Is it a Japan tragedy?

Early on Tuesday morning, read this interesting (and sad, to an extent) piece in the Nikkei Asia Review on Japan’s scenic golf courses in rural parts. But, the story is interspersed with narratives of dwindling populations and innovation.

Sample this:

The town of Nemuro lost its only obstetrician last year since its birthrate had fallen so low. Its fishing industry may be strong — global tennis star Naomi Osaka’s grandfather once served as chairman of the cooperative — but nobody new is moving there.

The lament is not particularly constructive but I doubt if any reconstruction is possible:

Somehow Japan has lost its will to innovate, to develop new technologies and to compete with the rest of the world. A pervasive conservatism has infected much of working and social life, leaving regional Japan a museum-like landscape of rural beauty and Asian culture. Buddhist temples of astonishing grace, Shinto shrines of perfect simplicity, small fields of rice or vegetables, and orchards of flawless fruit decorate the countryside. Yet behind it all are dying towns, shuttered shops, and unending road projects or concrete barriers piled up along island shores to protect against typhoons.

Abenomics works to preserve the tranquil beauty of rural Japan and sustain its culture. but what is going to save rural Japan from the hollowing out that you can see, hear and feel? The digital economy is barely discernible here, stunted by too many large corporations whose overweening presence in national policymaking makes the startup sector a minor sideshow instead of a pathway to the future.

Demographics are long-term and slow-moving trends in motion. They have impact on innovation and investments, etc.

Somehow, I feel that Buddhist Japan will and is handling its aging better than the Christian West would do or is doing. The swing towards relative and growing intolerance of strangers amidst dwindling economic prospects could be traced not just to a financial crisis but also due to demographic transition towards a greying population in the West.

The crisis pulled the economic rug from under the feet of millennials. More debt in America and youth unemployment in Europe. The older generation is reacting to the economic loss (networth wiped out by the decline in asset prices and having to work into old age) and the social aspects of globalisation.

Each and everyone of us who have crossed 50 can reflect on how their own attitudes towards many things have shifted and are shifting with age, slowly, imperceptibly but surely.

At a policy level, to counter this with even more forced immigration is a policy disaster which is what ‘liberals’ would want governments to do. One has to accept the costs of the economic crisis and demographic trends and work with them rather than seek to overturn the consequences forcefully. That ends up feeding the resentment.

‘Has Asian dominance arrived’ and other links

This Bloomberg story tells us that global debt rose ‘only’ USD3.3trn in 2018 to around USD243trn, about three times the global GDP. If you want to know the background to this news, the link is there in the Bloomberg news-story. It is a research note by the Institute of International Finance.

Despite that, President Trump is not happy with Fed Chairman Jerome Powell. He says he is ‘stuck’ with Powell. This is quite wrong and dangerous. I am surprised at US dollar’s resilience in the face of such gibberish.

According to ‘What we are seeing’ (Edition: 22.03.2019), for the first time, globally, the number of 65-year olds has exceeded the number of 5-year olds.

One has to do more detailed work on the claim that Asia has become the world’s largest economic bloc and that its GDP now exceeds the combined GDP of the rest of the world, in PPP $. My simple response is ‘So, what?’. Of course, I could be very wrong here but the obituatry of Western dominance is being written too prematurely. Asia is at very high risk of internecine warfare and the West has a good track record of ‘divide and rule’. I would like to recall my MINT column from nearly four years ago that the 21st century would belong to the West or to nobody.

This blog post from ‘Bank Underground’ (Bank of England blog) says that rising interest rates increase labour share of GDP because productivity might fall faster than wages do. Or, we can add that capital’s share declines faster in an environment of rising rates due to correction in asset prices. Very interesting and important empirical evidence in this. It shows that a reflexive opposition to higher interest rates by the likes of, say, the Economic Policy Institute is wrong.

Wages and profits in India

I had not realised that I last blogged on 31st January. It is indeed becoming difficult to dedicate time to blogging. Reading is happening somehow, even if not on the same scale as before. But, the ‘dereliction’ with respect to blogging is becoming more glaring. In any case, here goes.

