and an ageing and contracting workforce. This is the end result of several decades of very low fertility. The number of children in Japan fell to a new low in 2013, while the amount of people over 65 has reached a record high as the population ages and shrinks. This demographic background, which has really been obvious to demographers for years, has only lately come to be regarded as a significant factor in the "Japan problem" by economists. This neglect has most probably been due to the influence of a deep seated predisposition among adherents of neoclassical growth theory to think that population dynamics don't fundamentally influence economic performance in the long run. For many years the Japan phenomenon was simply seen as a classic example of what Richard Koo terms a “balance sheet recession” wherein the need for the private sector to deleverage from excessive indebtedness leads to a form of structural under-consumption.

Perhaps the most important thing which the whole Abenomics episode has brought to light is the urgent need to bring the existing corpus of economic theory somehow up to date with our modern realities. Despite all the talk of policies for "growth, growth, growth" a simple look at the population outlook in OECD countries and especially the potential work force numbers suggests that, at some point or another, economic growth will turn broadly negative. So the real point is there is an experiment being conducted in Japan, but the experiment isn't Abenomics (which I suspect won't work, and could end badly). No, the experiment is about learning to grow old with dignity, not as individuals, but as societies. It is about managing debt in a time of deflation, about giving opportunities to the young, even while the force of the ballot box rides with the old, and about finding ways to ease that rate of work force decline to give some additional room to allow productivity to help, which means both immigration and helping the young - at they are the ones who start families.

Speaking Engagements

European Identity and The Euro Crisis: Fiscal Limitations For Federalist Aspirations – ‘Sovereignty Formulas between Autonomy and Independence: Towards a Reconfiguration of Europe?’ Workshop on the Dynamics of Nationalist Evolution in Contemporary Europe,Foresight Centre, University of Liverpool, 14-15 May 2015

The Demographic Challenges Facing Greece, A New Growth Model For the Greek Economy, 3 June 2015, Conference (here) organised by the Greek Chamber of Commerce and the Greek Parliamentary Budget Office

Ideas, Models, Values – College of Certified Auditors annual congress, Sitges, July 2014 (more here)

Spain & Japan: Two Developed Countries Facing a Lost Decade – CIDOB Centre for International Affairs, Barcelona, January 2014 (more here)

What do ageing populations have to do with the sovereign debt crisis? - Morningstar Investment Conference Europe, Vienna, March 2013 (more here)

The Demographic Revolution – A Threat to Our Pensions? - Globes Israel Business Conference, Tel Aviv, December 2012 (more here)

Saving the euro, but at what price? – Presentation, British Chamber of Commerce in Spain, Barcelona, November 2012 (more here)

Challenges Still Facing Spain - Euram, Olot, November 2012 (more here)

Portugal, Will The Last To Leave Kindly Switch Off The Lights! – Presentation at the Conference "Neglecting social Europe? The economic deadlock!" European Parliament Greens EFA, June 2012 (more here)

The Future of the Spanish Economy in the Eurozone - Euromoney Spanish Capital Markets Forum, Madrid, May 2012 (more here)

The Economic Consequences Of Latvia’s Demographic Decline – Presentation at the conference “Too Late To Defuse The Ticking Demographic Time Bomb For Latvia” organized by the American Chamber of Commerce in Latvia, Riga April 2012 (more here)

Decision making in the face of an uncertain future: ageing populations and Europe's debt crisis - paper presented at the EU seventh framework programme meeting “Exploring the future in complex social systems for decision making”, Department of Urban and Regional Planning, Florence February 2012 (more here)

The Future of the Euro - Barcelona Business Network, Barcelona, January 2012 (more here)

The Stability of the Euro- Borsadiner Financial Professionals Forum, Presentation, Barcelona, November 2011 (more here)

The Euro, Demography and Italy's Long Term Growth Challenge – Presentation, Italian Democratic Party Summer School, Cortona, September 2011 (more here)

The Coming Indian Summer? – Lecture, Danske Bank Central Bankers Forum, Copenhagen, June 2011 (more here)

Exporting Your Way Out Of Trouble Under A Currency Peg – Open University of Catalonia , Presentation during the Conference “Economic Crisis in Small Countries”, Barcelona, Catalonia, May 2011 (more here)

