Deflation and Expansion?

For the last several quarters, Japan has been growing at a feverish pace economically. This trend is due, in no small part, to an increase in their exports, which has increased on average of about six percent over the last three quarters. Japanese consumers have decreased spending by about two percent and there has been modest expansion of business investment during this same period. This is all good news, right? Who wouldn’t be content with these economic results? There is a small catch, since the 1990s Japan has instituted and over the years has ratchet-up a program of deflation, carried out by its central bank. As the central bank injects liquidity into the economy, prices subsequently fall, but so does the value of their currency, the Japanese Yen. This has presented an attractive opportunity for foreign investors looking for cheap investments, and foreign consumers looking for cheap foreign goods. Naturally, this has had a positive effect on Japan’s GDP, which explains the six percent increase in GDP over the last year.

What are some of the lasting effects of this deflationary tactic?  One argument would be that this could inhibit growth; By keeping prices so low for so long, year over year this removes money and capital from businesses and this will continually lead to a decrease in investment domestically, which would could lead to economic stagnation. On the other hand, the Japanese government could keep instructing its central bank to pump money into the economy and count on consumers to make up the difference in economic activity, in other words, consumption. But would the latter pass economic muster? Especially since Japanese consumers and the domestic sphere has been saving over the last year, instead of spending to keep the economy growing. 


https://www.nytimes.com/2017/11/14/business/japan-economy-gdp.html?rref=collection%2Ftimestopic%2FInternational%20Trade%20and%20World%20Market&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=9&pgtype=collection&_r=0

NAFTA: State by State

            As the headlines around NAFTA and the negotiations thereof continue their steady drip into the mainstream media, a new study has suggested that many of the states that overwhelmingly voted for Donald Trump could actually have the most to lose if negotiations fail to come to a compromise. Case in point, Michigan, where trade is 38.9% of the gross state product. Looking at the diagram below, you can see that Michigan’s top import trade partner is Mexico and its top export trade partner is Canada. The terms of trade mostly derive from the automobile industry, where nine out of Michigan’s top ten exports and nine of its top ten imports were related to auto manufacturing. Simply put, Michigan buys a lot of auto parts from Mexico and sells a lot of cars to Canada.

            NAFTA has helped to facilitate free trade between the U.S., Canada and Mexico because conducting business with nations in close proximity has many advantages. For example, a typical good imported from Mexico to the U.S. is made from parts that are up to 40% American-made (compared to 5% American-made with Chinese imports). However, if the trade agreement were to sour, vehicles would then become more expensive to produce as the cross-border supply chains for finished products kinks. As we learned in class, the gains from offshoring would then diminish and that increased cost of production would be passed along to the consumer.

            That being said, should states like Michigan be in favor of Trump’s promise to get rid of this trade agreement?

References:

NAFTA Uncertainty Threatens International Trade

Trump-Heavy States at Biggest Risk of Trade, NAFTA Disruption

Every US State's Most Important International Trading Partners

Trump In China

It seems that Trump is being accused of making irrational decisions, again. Levy states that Trump wasn’t taking all matters into consideration when he made this deal, that this deal was too narrow sighted. Trump has made an attempt at reducing the US-China trade deficit by selling “$250bn of additional goods and services to China.” Yet, Levy raises the issue of world trade deficits rising; unfortunately, Trump’s deal only addresses part of the US trade deficit, it merely scratches the surface. Levy raises the point that the trade deficit is a multilateral issue being taken on bilaterally. Although, Trump isn’t necessarily fixing the problem as a whole, which is most likely impossible to do all at once, he is at least staying true to what he said he was going to do while he was running for president. Trump said he would lower the US deficit and at least he is not doing nothing.

Trump In China: Simple, Bilateral Policy In A Complicated, Multilateral World

Trump Talk: What the President is Saying About Trade

At a stop in Vietnam along Trump's tour of five Asian countries, he made further remarks about the state of trade with China. Trump stated that the free trade between China and other APEC nations has resulted in the loss of millions of jobs in the United States. 

However, we have learned in class that while the jobs may have been lost to offshoring, it has ultimately benefited the United States far more than the loss of jobs. The prospect of having to produce the goods made in China within the United States would lead to either a wage decrease or a price increase, which would negatively effect the real wages of the workers within the United States. By offshoring these jobs to places like China, where there is a labor abundance, the United States is able to reap the benefits of having higher wages and paying less for the goods produced in China. China's labor abundance is massive in comparison to other nations, meaning that labor can be utilized at an extremely cheap price. This works well in the production of goods that require more labor rather than capital. Since this is the case, bringing the jobs back from China would only hurt the United States more than it would benefit it. 

Trump also mentioned the trade imbalance between China and the United States. We have also discussed in class how this can be misrepresented. China is often the producer of the final good, but not the parts that go into the final good. However, export measurements only measure the value of the final good, not the value added. This means that the data can be misconstrued to show an enormous trade deficit for the United States. This seems to have a political motivation behind it, as economists who work for the government would have this data readily available to them. At any rate, it seems that Donald Trump is moving closer to imposing further tariffs on the importation of goods from APEC nations, which would ultimately only hurt the United States citizens, as it would decrease the terms of trade by raising the price of imports. This rise in import good prices would shift production back home, but at a higher price to consumers, decreasing the real wages of US citizens in the process.