One of my students in the class I am teaching sent me this useful link. Wages and profits are going in the other direction in India – i.e, good direction. Profit share of GDP has fallen but real wage growth has been brisk at 5.5% during the decade 2008-17. This raises doubts on whether some of the unemployment statistics touted by political opposition are as suspect as some of the government’s macro-economic numbers are.

The real wage growth numbers come out of the ILO global wage report which is available here. I am yet to go through it. The Executive Summary of the report is here. The ILO report was published in November 2018. Nikkei Asia Review had published a report on this already in November.

70% top marginal tax rate and other links for the weekend

Alexandria Ocasio-Cortez favours 70% marginal top tax rate to pay for climate change. Something to think about?

When Wall Street firms behave in this fashion, Alexandira Ocasio-Cortez’ proposal does not seem so outlandish or outrageous. The story is about Goldman Sachs with 1MdB in Malaysia and Credit Suisse in Mozambique:

According to the International Monetary Fund, the loans Credit Suisse and others arranged effectively doubled the cost of servicing the country’s debt. …

Mozambique defaulted and then restructured its debt. Last year, the country’s economy was due to grow at the slowest rate in 18 years — a burden that its citizens will be left to bear. 

Whatever the outcome of these cases — no doubt, risk controls will be tightened and new standards set — the bitter taste of these experiments with market capitalism will linger. [Link]

On climate change, these lines should strike fear in Indian hearts. It is about Yemen:

“The civil war in Yemen seems to be a politically-motivated competition for power among many actors with varying motives,” he wrote in his paper. “But underlying all other motives is the ongoing need by all parties to secure access to the diminishing water supply.” [Link]

Staying in the desert, let us read Noah Smith’s article on Saudi Arabia. The drastic fall in the fertility rate in the country is remarkable.

This FT article on how investors are pushing companies to look at all stakeholders’ welfare rather than maximise profits as Milton Friedman advised in 1970 was not impressive because it did not have any other name than Larry Fink, as the investor doing it. In other words, institutional investors are not exactly forcing companies to look at a bigger picture than shareholders, much as the FT writer would like to believe or have us believe.

But, it was good to see that the now-departed chairman and founder of Southwest Airlines walked his talk on profits and employee welfare too. Remarkable story, written well by Joe Nocera.

“Should a self-driving car kill the baby or the grandma? Depends on where you’re from.” That is the header of an article in MIT Technology Review. The article presents results of a voluntary survey in which millions participated from different countries. Responses varied from country to country.

This is a re-statement of the old trolley problem (I did not know about it although I had seen variants of it) in the era of artificial intelligence and self-driving cars.

Greg Ip begins the New Year with an optimistic take on how the world is getting relentlessly better. It is true but it is also true that it is a partial analysis.

Greg Ip has a more penetrating take on the US-China trade dispute. The observations by Senator Dan Sullivan, cited in the article, are pertinent:

Dan Sullivan, a Republican senator from Alaska, personifies these broader forces reshaping the U.S. approach to the world. Mr. Sullivan has followed the rise of China for decades—as a Marine sent to the Taiwan Strait in 1996 in a response to Chinese provocations; as an official in George W. Bush’s National Security Council and State Department; and for a time as Alaska’s commissioner of natural resources.

As companies moving goods from China to the U.S. face heftier tariffs, some have developed creative techniques to avoid paying them. The WSJ’s Steven Russolillo takes to the field to explain how some businesses sidestep import duties.

When Mr. Xi visited the U.S. in 2015, Mr. Sullivan urged his colleagues to pay more attention to China’s rise. On the Senate floor, he quoted the political scientist Graham Allison: “War between the U.S. and China is more likely than recognized at the moment.”

Last spring, Mr. Sullivan went to China and met officials including Vice President Wang Qishan. They seemed to think tensions with the U.S. will fade after Mr. Trump leaves the scene, Mr. Sullivan recalled.

“I just said, ‘You are completely misreading this.’” The mistrust, he told them, is bipartisan, and will outlast Mr. Trump.