East Europe’s Looming Demographic Crisis - Stockholm School of Economics, Public Lecture Riga, April 2011 (more here)

Saying Goodbye to One Crisis, Only To Say Hello To The Next One - International Employee Benefits Association, 11th Annual Conference, Brussels, March 2011 (more here)

Why Economists Got It Wrong - London School of Economics, School of Management, Public Lecture, London, February 2011 (more here)

Is Spain’s Fiscal Correction Sufficient? – Barcelona, Borsadiner Financial Professionals Forum, November 2010 (more here)

Is Immigration A Solution To Our Long Term Pension Problems? - Bergen Business School, TED Talk, Bergen November 2010 (more here)

Can the Euro Be Saved? - Polish Economic Forum, Krynica, Poland, September 2010 (more here)

Spain - Towards Finland or Argentina? - Circulo de Economía, Presentation, Sitges, May 2010 (more here)

All About Edward

"Economists hitherto have tried hard enough and often enough to change the world, the real difficulty however is to understand it."

"In a world where expectations are (nearly) everything, to change our understanding is already to change our reality. Not only that, changing things this way is the most plausible, most cost effective and least destructive way of doing so" 

Barcelona Urban Legend

"Santiago Rosinyol had had a hard day. As he sat himself wearily down at the top of Las Ramblas he bent over to adjust a small sign which was propped-up awkwardly against his left foot. It read. "To trade: any three ideas of mine for one of yours". Unfortunately that day there were no takers. Nor indeed were there any the next day, or the next one, nor even the one after that. Evidently people thought there must be some kind of catch. Finally, and exhausted, Rosinyol folded his chair, ripped up the sign, and went sadly on his way."

Who am I?

That is a good question. One I think most of us should ask ourselves more often. Officially I am currently fifty sixty five, I live in a small village near the town of Figueres, about half an hour away from the frontier with France and more or less the same distance from the beaches of the sunny Costa Brava. Before that I lived for 20 years in Barcelona.  In fact the area I live in is called the "Alt Empordà", and these days more than either British or Catalan I would describe myself as Empordanense. It is a lovely area for those who don't know it, and aside from the beaches and the Salvador Dalí legacy there are mountainous areas as well as splendid planes populated by vineyards and olive trees.

If I were pinned down in a corner and had for once to say what, in a single word, I was - as opposed to who I am - I would undoubtedly say I was an 'economist', although this is a destiny that most of the people who know me well would say I had spent the better part of my life trying to avoid. Pinning it down even further I would probably clarify that I was in fact a macro-economist. I have to say that microeconomics, which is the kind almost anyone who isn't a macro-freak prefers, has always bored me - almost to tears, and indeed almost to the point of causing me to fail my first degree. The fact that microeconomics fails to "turn me on" is curious since I notice that the vast majority of popular weblogs deal precisely with micro-type topics. Evidently either most people have understood something which I have failed to grasp, or the opposite is the case.

Or could it be I am just fascinated by the big-picture stories.

Filling-in that little box which asks "how would you describe yourself (maximum 50 words)" has always being something of a problem for me. In fact I have the feeling that as soon as someone tries to put a label on me I am already struggling loose trying to escape from it. Perhaps the best commendation to my work was made by my old school headmaster who, in one of those endless termly reports, got right to the heart of things: 'is he trying to prove that any fool can miss a bus?' He was definitely right, I seem to have spent the best part of half a century becoming a specialist in missing buses.

Adding insult to injury in this thankless quest to follow the advice of Socrates and try to get to know better what it was I didn't know, I was once described by my Departmental Professor as a 'thief' for accepting my doctoral grant while continuing to spend my time reading the books and attending the courses that I chose to, the ones that I thought were interesting and relevant to my development both as a person and as someone who works with ideas. In a way I am still doing this, reading what interests me, and writing about what attracts my attention. In many ways it is what being independent means, even if it doesn't get you much in the way of work with what is known as the "official sector".

I think I suffer from what used to be called 'an excess of curiosity', the kind that kills cats, you know. This is a condition which has never been encouraged by the mainstream, and indeed the  scholastics even regarded it as the nearest thing to an intellectual sin. Philosophy is born of wonder, but an excess of it was thought to be fatal. Possibly it is, or at least not conducive to producing a corpus of work, since you never know where to draw the line.  I do take some consolation, however, in the thought that in an age where internet connectivity puts the generalist right back in business, and big-time, then the optimal level of healthy curiosity per cubic centimeter of neuronal mass may have just risen, and excessive curiosity might now not be the 'vice' it was once thought to be.

