Japan's easy money / re-flate plan showing positive signs

Cheaper yen means higher sales expectations for Japanese manufactures in general.  In fact, Japanese automakers are especially optimistic because a cheaper yen will reduce the cost of their autos in terms of other currencies and help them to become much more competitive in the global market.

Last December, Japan’s prime minister Shinzo Abe promised to weaken the currency and create more government stimulus in attempt to fight deflation and re-flate Japan’s economy.  The new BOJ leadership, installed by Mr Abe, are following through – announcing plans to double the amount of yen in circulation.  Although, this plan is in the very early stages, given a 20% plunge against the dollar, and rosy forecasts from the Japanese automakers, there are some positive signs already that the plan may be working.  Furthermore, the exchange rate changes will have an even greater impact on Japanese manufactures like Mazda, who make majority of their products in Japan.  Mazda’s shares are up 90% this year!  Is this the new world of cheap money or should we return to fixed exchange rates?

Debating measurement

For a long time, economists have used general principles and assumptions like utility maximization, self-interest, and GDP, among others.  These assumptions and indicators help everyone from investor to politicians make important decisions that affect everyone around the world; but do they really reflect individuals underlying preferences and general economic performance?

Intuitively, we may question some of these measures and their accuracy, and there is emerging evidence that current measures do, in fact, leave out some important factors.  A recent article in the economist discusses several of these issues, including the assumptions of an individual’s fixed preferences, which are taken as a given.  Recent research in the field of cognitive science has shown people hold on to items well past the point at which it “makes sense” to sell.  They have also found people dislike losing something more than they like gaining the same amount; a finding such as this may have implications for future tax policy.

Another article continues the discussion about GDP vs. a county’s wealth and wellbeing.  GDP calculations only measure dollars spent but not what there spent on, i.e. things that either are beneficial or detrimental to growth and prosperity.  Unpaid and open source goods and services are not calculated either; even though improving an open source code will not create a monetary exchange, it does improve the overall utility of those who use the product.

Amartya Sen, a Nobel laureate in economics at Harvard, had this to say about GDP:

“We may be in the early stages in the United States of recognizing that the gross domestic product is very misleading and something must be done to get better measures of well-being.”

While there are problems with our current measures, they do help us make decisions about policy and investment, and they are the best indicators we have.  However, as domestic and international economies become more complex and less traditional, our current measure may become less and less effective, in which case new metrics must be created.

Cash Sent Home by Immigrants Remains Stagnant

heres an interesting article in the WSJ about how cash sent home by immigrants from the United States is much lower than expected

http://online.wsj.com/article/SB10001424127887323798104578451082562984810.html?mod=e2tw

Why so little demand for protectionism?

This is a question that Paul Krugman asks this week, and Tyler Cowen has some thoughts on it. What do you all think?

Blog-worthy topic: factory collapse in Bangladesh

Last week, a textile factory in Dhaka, Bangladesh, collapsed, killing hundreds of workers. A few days later an economics/business blogger at Slate Magazine, Matthew Yglesias, wrote that

Bangladesh may or may not need tougher workplace safety rules, but it's entirely appropriate for Bangladesh to have different—and, indeed, lower—workplace safety standards than the United States.
...
The reason is that while having a safe job is good, money is also good.
...
Safety rules that are appropriate for the United States would be unnecessarily immiserating in much poorer Bangladesh.

Yglesias backtracked some of his comments later, but this poses some interesting questions nevertheless. We addressed some of these issues, for instance regulatory races to the bottom, earlier in class. But there are a number of interesting questions worth asking:

• What can political economy tell us about why this disaster happened?
• What can it tell us about why regulations are the way they are?
• What can it tell us about the gap between laws and regulations on the one side and practice (the condition of the building) on the other?
• What can a political economy approach tell us about how such tragedies might be avoided in the future?

I'm looking forward to hopefully a few posts this week that address these or other questions related to this event.

Austerity vs Growth

Greece’s struggling economy was back in the spotlight this weekend.  According to BBC News, “The Greek parliament has passed a bill which will see 15,000 state employees lose their jobs by the end of next year.”  But that’s not all, by 2015, 150,000 public employees are expected to lose their jobs.  How’s that for austerity?  Not surprisingly, the passage of the law, which will continue to swell Greece’s already high unemployment rate of 27%, was not well received and the people took to the streets in protest. 

Interestingly, also over the weekend, Business Insider published a story outlining how support for austerity in the United States may be diminishing in light of “the very public demolition of a sacred text of the austerity movement, the 2010 paper by a pair of Harvard professors arguing that once debt exceeds 90 percent of a country’s gross domestic product, it crushes economic growth.”  As we discussed in class, the validity of the Reignhart-Rogoff study has been called into question due to a coding error in their spreadsheet that led to some data being omitted.  Their data, according to The Economist, shows a steep decline in growth, from 3% to -0.1%, at 90% GDP.  But a new paper, published by Herndon, Ash and Pollin of the University of Massachusetts, Amherst stated that with the inclusion of the omitted data the decline in growth is in fact 2.2% and not the reported –0.1%.  Business Insider asserts that these findings have brought many in Washington to “The realization that growth is how you close the deficit and that austerity (because it saps growth) is counterproductive.”

In Greece’s case, it doesn’t matter.  The moves toward austerity are not self-imposed.  According to BBC News the recently passed law and other austerity measures are a condition of a structural adjustment loan that is dispersed by IMF in tranches.  If Greece hopes to receive future tranches of the loan, they have no choice but to continue to move toward austerity.  But it still begs the question: Is austerity the right move for Greece? 

Remittances--the "New Foreign Aid?"

Recent data suggests that remittances to Africa have added up to far more than Western donors send in foreign aid.  Not only are Africans sending more money home than Western donors are giving, the money is also thought to be much more effective. 

According to Adams Bodomo, a professor at the University of Hong Kong, the remittances to Africa have been “more efficient and better targeted....it’s more effective because it’s better informed.  An African family member abroad knows what is needed...only a small amount of ‘traditional aid’ ends up with the people who need it.”  

This can be connected with our in-class discussion about one of the major problems with bilateral aid: governments don’t always know what the people need.

Because of the vast influx of remittances from country to country, efforts have been made to facilitate this process.  For example the AIR project (African Institute for Remittances), commits itself to “us[ing] remittances as development tools for poverty reduction.”  In doing this, they have dedicated resources to performing more research on remittance flows and policy change in order to develop ways in which remittances can effectively contribute to development in Africa. 

Others are actually capitalizing on remittance flows.  A company called Xoom has created a convenient service to simplify the wiring of money from one country.  They do this by allowing the customer to use their bank accounts and credit cards instead of hassling with cash.  And all this for a small fee of around $5 per transaction.  Because of the immense number of remittances that are being transferred around the world, the company is sure to make a hefty profit in the billions. 

However, some claim that remittances aren't all they’re cracked up to be.  A study by Chami et al. argues that, contrary to popular belief, remittances are not necessarily correlated with economic growth.  Part of the problem, they say, is the Dutch disease, or the idea that an increase in remittance flow will appreciate the country’s exchange rate, thus distorting the market.  Dutch disease often leads to a decrease in price competitiveness for the remittance-receiving country.    

Though not everyone agrees on the effectiveness of remittances, it will be interesting to read upcoming research on whether or not remittances can become the “new foreign aid,” or, if in the long run, remittances are problematic. 

What policy recommendations could be useful to implement, given the popularity of remittances?