Steven Hales

Japanese Lesson for U.S.: Demographics Matter a Lot

Larry,

China has a fertility rate of 1.79 and Russia about 1.4 and the US has a fertility rate of 2.05. How can America precede Russia and China when it has a near replacement fertility rate?


On Apr 17 04:14 PM Larry House wrote:

> This is a very real factor. Russia and China are heading toward the
> same demographic problems down the road--Russia before China. America
> will precede both.

Japanese Lesson for U.S.: Demographics Matter a Lot

On Apr 16 02:19 PM John Lounsbury wrote:

> Steven H. - - -
>
> Interesting comment.
>
> With respect to robotics, the problem there is that robots are not
> consumers. The demographic problem has more to do with demand (consumption)
> than supply (production). This has two aspects:
> 1. Declining working population decreases demand (macro). A person
> earning $30,000 - $60,000 a year consumes much more goods and services
> than someone who is homeless or surviving on subsistance entitlements.
>
> 2. If working population declines at a faster rate than total population,
> then supporting those that are not producing becomes a bigger and
> bigger proportion of the economy. That produces a downward spiral.

John, I think you have to think of robotics in terms of capital available per worker. Capital investment causes worker productivity to increase returns to capital decrease and returns to labor increase. The evolution of our economy to a service economy will be more rapid with robotics more widely deployed but that doesn't mean that production of goods will not have ready domestic markets. I think also that robotics has implications for where factories are located.

The ratio of working age population to total population will level off this century, even for the developing world. This does not mean that population does not continue to grow. It will grow from increases in longevity and from a birth rate at or slightly above replacement for the US and from immigration. A fall in aggregate demand in the developed world is possible but it is at least a century or more away for the US. There are US states where birth rates are low like Vermont. Europe is possibly facing Demographic Winter see www.demographicwinter.... (The film, from what I saw, uses incorrect data and comes to wrong conclusions.) A falling birth rate has many causes like growing affluence. But a falling birth rate does not mean it will fall forever. In the US ours has risen and fallen and is rising again.

China's fertility rate is 1.79 live births per female. Does this mean that their fertility rate will continue to fall? It could just as easily increase in future decades. But they have a saying in China, 4 2 1, four grandparents, two parents and one child. That is demographic disaster in about 40 years. You can't maintain the world's largest military by manpower if the demographics don't favor you.

Japanese Lesson for U.S.: Demographics Matter a Lot

Thanks for the article. I agree that demographics is poorly understood as the commenters indicate in their confusion. These ideas and interests have been discussed for at least 80 years and population studies date back to Malthus. Please before you comment visit
www.iussp.org/

demographymatters.blog.../

Read some of what David Bloom has written it agrees with what Mark has written here.

www.wilsoncenter.org/t...

www.imf.org/external/p...

Disruptive ideas that cut through conventional wisdom are the most interesting. Robotics might at some future date solve some of the world's demographic problems. The Japanese might solve this before anyone else:

www.allbusiness.com/po...

Best, Steve

Home buyers who bought the "median priced single-family" home at the 1979 peak are now under water.

The average home size in 1979 was about 1700 sq. ft. In 2008 the average home size was about 2400 sq. ft. A 1700 sq. ft. home today is worth far less than the median price. A home is not always a good investment. Because it is a depreciable asset it requires constant maintenance and improvement to maintain its value and because it is a taxable asset the stream of benefits of its location are not free. But that begs the question is a home an investment?

I have been a home owner for the past 25 years. I have owned 3 homes. I made some money on the two I sold because of timing that was just dumb luck. However, I have had to make substantial improvements to this current home, a fixer, to make it livable but its value may have declined and I won't see a positive return for years but I have holding power and about 63% equity. In the last real estate downturn in the late 1980s I experienced a similar decline in value. But I now live in a low price volatility region with stable ownership and relatively low turnover. If you asked me 5 years ago if a home was an investment I would have said yes. Today I would still say yes but with the caveat that your holding time might be longer to realize an inflation adjusted gain.

GE's Immelt Thinks for Himself: U.S. Not Shifting to a Service Economy

On Mar 15 01:50 AM Howard Richman wrote:

> Steven H.,
>
> I am not disputing that manufacturing employment has been declining
> worldwide due to greater efficiency. I am pointing out that the U.S.
> manufacturing is in decline relative to other countries with a similar
> level of technology, such as Japan and China.

But their decline is almost as great as ours and they are export oriented.

