The Unassuming Economist

From Noah Smith:

“This is the fifth and final post in my series of posts about Japan. In the first post, I lamented Japan’s low-ish living standards and called for a cash-based welfare policy. In the second, I suggested some industrial policies that Japan might use to boost growth. In the third, I discussed Japan’s stagnant corporate culture and how to fix it. And in the fourth, I reviewed two books on Japanese pop culture and how it conquered the world even as the country’s economy languished.

I’ve been coming to Japan pretty regularly for 20 years now. But only this time did it really hit me how different this country feels from the place I first visited back in 2002. Not just all the shops and buildings — in fact, the building boom in big cities, though real, might be the least of the changes. Nor is it just the residue of the pandemic. Attitudes and lifestyles and culture are all different.

When I thought carefully about it, I realized that the changes mostly boiled down to three big things: The expansion of the labor force, the rise of immigration and diversity, and the country’s willingness to assert itself in the international security sphere. And although big changes like these are never the work of just one person, all of them can be traced directly to policy shifts under Japan’s longest-serving postwar Prime Minister, Abe Shinzo.

When Abe took over as PM in late 2012 (his second and much more consequential stint in that job), he inherited a country in deep trouble. It had been over two decades since the bursting of the famous land and stock bubbles, and although the country’s growth revived a bit in the 00s, it didn’t recover to previous levels. A rapidly aging and shrinking population, stagnant productivity growth, and the loss of global market share by many of Japan’s flagship companies all weighed heavily. And then in 2011, disaster struck — a massive tsunami that killed around 16,000 people and destroyed a nuclear plant, irradiating a city and leading to a popular backlash against nuclear electricity.

Abe set himself the task of turning this ship around, with a bold economic reform package called “Abenomics”, as well as some stealthier measures that may ultimately prove even more consequential. But on top of that, Abe set himself another task — the task of shedding Japan’s post-WW2 pacifism and turning it back into a “normal country” with a place in the global security framework.

To many in Japan’s expat press (which far too many Americans rely on for their news about the country), this latter goal immediately pegged Abe as a fascist. But in fact, Abe is a civic nationalist — a guy who wants to make his country stronger in any way he can. And the things Abe did to make Japan stronger — encouraging the hiring of more women, opening the country up to more immigration — often made it more liberal in the process.”

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From Conversable Economist:

“Economic development typically involves a group of transitions, like the shift from agriculture to manufacturing to services. The Winter 2022 issue of the Journal of Economic Perspectives (where I work as Managing Editor) includes five papers on aspects of development-related transitions in the nations of Africa. Here are some of the big questions:

Does Africa have a manufacturing path to economic development?

In “Labor Productivity Growth and Industrialization in Africa,” Margaret McMillan and Albert Zeufack investigate Africa’s manufacturing sector. As they point out, a shift from agriculture to low-skilled manufacturing to high-skilled manufacturing to services has been a standard pattern of economic development for countries around the world. However, there are concerns that this path may not work well in the 21st century, because automated production keeps getting cheaper and thus reducing the opportunities for low-skilled jobs.

Some of the signs for industrialization in Africa are encouraging. The most comprehensive information about manufacturing employment in Africa only covers 18 countries, but based on those data, manufacturing employment in Africa’s lowand middle-income countries increased from 6 million to more than 20 million from 2000 to 2018, raising the share of employment in manufacturing from 7.2 percent to 8.4 percent (Kruse et al. 2021). In comparison, the 1990s saw zero growth in Africa’s manufacturing employment. Manufacturing exports from African nations have also grown at an annual average of 9.5 percent per year (Signé 2018). However, while employment and value-added shares of manufacturing in Africa are rising, both remain very low in comparison to the rest of the world …

But when the authors dig into the data, they find that the growth in manufacturing employment in nations of Africa has been primarily happening in small firms with less than 10 employees. Conversely, the growth in productivity in manufacturing in Africa is primarily in large firms, which aren’t adding many jobs. Many of Africa’s large manufacturing firms are in one way or another involves in processing of natural resources, which has been becoming an ever-more automation-intensive process.