At least, this is how I square things with myself.

The humanist psychologist Erich Fromm wrote quite a lot about 'Having and Being'. I'm definitely on the 'being' side of thinks (indeed I just gave away the last consignment of what used to constitute a lifelong collection of books). Don't worry, they were all found good homes, it's just that I don't believe in leaving things around to accumulate dust, and books do accumulate lots of the stuff. Sartre on the other hand indulged himself with the exploration of the boundaries between being and doing. Again he was (existentially speaking) much more on the 'doing' side of things, (as was his writer friend Albert Camus). But there is doing and doing. The last time I was asked what it was I 'did', I replied rather cantankerously, that I don't do, I think. Perhaps if I said thinking is what they pay me for, that would sound less pretentious.

I mention this here since I suppose, tucked away in that response, somewhere there lies a feeling, possibly even a prejudice, which more or less sums me up. It runs something like this: if more economists spent more time really thinking about what economic systems are, and exploring more audacious hypotheses about how they might work, and how they might relate to other systems which interact with them (like the climatic or biological reproductive ones), and less time tinkering around with what appear to be me to be exceedingly ontologically-promiscuous, but at the same time all too often essentially useless, mathematical models, the as a profession they might have a better reputation.  The models they use all too often have a pretty questionable set of relationships with the day-to-day functioning of that all too real economic system we encounter all around us in our everyday lives. Well I think that if we made a move in that direction we might (just might), as a profession, make a better 'all round' job of anticipating some of the problems knocking around out there  before they come crashing into our lives making their presence only too obvious.

OK, so maybe Hegel was right, the owl Minerva does only get to fly after dusk, but do we really have to be so complacent about this that we simply lie down and accept it? Who could possibly have seen it coming? Einstein, I feel, had it about right, keep your explanation simple, but no simpler than the complexity of the problem you have in hand necessitates. (Six centuries earlier, Occam, of course, had  had a very similar thought).

My big (as in biiiiig) bet is that one or two simple parameters can explain more about the whole economic development process than we are conventionally prepared to admit. Pride of place here I would give, of course, to our biological reality, our fertility and our life expectancy, to how these change and to how the changes impact on population age distribution and structure, on performance and on productivity. Much of the rest of our secondary economic epi-phenomena - savings, investment, aggregate demand, interest rates, balance of payments, inflation, productivity - can, I conjecture, be better understood once this fairly basic 'ground-point' has been established. Alfred Marshall had it right, economics has more to do with biology than ever it has to do with physics.

Going back to the practical end of things for a moment, and unwinding history a little by turning realism on its head for a change, I would say - as I indicate in the initial quote at the top of this page - that economists have hitherto been overly obsessed with trying to change the world, and insufficiently so with trying to understandi it!. If as we never cease to tell ourselves expectations matter, then what matters most isn't how things are, but how we perceive them to be.

Finally, to close this whistle stop tour of all my visceral weak spots, three of my favourite quotes on or by Keynes in whose spirit, but not whose letter, I walk:

"John Maynard Keynes was pretty generally regarded as an extremist"

(James Cox, Journey Through My Years, p 367),

"I have sown dragons, but harvested fleas"

(posthumously attributed),

and most important of all

"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again"

(Tract on Monetary Reform p80).

I do not consider myself a Keynesian, yet I admire his life and his work enormously. I consider myself a Keynesian in the spirit of Keynes, not the letter. The times have changed and so have the problems, both theoretically and practically.

Keynes' problem was war, how to pay for it, and how to escape from the consequences of the indebtedness which comes with it. Our problems are different. They stem principally from our changing demography, and are issues like how to maintain our elderly populations free from penury in the longer run, how to handle the resource supply issues which accompany the rapid economic growth of some of the most populous countries of the world, and how to deal with the climatic impacts of the previous two processes, are the big items on our agenda.