The Guardian has an unsurprisingly condescending piece on the new Brazilian President. I think he is interesting and India needs to build its ties with him closely before China does.

This NYT profile article on Bob Lightheizer is a good one. More strength to him.

A colleague of mine pointed to this CATO Institute policy analysis titled, ‘Nostalgia and the Liberal Order’. Yet to read it. I like the sound of it, though. It was published in June 2018.

Roach and I agree

I have often found myself in disagreement with Stephen Roach in his cheer-leading of China. After I read Martin Pillsbury’s ‘100-year marathon’, I am all the more convinced that, as a Sinophile, Roach got China wrong. Never mind. I hope he is right on the Federal Reserve and he is right about this too:

The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values. [Link]

Similarly, I have had plenty to disagree with Martin Wolf too. On this one, especially with the header, he is right. The future might not belong to China. In fact, while I liked Martin Pillsbury’s book, I must concede that James Kynge gave us an excellent psychoanalysis of China (without really intending to do so) that accords with what Martin Pillsbury wrote some nine years later. Kynge’s ‘China shakes the world’ (published in 2006, I think) showed us clearly that we are not dealing with a normal nation.

For them, cheating, hacking, stealing technology secrets, redrawing boundaries unilaterally, accessing markets around the world but keeping theirs closed are all part of the statecraft and fair game. The only way to deal with them is to play the game ‘by their rules’.

That is why, this piece by Raghuram Rajan in FT, published nearly a month ago gets it somewhat muddled and wrong. The last paragraph begins correctly saying that America’s tough negotiating tactics brought China to the table. Then, why should America sound conciliatory now? What does it have to show for its toughness in terms of a more open China market?

Finally, I understand that Jeff Bezos and Bill Gates do dishes in their homes. As long as I lived in America and in Europe, I did them too. But, I did not become a billionnaire. Looks like doing dishes is neither a necessary nor a sufficient condition for becoming a billionnaire. H..mmm. What to do? I tried.

Bangladesh and Maldives

With Rahul Gandhi occupying the front pages with his exemplary ‘prudence’ on farm loan waivers, this news-story did not get the attention it deserved – India’s offer of assistance to Maldives. Well done.

While I am rather pleased and impressed with the progress that Bangladesh has made and I am very happy for them, I do detect signs of hubris when the Prime Minister talks of achieving 9% GDP growth, etc. I am sceptical of such claims. It is still largely reliant on garment exports. Impressive that the per capita income has risen to USD1750. But, the economy is not diversified enough to be able to achieve and sustain a growth rate of 9% per annum. Plus, the loans to China should cause concern.

More importantly, it is good for her to realise that the current status did not arrive due to a pre-meditated plan. That is how it usually is. The end of MFA, the rise of costs in China, India’s inability to up its game on textile exports, etc., contributed. Understated confidence would do no harm at all. That said, a good story to read. Happy for them.

Cannot learn, won’t learn

Robin Harding of FT wrote an article on why Japan should not withdraw its monetary policy stimulus and listed instances in which the Japanese economy went into recession when the stimulus was withdrawn ‘prematurely’. May be, true. But, if it is always the case that one has to increase the intensity of the treatment, when would one consider the possibility that the treatment was wrong, in the first place?

Is it possible to keep an economy on life support all the time? What are the costs of doing so? A reader had sent a good set of comments on the Harding column:

Japan’s central bank now owns bonds and shares equivalent to a full year of national economic output. Real interest rates have been negative for years, something not seen in 5,000 years of recorded debt history. The long-term effects of such monetary policies are quite simply unknown, but the asset bubble created by QE has been nothing short of obscene.

The results on Japan’s domestic economy have been, at best, unimpressive, and at worst, an absolute disaster for the country’s competitiveness. Why bother to adhere to good corporate governance principles if the government is going to prop up your stock price anyway? Or why bother to make money if you can borrow to pay back interests? Mr. Harding is actually calling for more of this madness. What has the world come to? The end of capitalism is in sight.

This comment correctly focus on many unintended consequences of policy decisions and actions.