Thus, the broad challenge for Africa’s manufacturing sector is for the larger firms to build linkages backward and forward into other African-based manufacturing firms, and for at least some of the small firms to make productivity gains and grow in size, so that they can become an “in-between” sector of manufacturing. One promising change is the African Continental Free Trade Area, started in 2018, which may offer possibilities for African-based manufacturing firms to sell and compete within a larger and more unified market. In addition, there are still some industries like certain kinds of textile manufacturing where low-wage labor can offer a comparative advantage in global production.”

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From a new working paper by David Ratner and Jae Sim:

“Is the Phillips curve dead? If so, who killed it? Conventional wisdom has it that the sound monetary policy since the 1980s not only conquered the Great Inflation, but also buried the Phillips curve itself. This paper provides an alternative explanation: labor market policies that have eroded worker bargaining power might have been the source of the demise of the Phillips curve. We develop what we call the “Kaleckian Phillips curve”, the slope of which is determined by the bargaining power of trade unions. We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence.”

From a paper by Giulia Giupponi, Camille Landais, and Alice Lapeyre in the Journal of Economic Perspectives:

“What is the most efficient way to respond to recessions in the labor market? To this question, policymakers on the two sides of the pond gave diametrically opposed answers during the COVID-19 crisis. In the United States, the focus was on insuring workers by increasing the generosity of unemployment insurance. In Europe, instead, policies were concentrated on saving jobs, with the expansion of short-time work programs to subsidize labor hoarding. Who got it right? In this article, we show that far from being substitutes, unemployment insurance and short-time work exhibit strong complementarities. They provide insurance to different types of workers and against different types of shocks. Short-time work can be effective at reducing socially costly layoffs against large temporary shocks, but it is less effective against more persistent shocks that require reallocation across firms and sectors. We conclude that short-time work is an important addition to the labor market policy-toolkit during recessions, to be used alongside unemployment insurance.”

From VoxEU post by Leandro Prados de la Escosura:

“GDP per capita is a commonly used, but imperfect, proxy for human wellbeing. This column analyses the relationship between life expectancy at birth and per capita income over the past 150 years. It shows that life expectancy and per capita income growth behaved differently in terms of trends and distribution over the period. The relationship was particularly weak during the period 1914 to 1950. Separately, medical improvements and the diffusion of medical knowledge have been crucial drivers of life expectancy improvements across the world.

Human wellbeing is increasingly viewed as a multidimensional phenomenon, of which income is only one facet (Stiglitz et al. 2009, OECD 2011, Proto and Rustichini 2014). However, economists continue to rely on GDP to gauge wellbeing (Oulton 2012). A way to assess GDP as a comprehensive measure of wellbeing is by looking beyond per capita income. In a recent paper, I focus on life expectancy at birth – a synthetic measure of health – and its relationship with per capita income over the past 150 years (Prados de la Escosura 2022).

An important caveat is that, when assessing life expectancy over time and across countries, we need to bear in mind that original values of life expectancy are bounded and that life quality improves with the quantity of years lived (Prados de la Escosura 2021). A solution is provided by Kakwani’s (1993) non-linear transformation in which an increase in life expectancy at birth at a higher level implies a greater achievement than would have been the case had it occurred at a lower level.

Trends in life expectancy and per capita income

Life expectancy (expressed as a Kakwani index) exhibits slightly faster long-run growth than per capita GDP. A closer look, however, reveals an apparent development puzzle: economic growth and life expectancy gains do not match each other (Table 1). During the globalisation backlash between 1914 and 1950, real per capita GDP growth slowed down as world commodity and factor markets disintegrated, while life expectancy experienced major gains across the board. But, from 1950 onwards, life expectancy achieved, on average, smaller gains to GDP per head. Thus, world average life expectancy exhibited a major advance across the board before 1950, earlier than usually presumed and at odds with the view that that global health only improved after WWII, when new drugs from the West reached the rest of the world (Acemoglu and Johnson 2007, Klasing and Milionis 2020).”

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