However even if the problems may be very different, sometimes the economic dynamics are unnervingly similar: increasing population, like increasing military activity, tends to be inflationary, at least in an industrialised society. Population decline, and paying-off war debts tend, on the other hand, to be deflationary. But perhaps here the comparisons begin and end. We are a new generation and we have new problems. Perhaps the old labels no longer really help. For me the job of the economist, like that of any other scientist, is to try to understand. Paraphrasing a statement from Robert Lucas about economic growth, and appropriating it to my own circumstances: scarcely a day goes by when I don't think about the changing population structure of the planet, and what it means for us all.

Where Am I?

I live and work in Barcelona, the capital of Catalonia. Barcelona is a city with a long history and a diverse cultural heritage, which means that here we all speak at least two languages: Catalan and Spanish. Barcelona is, was and always has been a city of tremendous immigration, and with the migration it has always been a dynamic city, a city of cultural change.

Across the twentieth century these migration processes have marked Catalonia's history like little else (with the obvious exception of the civil war and the subsequent Franco dictatorship). The start of the century itself saw Barcelona as the vanguard city of a new Spain, with workers arriving from across the whole country to build the new metro system (Spain's first), and to erect the site for Spain's international Industrial Exhibition, which again, not coincidentally, was held in here. In the 1950's and 60's many more migrants came - in particular from Andalusia and Extremadura - to work in the new, rapidly developing, industries which characterised the end of the Franco era.

Today the migrants come from every farflung corner of this diverse planet, but they have one aim in common, to make their future in this wonderful city. This unprecedented recent migratory wave - Catalonia's population has grown from 6 to 7 million in just five years - is now, once more, making Barcelona the most culturally diverse and the most creatively dynamic city in modern Spain.

So it is fitting that I too who am, like my father before me, and his father before him, a migrant, should come here, to one of the migration capitals of modern Europe. Over the the years that I have been here - 16 to date - It is has become abundantly clear to me that immigration played an important part in Barcelona's history long before the arrival of the most recent and obvious waves. Whether you look to the early Phoenicians and Greeks, the later Romans to the arrival of the Converso Jews, fleeing persecution at the end of the middle ages, or to the migrants from France who came in the late 14th century, in this case fleeing to escape the plague, or if you turn your attention to the great internal Spanish migrations of the second half of the 20th century. One common thread remains clear: the singularity and evident prosperity of Barcelona and Catalonia has been in large part due to the singular combination of the hard-working and business-like mentality of the original Catalan inhibatants of this green and pleasant land and the the constant and steady flow of new and eager workers and citizens. This is the secret of the success, and yes, at a time when the seach for 'viable models' is rampant, it is something which I think it would be well worthwhile exporting.

WHY AM I ?

Why am I doing these all this internet stuff that is. (More fundamental questions will have to be answered
elswhere). The conventional answer would probably be that I hadn't got anything better to do at the time.
But I'm sure my friends and family would remind me that that isn't true. Another very good explanation would be that running a blog and updating website pages helps you to order your thoughts, to classify and not lose your ideas. Again, you can share your discoveries - this is a little more difficult since first of all you have to locate the people who might be interested in them, or better said, they have to locate you, but perhaps this amounts to the same thing in the long run.

Deep down I suppose I'm doing this because I've rather stupidly convinced myself that I've got something to say. In particular you'll probably notice I tend to get rather excited about the way the population structure of our planet is in the process of changing. I also happen to hold the opinion that the history of our species is one of continuous migration (right from the very earliest days of our origins African origins). This reality feels rather strange since we tend to think of ourselves as sedentary, spending our time as we do establishing tribes, comunities, nations etc. What we actually do best and most is move, adapt and change. Perhaps this is another example of the lack of conformity between our self-image and our reality. In any event the recent patterns of global migration are not new, they are the continuation of processes that go way, way back. Our identities are changing, and one of my objectives here will be to try and chronicle how this is happening. The bottom line is that these two phenomena, demographic change and global migration are probably going to have important, and undoubtedly unexpected, consequences, and I'm going to try to follow and record them here, on my website and thorugh my weblog.

In my childhood days - I grew up in the UK of the nineteen-fiftees, in the grimy northern and decidedly unromantic city of Liverpool - there was an establishment TV commentator - Richard Dimbelby - who was always wheeled out to talk us through the things which were then thought to be important, and no matter what the occasion there he was (in fact two of his sons seem to have pretty successfully carried on the family tradition). I have always retained my youthful admiration for the masterful and dignified way he did what he did (even though my feelings about the events being commented-on has undoubtedly changed with the changing of the years).

