Will Wilkinson has been schooling the internets about
division properly controlling for inflation when figuring real incomes, eliciting bored nods from those that have actually read Broda/Weinstein/Romalis (no links… too boring to write a post about) and confused indignation from those that want to talk about everything except real income inequality. Anyway, this prompted me to take another look at Broda’s (the intellectual ring master of this set of papers) list of working papers.
I found this interesting paper. Broda and Weinstein do the same sort of analysis for Japan that Broda/Romalis did for poor people in the US: he generates price indices (hah!) controlling for substitution and quality issues (but leaving out the fancy math to account for new products). Japan doesn’t make these corrections when calculating its CPI and so the authors just replicate the changes the BLS made in calculating the US’s CPI after the Boskin report but for Japan. They find that deflation was understated:
Ignoring the factoid that “deflation is bad”, this actually means growth in real consumption per person in Japan was higher than previously thought. Instead of growing at a rate 2% slower than the US, using the uncorrected Japanese official statistics, real consumption per capita has been growing at a rate only 0.7% slower than the US.
Here’s the per capita GDP for the G8 countries (relative to the USA):
You can take two lessons from this chart.
1) Japan hasn’t had bad monetary policy relative to, say, the continental European countries
2) Monetary policy just doesn’t matter in the long-run
Also, the more you stare at these real GDP per capita charts, the more you think the 1980s in Japan was an outlier (aka bubble).
I haven’t read John Taylor’s newest working paper yet, but its about the Fed’s start-stop policy stance under the ancien régime. The story he’s riffing on in that paper is pretty standard. There was high and variable inflation under the old monetary policy regime because the Fed didn’t fully accept its role in determining inflation. It would have moments of commitment to fighting unemployment or the output gap and so it would loosen policy. When inflation came, they’d commit to lowering inflation. They’d tighten policy long enough to induce a contraction in output, but not long enough to re-anchor inflation expectations at lower rates. Rinse and repeat. Stagflation and uncertainty.
Then Volker came and saved the day!
The Great Inflation is the time before 1985 and the Great Moderation is the time after. I’ve labeled the regime average and standard deviations.
I’m not interested in debating the reasons for the Great Moderation starting in the mid-80s, but at least one reason for the decrease in volatility in both output and inflation is that the policy stance of the Fed changed. It gained credibility as an inflation stabilizer. It was going to set an (implicit) inflation target and do what it needed to hit it.
Compare the 25 years before 1985 to the 25 years after. The old regime saw 5 recession, the new regime only three (and two of those were pretty mild). As you can see in the graph (which includes the most recent recession), volatility of output decreased. Similarly, volatility of inflation and consumption also decreased. As Bernanke pointed out in his Great Moderation speech, these trends are evident in other countries as well.
The thing that changed was the adoption of a confident and credible policy stance by Central Banks around the world. They woke up to their power to control inflation. And Bernanke was trying to wake up the Bank of Japan to its power as an effective manipulator of inflation; to build their confidence. Central Banks also learned the power of credibility. And this is why Bernanke responded to Delong’s question the way he did.
In November, Japanese unemployment was at 5.2%.
Many folks are comparing the Fed’s action today to those of the Bank of Japan in the “lost decade” (e.g.). I can’t quite peg down the comparison being made by Sumner, but Yglesias articulated it most clearly:
[Bernanke] knows that unemployment is a problem now and he believes that he could fight it, but that fighting it more aggressively would elevate the risk of inflation in the future and he thinks that reducing the possibility of future inflation is more important than reducing the reality of current unemployment. I think that’s nuts. But it’s an attitude the Bank of Japan has consistently maintained since the 1990s.
Here’s the employment to population ratio:
Its safe to say employment wasn’t a problem in the “lost decade” and there wasn’t too much weight put on inflation relative to unemployment.
This one needs a caption: There was a sign describing this construction project as building a fish spawning pathway. As you can see, they’re tearing out the old fish spawning pathway to build this new one. I should mention that the government agency that funds such projects had its prefecture headquarters across the street from the construction.
We were in Japan for 21 days and I’d say, besides the usual “Japanese” stuff, the thing that struck me most was the number and size of infrastructure projects, e.g. bridges, dams, railroads, etc.
We got lost driving in the middle of nowhere one day on a one lane road winding through the mountains. In 30 or so kilometers we drove through two or three villages with a total population of at most 100. Along that route there were three major infrastructure projects — realigning the road, erosion control, a new bridge — that must of had budgets in the tens of millions.
In other news, the Japanese government just approved a $132,000,000,000 stimulus package.
For the first two years of grad school, I TA’d in the Anthropology department for a professor that taught Japanese culture. While I had always been interested in Japan — my original plan in grad school was to study Japanese economic history — I was literally a day’s reading ahead of my students.
Anyway, the readings would drive me nuts. Each book opens with a preface or introduction talking about how important it is to study such and such minority group; that to truly understand Japan, we need to be able to empathize with the Monks on Mt. Haguro or whatever. It took me three or four books to realize that the authors wouldn’t actually support this claim in any way. Instead the book would be 200-300 pages of pure description with an off the cuff comment about the dominant culture or American cultural hegemony thrown in.
Bothered by this, I went to the professor and asked her about normative Anthropology. I introduced the topic by asking something like, “On what basis do Anthropologist compare one culture or sub-culture against another? How do they know that minority cultures are in some way better than dominate cultures?”
I don’t remember her exact reply, but it was something like, “there is no normative Anthropology, there’s only description.” This seemed implausible given the tone of the readings for the course, but I let it pass. Every discipline has its delusions (*ahem* rationality *ahem*); who am I to burst Anthropology’s bubble.
Well, gnxp, who often criticizes Anthropology, out of love I’m sure, says there is no positive Anthropology either. Actually, I would say, there are theories in Anthropology, they’re just not written down. They swim around in Anthropologists heads, refracting observations into descriptions.
UPDATE: Just remembered this critique of Japanese Anthropology I wrote up a couple years ago.
This, I think, is a surprise.