For more on Trump's trip and comments on his way through Asia, please read this article:

Trump's Asia Tour

WSJ Article

Housing Markets Creating Issues for Consumers

The housing market has gone through a lot in the past ten years but more recently there has been another issue that was been coming up. This issue has to do with the fact that 48% of the nations’ top housing markets are considered “overvalued”. What overvalued means is that the prices are 10% or higher than the long-term sustainable level. Which essentially means that the housing market wouldn’t be able to stay on this track for very long because it isn’t maintainable. The reason for this overvalue could in part be due to the strengthening economy which increases consumer spending and creates a strong request for real estate. Austin Texas in particualr has one of the highest amounts of "overvalued" homes in the nation. This high demand for real estate has created a situation where there is very minimal availability which just continues to skyrocket the prices. Another main issue is that consumers are finding it very easy to sell their homes but then are have problems finding a home that fits their needs and that is reasonable priced. I believe this will all change, if in the next coming months the economy takes a turn for the worst. This would create the opposite effect on the housing market and favor buyers. All in all I believe that this “overvalued” housing market will not last very long and will shift in the upcoming months.  

US increase in jobs is below the forecast.

After 2008 financial crisis US has been engaged in increasing the rate of employment ever since. Reducing the unemployment rate is tough to achieve. However in October 2017 there was an increase in the employment level of 261,000 jobs in US. A solid gain that nevertheless fell short of expectation.  As per BBC the wage grow was slower however the number of people that were not in the labor force rose. Which lead to unemployment rate to 4.1% in 2017 October which is the lowest rate in the US since 2000. The US Department of labor claimed that the employment in the food and drink industries increased sharply. One of the economist said that older speed of hiring would be difficult to maintain, because the supply of unemployed worker fell. However US departments are confused because the wage growth did rise significantly despite the employers pay more to the recited workers. As per the department of labor US average hourly pay for private sector was $26.53. Earnings increased by only 2.4% year by year.  Though the results were less than the forecast Mr. Wilson claimed that the results will not change the expectation that the US FED will increase the interest rate in December.

Retrieved from:

http://www.bbc.com/news/business-41856443

Tax Reform, Boom or Bust?

On Capitol Hill over the last two weeks, there has been a feverish pitch to change the tax code. Among the proposed reforms are a reduction in the corporate tax rate, increased standard reductions and lower rates, and an elimination of the estate tax. For lower to middle class residents the child tax credit will go up to $1,600 from $1,000, there will be a $300 credit to non-child dependents, and mortgage deductions will be capped at $500,000. These are just some of the big bullet points of the tax reforms. The impetus for such tax policy is to spur economic growth and to make the U.S market more competitive in terms of the corporate tax rate, which would be reduced to 20% from the current stated rate of 35%. These changes are estimated at a cost of about a $1.4 trillion addition to the deficit, but congressional proponents of the new tax reforms believe that increased economic growth and GDP will more than compensate for the expenditure. Taking what we have learned in the various models, and focusing on the laborer, would a lower corporate tax rate lead to higher wages due to a trickle-down effect from corporate savings? https://www.cnbc.com/2017/11/01/the-us-economy-is-strong-and-its-about-to-get-even-stronger-atlanta-fed-model-shows.html

https://www.cbsnews.com/news/gop-tax-plan-5-ways-the-proposed-tax-cuts-could-impact-you/

To Truck,to barter, .... and to eat brains! : Pursuing Prosperity in a Post-Productive World.

Last week in Senior Seminar, Jim Bang mentioned a book that he called "humor for nerds". I ordered this book because I felt that it would be a fitting read for the holiday; Economics of the Undead. This book covers important issues like how to attract to perfect living dead boyfriend, how humans and zombies may co exist, and how to political economy would act to the introduction of supernatural beings. as you can tell there are the issues we need to be worried about!

Once article in particular deals with how humans will trade when the zombies take over. The authors explore this concept in the context of The Walking Dead. We are very accustomed using money which will have no value in the apocalypse. There will be tone of objects of value laying around when the population is dramatically decreased. You could loot all the houses in the North America however eventually goods will become scarce in a world that has no human production. The authors make sure to note that the ever present danger of a zombie attack will likely make all survivors nomadic.

Trading for resources will be both a benefit and a hardship for the traveling bands of humans. Without the safeguards of laws and property rights, distrust will make trading difficult. How can you trade the other tribe half your stash of weapons for food and not be worried that they will turn those weapons on you for the food back? Trade will be necessary as members of tribes specialize in certain things, find special items looting, and find themselves unable to find or make badly needed items.

Without the aid of money, trading will be a complex series of arrangements. You must hope that the person you are trading with wants what you have. If you don't have want they want, you have to find someone that does and also will trade whatever the other person wants with you. So what is the best items to have? Moonshine or the knowledge to make moonshine would probably be a good choice. When choosing items of value to you hope to trade keep three things in mind: inherent value, divisibility, uniform quality, and a relatively high value to weight ratio.

While this may seem like a silly book right now, when the zombie invasion comes someone looting my house will find this very helpful.