So maybe that's my real ambition in doing all this, to be a sort of Dimbelby voice-over for the process, the self-conscious part of consciousness or whatever. (If I said just plain and simple that I was here to be a witness that would sound rather religious which it isn't meant to be, so let's just wind this up by saying that I like the thought of all this going to its eternal destiny in the hard drives of Brewster Kahle's Wayback Machine).

WHY BONOBOS?

Finally I can't escape without saying something about my dear friends the bonobos. First of all what the hell are bonobos? Well in case you didn't know, bonobos and chimpanzees are our closest relatives in the animal kingdom, and bonobo's are, in fact, genetically closer to us than chimpanzees. If you don't know much about them you can find lots of information about bonobos at The Bonobo Conservation Initiative. You can also inform yourself there about the fact that BONOBOS ARE IN DANGER due to the fact that the last remaining populations are to be found in central Africa (in the Democratic Republic of the Congo) in an area of war and conflict. It is especially ironic that the last remaining members of a pacific and affectionate species should be endangered in this way by their human cousins.

I was first 'turned on' to Bonobos by the work of Richard Wrangham. An interesting interview with Wrangham can be found here, and a good introduction to the life and mores of bonobos can be found in this article from Scientific American by Frans de Waal (one of the first to seriously study bonobos).

The esential and obvious point is that bonobos are really a metaphor, a metaphor based above all in the fact that they resolve conflicts through affection, and not, as is all too often the case with their chimpanzee and human kin, through the use of tribal violence and aggression. Incidentally another thing humans have in common with chimps is territoriality, so the next time you hear someone slagging off a newcomer from some distant shore, just remember THIS BEHAVIOUR HAS BIOLOGICAL MORE THAN CULTURAL ORIGINS. Oh, we are so, so sophistocated. I'm still not decided whether this, following Nietzsche is 'human all too human', or following Eudald Carbonell, is rather 'human, not yet sufficiently human'. Be that as it may I canot help but share the hope of Norbert Elias that there is somewhere here a Civilizing Process is at work, or, as I prefer to call it, a domestication process.

Secular Stagnation Part 1 - Paul Krugman's Bicycling Problem

"What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese."
Paul Krugman - For Bonds, This Time is Different

Ever since Larry Summers gave his game-changing speech at last autumn's IMF research conference the back-and-forth flow of arguments about secular stagnation has been almost non-stop (indeed Larry himself now has a webpage dedicated to the topic). First to dive into the swimming pool after the sounding of the starting pistol was Paul Krugman, with a series of blogposts and NYT articles (here, here, here, here, here, here, and here).  These were followed/accompanied by a series of commentaries (both for and against), and then finally we got to one of the potential end points of the argument, the "negative natural interest rates for ever and ever" model produced by Gauti Eggertsson and Neil Mehrotra (here) - summarised by Krugman in his memorable "Stagnation Without End, Amen" post.   A fuller bibliography of major milestones in the secular stagnation issue can be found at the foot of this post, but I'm going to eat up most of the column space here looking at just one Krugmans arguments - the one contained in Demography and the Bicycle Effect - since in many ways in goes right to the nub of the issue.

The background to the argument (as originally, even if prematurely, explored by Alvin Hansen, Günar Myrdal and even John Maynard Keynes himself in the 1930s) is that the population dynamics set in motion by the industrial revolution of the late 18th century have reached a historic turning point. In the two centuries or so that have elapsed since what many term the modern growth era got going three related but distinct processes co-existed in time:

1/ positive trend population growth
2/ positive trend economic growth 
3/ steadily accelerating technical change

You could call these the "stylized facts" which characterize the modern growth era, but the secular tendency in two of them  is about to undergo a seismic shift. At some stage during the 21st century global population will peak, and then gradually start to decline, probably forever more. In fact in some countries (principally in Eastern Europe, but also Japan, Germany, Spain, Portugal, and Greece) population is already falling. All of Europe will likely head in this direction sometime in the 2020s, although there is considerable uncertainty still about the actual path dynamics of this process since in addition to birth rates immigration rates also play a part. At the present time some countries in Europe (the UK, Germany, Switzerland) are in receipt of large numbers of migrants annually, while others are losing working age population precisely to the aforementioned trio.