>
> The statistics that you site make my point. Go back to 1965, and

Well, that's convenient as a start date. Japan was just taking off as a net exporter having rebuilt and trained a generation of engineers and business people. Of course their manufacturing employment would surge.

> the U.S. decline is even more evident. In 1965, the United States
> had a larger percentage of its civilian workforce employed in manufacturing
> than Japan (27.0% compared to 24.8%). Canada had a lower perentage
> than both.
>

The US after 1965 would soon be mired in a state of obsolete manufacturing from steel making to automobiles. It wouldn't turn around until the mid 1980s. New factories required fewer workers but industrial output surged. From the mid 1980s to 2001 manufacturing employment remained constant at about 17 million while falling as a percent of the workforce but output grew by almost 100%. I would say that is a healthy manufacturing sector.

Output has continued to grow since 2001 while manufacturing employment has fallen at a slightly steeper rate. Is this a bad thing? No! It is the continuing transition to a service economy hastened by globalization. Now have American managers made mistakes in their chase of global markets, undoubtedly but American labor has made horrendous errors. Just witness the UAW as it circles the drain. But American consumers have won from lower prices. That allows more disposable income available for other consumption. Wealth has increased from trade as measured by increases in consumer welfare.

If the dollar weakens after global financial markets have stabilized then there should be an increase in manufacturing here.

Foreign Direct Investment in 2007 was $237 billion. In the first 3 quarters of 2008 that investment was $250 billion That is investment in plant and equipment. That is investment in future production here.

GE's Immelt Thinks for Himself: U.S. Not Shifting to a Service Economy

On Mar 14 08:20 AM Howard Richman wrote:

>

> 2. <i>Employment and Level of Technology</i>. Many of our trading
> partners, including Canada and Japan, have similar levels of technology
> in their manufacturing operations, but have not been experiencing
> our rapid decline in manufacturing employment.

Howard, Canada and Japan have experienced a decline in manufacturing employment. Since 1991 Japan's manufacturing employment as a percentage of the labor force has fallen from 24% to 17% and Canada's has fallen from 16% to 11% and the US has fallen from 19% to 11%. Total manufacturing employment has also fallen in absolute terms in all three countries. The same story is true in Europe. The data are indisputable all industrial nations are shedding manufacturing jobs. China and India will soon follow our lead as services begin to dominate their economies.

Sources: CANSIM, Canada; BLS, US; E-Stat, Japan

The question comes back to my original point that the value of manufacturing is in decline worldwide. It is easier to transform raw materials and labor into goods than at anytime in our history. Labor inputs will continue to fall and labor productivity will continue to soar. The robotics and information technology industry will continue to transform manufacturing into an information intensive sector. Services will dominate. Immelt is living in a fanatsy world.

I hope you will respond to this note. And debate this point fairly. Then we can proceed to labor force issues like training and education.

GE's Immelt Thinks for Himself: U.S. Not Shifting to a Service Economy

Hi Howard,

Thought provoking post. I didn't read Immelt's speech but I have a few ideas about the shift from manufacturing to services. Just a little over a century ago most manufacturing was still craft intensive which meant many people involved in the production of goods. Goods were very dear as their labor content was very high.

For the past century, as industrial processes were automated through countless millions of process innovations worker productivity soared and the labor content of goods fell. Goods became less dear. And the simple manufacture of goods became even less dear. Returns from manufacturing fell. This fall in returns led to industry consolidation and the drive for economies of scale. The end result has been falling manufacturing employment and rising service employment.

Most service employment flows directly from the goods producing sector. From accounting, financial management, marketing, retailing, wholesaling, advertising all of these sub specialties speed the flow of goods to consumers. Each service specialty has seen a relentless onslaught of process innovation and increase in worker productivity. Employment has risen here largely because of population growth and new household formation. Where pure service employment (non-goods producing related) has exploded has been healthcare but since it is largely a monopoly, employment can increase and worker productivity can fall without affecting profitability. For example the dispensing of self-administered drugs for inpatient hospital stays routinely carries a cost equivalent to the rate of compensation of a neurosurgeon.

Simple manufacturing cannot add many jobs because production innovations do not allow it to occur. But why do we import so many goods? Paul Krugman solved part of the riddle of trade between developed nations that might exchange similar goods. I know I eat belgian cookies made in Belgium. And I am sure there is a Belgian with a taste for oreos made here. We could simply exchange recipes but marketing and product placement make it more profitable for this cross country trade. Other explanations are higher efficiencies of one company selling in another country of similar makeup and another resting strictly on consumer brand preference in yet another country. In such a free trade environment with many competing factors imbalances are sure to arise.

