US economy

World growth over the past three years has fallen below its five-year rate and below its very long-term one, as chart one shows. It seems therefore reasonable to assume that we are experiencing what is at least a cyclical downturn. But the chart also shows that the trend since 1980 or 1990 seems to be a rising rather than a falling one. It doesn’t therefore seem to me reasonable to assume that the world is about to experience of the sort of longer -term slowdown that can reasonably be described as secular stagnation, though of course this may happen. Read more

On current trends, Japan’s gross domestic product will grow faster than that of the US over the next 10 years. As Japan’s population is expected to fall and that of the US to rise, the relative improvement in living standards will be even greater. This will be denied by many economists and journalists, for whom Japan’s relative weakness is an item of faith.

The habit of looking at the change in GDP and assuming that this provides a good guide to the success of an economy is to blame for the prevalent view. It is a deeply embedded and near-automatic assumption that has blinded commentators to Japan’s relative economic success. In the recent past, demography has posed a far greater challenge for Japan than for other G5 countries but that has now changed. If, in other respects, Japan can maintain its past progress over the next 10 years, then the improvement in its demographic balance will boost the growth of its GDP and its living standards. Read more

Conventional wisdom, those wrongheaded comments that sound authoritative, is flourishing. Much comes from seeing gross domestic product as the measure of economic success. As Japan’s GDP has grown slowly this has led the unreflective to assume that the country’s performance has been poor. As readers of this blog will know, this seems to me to be nonsense. GDP is a fair measure of a country’s economic power, but changes in GDP per head provide a better guide to the progress of a country’s welfare and GDP per person of working age is a better guide to the success of economic policy. The number of Japanese aged 15 to 64 has been falling and this has limited the country’s ability to expand its GDP. If the changes in GDP per person in major developed countries are compared, Japan stands out for its success rather than its failure.

I am by no means alone in pointing this out; the former Bank of Japan governor, Masaaki Shirakawa has also regularly done so. Judging, however, by comments in the financial press we seem to have been talking to brick walls. The damage done from seeing GDP as a valid measure of economic success has been magnified by an association that is commonly made between low growth and deflation. It is widely believed that Japan’s economy has performed poorly and that this has been caused by deflation. It would be more reasonable, though not much more, to praise deflation for the relative success of Japan’s economy. Read more

According to an article in The Economist on August 2, “economists trying to explain the feeble pace of America’s recovery regularly blame deleveraging”. This raises two questions: can the US recovery sensibly be described as feeble and, if it can, is deleveraging to blame? Read more

The gross domestic product data for the second quarter of 2014 showed that the US economy bounced back strongly, and with enough vim to justify the view that its first quarter weakness was largely due to bad weather.

However, the productivity figures provided another bad surprise. In the first quarter GDP per hour worked fell, and it would therefore have been reasonable to expect it to improve with the sharp recovery shown in the second quarter. In fact, there was another fall.

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Before the recession of 2008/09, the US economy grew fairly consistently at about 3 per cent a year. This was, for example, the growth rate achieved up to the end of 2007 whether it is measured over the previous 20 or 30 years. In the four years since the economy hit its nadir at the end of 2009, it has grown at 2.6 per cent a year. It is widely assumed that the trend growth rate of the US economy, ie, the long-term potential growth rate of the US economy, is at least equal to this lower rate of 2.6 per cent a year. Read more