Hence the significance of the fact that Paul Krugman uses the expression "demographic transition" (for the first time to my knowledge) in the quote which opens this post. We are not talking here about some one-off problem (although often observers have spoken about Japan in just these terms), but a generalized phenomenon, a transition, something which eventually will affect all countries on the planet and our entire species. Previously people have tended to use the expression "demographic transition" to refer to the increase in the proportion of working age population and total population that accompanies the drop in fertility from high levels in less developed economies. The expression "demographic dividend" has often been used to describe the boost to economic activity this shift entails. Normally people assumed that this process would come to a halt around the 2.1tfr replacement level, but in one developed economy after another this hasn't happened, and those in which it has have been more the exception than the rule. So now reality pushes us towards a broadening in the definition of that transition towards acceptance of a later phase wherein populations age, and ultimately decline, a process which is greatly accelerated in those countries which have experienced long term very low fertility.

What Alvin Hansen and others started to think about in the 1930s was what the consequence would be for the second of the secular process which have characterized the modern growth era  (positive economic growth). What happens if populations (or better put working age populations) start to shrink? The kernel of their argument is summed up (here) by Paul Krugman as follows:

"To have more or less full employment, we need sufficient spending to make use of the economy’s potential. But one important component of spending, investment, is subject to the accelerator effect: the demand for new capital depends on the economy’s rate of growth, rather than the current level of output. So if growth slows due to a falloff in population growth, investment demand falls — potentially pushing the economy into a semi-permanent slump."

Pretty simple really, but isn't this just what Keynes says at the start of the General Theory, sometimes the simplest things are the hardest to see. Especially if our natural intellectual disposition leads us towards assuming the opposite. Apart from the theoretical simplicity, the idea is backed by plenty of empirical evidence. It has become clear in one country after another that there is a steady falling off of economic growth after the rate of working age population growth peaks and then starts to decline.

The Japan case (as shown above) is clear enough, but the start of this process is already observable in China, where working age population is currently peaking, and where growth rates have now fallen from the earlier double digit levels to ones in the 6%/7% range. People are even alarming themselves by saying we'd better get used to the idea of 5% growth, but in fact this easing in growth rates has little to do with a housing slowdown. Rather it is structural and long term, and Chinese growth rates will eventually fall to the level of Japanese ones (see my 2008 "Has China's Economic Growth Now Passed It's Peak"). Or does anyone seriously think China can keep going on the basis of attracting immigration?

What we are seeing then is that as working age population growth drops towards zero, so GDP growth weakens. The question is, as it turns negative will GDP growth (as opposed to GDP per capita growth) also turn negative. The answer is it depends. A simple approximation to a growth accounting model of the type used by IMF, OECD etc to calculate trend growth in an economy would be the following:

GDP growth = growth in working age population + TFP (total factor productivity) growth

Now, if working age population growth turns negative, then GDP growth can only be positive if productivity grows faster. One conclusion is very obvious here, handling the later stages of the demographic transition is all about managing the rate of working age population decline. This can be achieved to some extent via lengthening the working life, raising the participation rate, or having immigration. Even so, we may arrive at a point were GDP trend growth rates drop below zero. This situation is very near to being the case in Japan, Italy and Portugal, among others.

So we could be moving to a world were eventually both population and GDP decline. What about technology? Well this will need to be the subject of a separate post, but it is highly likely that the rate of technical  change will continue to accelerate, so we could have the peculiar situation that while GDP notional falls, and keeps falling, materially we feel a lot better off.

Well, after this excursus, let's go back to Paul Krugman's bicycling issue. Basically Paul has started to run into a problem that Claus Vistessen and I ran into on our Demography Matters blog. If the world is overpopulated, and there is a constant pressure on natural resources, then why are you economist types worried about falling populations? Wouldn't it be a positive for the planet?

"whenever I raise these points, I get questions from people who ask why I don’t regard slowing population growth as a good thing. After all, it means less pressure on resources, less environmental damage, and so on".

Now naturally at the moment in the US we are talking about slower population growth, but in Japan and parts of Europe - and eventually as we have seen probably everywhere else - population and working age population are already falling. But still, if slowing population growth is going to be a problem for an economy, then sure as hell falling population could be.