I would be very sceptical of any notion that manufacturing employment can be increased through some crash program of encouraging math, science and engineering enrollment. We certainly import this talent on H1B visas today and manufacturing employment continues to shrink.

Just a side note China's manufacturing sector is shedding workers as process innovations invade the factory floor.

Should we be concerned with our trade deficit in goods? I don't think so. If the deficit were to be paid in other currencies other than the US dollar our deficit would evaporate in a blinding flash. It is simply the willingness of our trading partners to accept US dollars that perpetuates the deficit. It is now so large and they are so dependent on it to sop up their excess capacity that it is their problem and not ours.

As to relative exchange rates I think you'll find that during sustained dollar strength US manufacturers locate plants overseas and during sustained dollar weakness there is more plant expansion domestically.

Best, Steve

Domestic Financing of Privately Held Public Debt

wdhalgren,

My subtitle to the note was "Recent Reversals have Bought Us Some Time", it got lost somewhere. What I meant was if foreign purchasers balked the FED could use quantitative easing or monetization of additional debt for a short period until the economy stabilized. The fact that domestic purchasers have returned would mean that the monetization would not be 100% of the financing needs. It would be a tightwalk but they are going to be buying long dated treasuries to restart the housing market in the next few months so we will get a test run to see how it might play out on a larger scale.

I don't think inflation will be triggered by monetization in this deflationary environment. Normally it would but not in this case. A bit of inflation is healthy right now.

Has Stagnating Innovation Led to This Economic Crisis?

Sean,

There has been no drop in R&D spending through 2007. In fact since 1950 the US has spent about 2.6% of GDP on R&D. Only Japan has a significantly higher rate of spending of their GDP over the US of any other OECD country. There is no want of innovation. Patents applied for are accelerating patent pendancy is at about 30 months. Knowledge is doubling generally about every 5 years more rapdid in computer science, materials science and nanotechnology. Government funding for R&D has fallen but the slack has been taken up by charities, industry and academia. See:

www.nsf.gov/statistics...

www.cbo.gov/ftpdocs/82...

Your premise is false.

Cramer's Stop Trading! General Electric Brings Bad Credit to Light (12/18/08)

"If cows had written them, we'd rate them.", an S&P analyst earlier this year in an internal conversation about mortgage backed securities ratings.

Need we say more.

The Economic Policies of Failure

On Dec 11 03:16 PM moonbat1775 wrote:

> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> Nope. It turns out the problem has been a false choice between a
> dishonest/unstable but fast money system (FRB) and an honest/stable
> but slow money system (100% reserve gold standard).

This is a false dichotomy. Mediums of exchange whether they be gold or fiat currencies are only valuable for what they can be exchanged. Golds value fluctuates through time and is not stable. Simply fixing the unit of exchange to such a standard will prevent central bank flexibility.

> There are alternative monies that are 100% honest and that will outperform
> FRB in all but the short run as you would expect when the honest
> compete against the dishonest.
> The solution is two step:
> 1. Move from dishonest/unstable FRB to 100% reserve gold standard.
> This will stabilize the stock market. Now we are at honest/stable/slow.
>
> 2. Move from honest/stable/slow (100% gold standard) to 100% reserve
> equity backed monies (notice plural). We would then be at honest/stable/high
> performance. The market as a whole would only move up. The market
> would then be separate forever from the threat of FRB deflation.

This is just silly. If a country adopts a gold standard and If demand for gold increases thereby increasing its price then the only solution is a deflation in price of all goods and services to keep gold's price from rising. Gold is not mystical or even practical as a medium of exchange or peg of value, it is an industrial metal subject to the same forces of supply and demand as any other commodity.

The Economic Policies of Failure

On Dec 11 03:07 PM Smarty_Pants wrote:

> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> What? You mean go back to the late 19th century when our country
> was a vibrant, fast growing, and wealthy creditor nation?
>
> Who would want that? I'm sure many more prefer the crumbling, debt
> laden, and economically floundering country we have become instead.
>

Yes we could go back to a time when banks were free to issue their own currency and when bank runs were ruinous to many communities new and old.

Even though we are a net debtor nation our debt is issued in US Dollars and we are solvent and extremely wealthy. The federal government has the power to tax so that keeps our debt highly rated. It makes sense to trade even when we might be at a disadvantage because to produce what we import could cost us more. This frees up investment to higher value activities.

The 19th century also saw the rise of gold and silver discoveries that wreaked havoc on the economy. Remember that everytime and everywhere inflation is a monetary phenomenon.