"What’s important to realize, then, is that slower population growth indeed could and should be a good thing — but that what passes for sound economic policy is all too likely to turn this potentially good development into a major problem. Why? Because under the current rules of the game, there’s a strong bicycle aspect to our economies: unless they’re moving forward sufficiently rapidly, they tend to fall over."

So what's the issue here? What he calls the current rules of the game (is it in our power to change them?)? Or the bicycle effect, which implies that we are perpetually "condemned to grow", since as Paul says, if our economies don't move forward fast enough they tend to fall over. This is what I intend to examine in the posts which will follow.

To close this introduction to my series on Secular Stagnation I would like to cite the end of the Keynes speech I mention above (here):

"A too rapidly declining population  would obviously involve many severe problems, and there are strong reasons......why in that event, or in the threat of that event, measures ought to be taken to prevent it. But a stationary, or slowly declining population may, if we exercise the necessary strength and wisdom, enable us to raise the standard of life to what it should be, whilst retaining those parts of our traditional life which we value the more now we see what happens to those who lose them"

"In the final summing up, therefore....... I only wish to warn you, that the chaining up of one devil may, if we are careless, only serve to loose another still fiercer and more intractable."

Conclusion

In this introduction we have seen that population decline may now well be inevitable, as may a turning negative of economic growth. This need not make us poorer, depending on how we:

a) develop technology
b) manage the process

As Paul Krugman warns, the current economic and financial "set up" implies the bicycle needs to constantly move forward, something which may prove more and more difficult to achieve. We therefore need as Keynes said, to exercise the necessary strength and wisdom. That is to say we need to adapt the current rules of the game to the new reality, and learn to manage the process. Is simply blowing bubbles the best way to handle this sort of epochal change? That is the topic we will turn to next.

Bibliography

 E. Cary Brown: Alvin H. Hansen's Contributions To Business Cycle Analyisis, 1989 (here)

Willem H Buiter: The Simple Analytics of Helicopter Money, Why It Always Works, Cepr 2014 (here)
Willem H Buiter, Ebrahim Rahbari & Joe Seydl: Secular Stagnation: Only If We Ask For It, Citi Global Economics View January 2014

Gauti Eggertsson & Neil Mehrotra: A Model of Secular Stagnation, 2014 (here)

Alvin Hansen (1939), “Economic progress and declining population growth,” American Economic Review.

John Maynard Keynes: Some Economic Consequences of a Declining Population, Galton Lecture, 1937 (here)

Paul Krugman: Inflation Targets Reconsidered, Sintra May 2014 (here)

Paul Krugman: For Bonds, This Time is Different, NYT 2 June 2014 (here)
Paul Krugman: Demography and the Bicycle Effect, NYT 19 May 2014 (here)
Paul Krugman: Secular Stagnation in the Euro Area, NYT 17 May 2014 (here)
Paul Krugman: Stagnation Without End, Amen (Wonkish), NYT 9 April 2014 (here)
Paul Krugman: Monetary and Fiscal Implications of Secular Stagnation, NYT 19 November 2013 (here)
Paul Krugman: A Permanent Slump?, NYT 17 November 2013 (here)
Paul Krugman: Secular Stagnation, Coalmines, Bubbles, and Larry Summers, NYT 16 November 2013 (here)


Paul Krugman: Monetary Policy In A Liquidity Trap NYT 11 April 2013 (here)
Paul Krugman: The Japan Story, NYT 5 Feb 2013 (here)
Paul Krugman: Japanese Relative Performance, NYT 9 February 2013 (here)

Paul Krugman: Japan: What Went Wrong? June 1998 (available in Japan section here)
Paul Krugman: Further Notes On Japan's Liquidity Trap, June 1998 (available in Japan section here)
Paul Krugman: It's Baaack: Japan's Slump and the Return of the Liquidity Trap, Brookings Papers on Economic Activity, 2:1998 (here)

Gunnar Myrdal: The Effects of Population Decline. Godkin Lectures, Lecture VI, 1938 (here)


Masaaki Shirakawa (2014):Is inflation (or deflation) “always and everywhere” a monetary phenomenon?, BIS (here)
Masaaki Shirakawa (2012): Demographic Changes and Macroeconomic Performance, Bank of Japan  (here)

Larry Summers (2014):On secular stagnation (here).

Timothy Taylor: Secular Stagnation: Back To Alvin Hansen, 2013 (here)