As far as the demographic differences between the 19th century and today I'll leave that to the reader as an exercise.

The Economic Policies of Failure

"The greatest limitation set in place is the inability of the economy to deflate"

Well, the Great Contraction between 1929 and 1933 was the greatest deflation in our history, so are you in favor of a deflation? Let the velocity of money decline while the money supply falls and you have a huge contraction in output. This is something to be wished for?

Recessions are part of the business cycle which has an unknown or unknowable periodicity. There is contraction in output during recessions and weaker companies fail. This is a good thing.

The circuit breakers that are in place from unemployment insurance to social security prevent demand from falling off a cliff in a recession. This is a good thing. It allows breathing room for inventories to be reduced and capicity utilization to fall. Until confidence returns as marginal demand increases the economy is resting on a floor of demand created by the circuit breakers.

All economies at all periods in history have been subject to the liquidity preference whether they were aware of it or not. The Spanish economy collapsed in the 16th and 17th centuries as its money supply shot up from gold discoveries in the new world. The situation was so dire that Spain tried to invade both England and the Netherlands. The Spanish wool trade had collapsed because of domestic inflation, Spanish wool became too expensive as measured in bullion.

We are not 16th century Spain. Our money supply as measured by M2 has remained a fairly constant percentage of total output (GDP) in other words inflation is contained. Exogenous factors like commodity price hikes or speculative investing are not under the direct control of central banks. Recently the monetary base has increased largely because velocity has decreased threatening a severe contraction in output. The FED has responded reasonably to the threat of deflation. The lessons of the Great Contraction have been learned very well. And the economy is not deflating. This is a good thing.

If you are calling the circuit breakers "keynesian" then so be it. But recognize them for what they are an economic floor. They do distort the depth of the business cycle but they do not abolish it.

Liquidity is and always has been the lifeblood of economies. Our fractional reserve banking system is the most efficient means yet invented to ensure that money supply expands in tandem with output. This is not Keynesian or Moneterist it is simply observations of how economies function put into formal practice. We could go back to Herbert Hoover or even further before the Federal Reserve Act, but do we want to?

How Long Will The Price of Oil Remain This Low?

Engineer,

Your reference to Japan's oil consumption proves my point that Japan's petroleum consumption is in a long term decline. Consumption rose from 1980 to 1996 and has fallen from 1996 to 2007. See the following table:

Year Japan
1980 4,960.00
1981 4,848.00
1982 4,582.00
1983 4,395.02
1984 4,666.00
1985 4,436.00
1986 4,503.00
1987 4,567.00
1988 4,849.00
1989 5,058.00
1990 5,316.00
1991 5,392.00
1992 5,484.00
1993 5,403.00
1994 5,664.00
1995 5,699.84
1996 5,746.45
1997 5,711.22
1998 5,515.44
1999 5,631.50
2000 5,511.72
2001 5,415.13
2002 5,317.22
2003 5,427.62
2004 5,318.22
2005 5,324.21
2006 5,197.73
2007 5,006.66

This trend is real. The explanations could be shifting demographics, population growth, diffusion of efficiency innovations and market price. The current decline began in 1996 and has continued for 11 years. You can't argue with the data.

US consumption of petroleum for all uses rose at a total rate between 1978 and 2007 of just 10% and is continuing to slow. By way of comparison the rate of petroleum consumption growth between 1949 and 1977 was 220%. In 1978 annual US petroleum consumption was 6.9 billion barrels and by 2007 it was just 7.5 billion. There are steady downward trends on the slope of the growth curve across all developed economies for petroleum. Price has been a big determinent of slowing total petroleum consumption in the US from 2004 to 2007 which saw an actual decline from 7.6 billion barrels in 2004 to 7.5 billion barrels in 2007. Price is the major determinent in this present decline. On the other side of this recession you have to consider the diffusion of many innovations into the fleet and a complete fteet turnover in less than 20 years and what downward pressure this will place on quantity of petroleum consumed. Trends in place in Japan indicate that we will see a steady decline in total petroleum consumed in the US over the next decade.


Source: DOE/EIA Annual Energy Review and other data

How Long Will The Price of Oil Remain This Low?

All developed economies have had flat or declining petroleum consumption beginning in the 2004-2005 time frame. The transportation sector was also showing signs of topping out well before the recession. Japan's petroleum consumption has also fallen off a cliff. If you consider them to be early adopters of technology then you can forecast the ROW's position on the "S" curve and in turn forecast a gradual decrease in energy intensity coupled with actual declines in energy consumption ex-recession.