Article by Anthony Faiola and Catarina Fernandes Martins
PORTO, Portugal — Addiction haunts the recesses of this ancient port city, as people with gaunt, clumsy hands lift crack pipes to lips, syringes to veins. Authorities are sealing off warren-like alleyways with iron bars and fencing in parks to halt the spread of encampments. A siege mentality is taking root in nearby enclaves of pricey condos and multimillion-euro homes.
Portugal decriminalized all drug use, including marijuana, cocaine and heroin, in an experiment that inspired similar efforts elsewhere, but now police are blaming a spike in the number of people who use drugs for a rise in crime. In one neighborhood, state-issued paraphernalia — powder-blue syringe caps, packets of citric acid for diluting heroin — litters sidewalks outside an elementary school.
Porto’s police have increased patrols to drug-plagued neighborhoods. But given existing laws, there’s only so much they can do. On a recent afternoon, an emaciated man in striped pants sleeping in front of a state-funded drug-use center awoke to a patrol of four officers. He sat up, then defiantly began assembling his crack pipe. Officers walked on, shaking their heads.
Portugal became a model for progressive jurisdictions around the world embracing drug decriminalization, such as the state of Oregon, but now there is talk of fatigue. Police are less motivated to register people who misuse drugs and there are year-long waits for state-funded rehabilitation treatment even as the number of people seeking help has fallen dramatically. The return in force of visible urban drug use, meanwhile, is leading the mayor and others here to ask an explosive question: Is it time to reconsider this country’s globally hailed drug model?
How can the U.S. reduce drug overdose deaths? A wide range of ideas awaits Biden.
“These days in Portugal, it is forbidden to smoke tobacco outside a school or a hospital. It is forbidden to advertise ice cream and sugar candies. And yet, it is allowed for [people] to be there, injecting drugs,” said Rui Moreira, Porto’s mayor. “We’ve normalized it.”
Reexamining drug policies
Cocaine production is at global highs. Seizures of amphetamine and methamphetamine have exploded. The multiyear pandemic deepened personal burdens and fomented an increase in use. In the United States alone, overdose deaths, fueled by opioids and deadly synthetic fentanyl, topped 100,000 in both 2021 and 2022 — or double what it was in 2015. According to the National Institutes of Health, 85 percent of the U.S. prison population has an active substance use disorder or was jailed for a crime involving drugs or drug use.
Across the Atlantic in Europe, tiny Portugal appeared to harbor an answer. In 2001, it threw out years of punishment-driven policies in favor of harm reduction by decriminalizing consumption of all drugs for personal use, including the purchase and possession of 10-day supplies. Consumption remains technically against the law, but instead of jail, people who misuse drugs are registered by police and referred to “dissuasion commissions.” For the most troubled people, authorities can impose sanctions including fines and recommend treatment. The decision to attend is voluntary.
Other countries have moved to channel drug offenses out of the penal system too. But none in Europe institutionalized that route more than Portugal. Within a few years, HIV transmission rates via syringes — one the biggest arguments for decriminalization — had plummeted. From 2000 to 2008, prison populations fell by 16.5 percent. Overdose rates dropped as public funds flowed from jails to rehabilitation. There was no evidence of a feared surge in use.
“None of the parade of horrors that decriminalization opponents in Portugal predicted, and that decriminalization opponents around the world typically invoke, has come to pass,” a landmark Cato Institute report stated in 2009.
But in the first substantial way since decriminalization passed, some Portuguese voices are now calling for a rethink of a policy that was long a proud point of national consensus. Urban visibility of the drug problem, police say, is at its worst point in decades and the state-funded nongovernmental organizations that have largely taken over responding to the people with addiction seem less concerned with treatment than affirming that lifetime drug use should be seen as a human right.
British Columbia to decriminalize small amounts of cocaine, heroin
“At the end of the day, the police have their hands tied,” said António Leitão da Silva, chief of Municipal Police of Porto, adding the situation now is comparable to the years before decriminalization was implemented.
A newly released national survey suggests the percent of adults who have used illicit drugs increased to 12.8 percent in 2022, up from 7.8 in 2001, though still below European averages. Portugal’s prevalence of high-risk opioid use is higher than Germany’s, but lower than that of France and Italy. But even proponents of decriminalization here admit that something is going wrong.
Overdose rates have hit 12-year highs and almost doubled in Lisbon from 2019 to 2023. Sewage samples in Lisbon show cocaine and ketamine detection is now among the highest in Europe, with elevated weekend rates suggesting party-heavy usage. In Porto, the collection of drug-related debris from city streets surged 24 percent between 2021 and 2022, with this year on track to far outpace the last. Crime — including robbery in public spaces — spiked 14 percent from 2021 to 2022, a rise police blame partly on increased drug use.
‘What happens when the police leave?’
On the south side of Porto, the hillside city’s sweet wine bars and medieval churches give way to rough-edged public housing complexes. Only one block from police headquarters stands a squat building. It’s a new state-funded drug use center, opened in the hopes of giving the growing ranks of street people with addictions to heroin and cocaine a place to use outside of public view.
Inside, a 47-year-old man struggled to mix ashy heroin with fragments of crystal crack, crushing both into a souped-up speedball. Observed by a nurse, he took the needle and jabbed it into a vein in his neck. “The veins on his hands have all dried up,” the nurse said matter-of-factly.
“I can’t use at home,” said another person at the center. “It causes too much trouble. So I make the drive an hour and a half here.”
In the tourist quarter in the shadow of Porto’s fortresslike cathedral, a social worker with a government-funded nonprofit, SAOM, handed out clean syringe packages to people who use heroin. When crack pipes are available, the social workers give them out. There’s no judgment, few questions, and no pressure to embrace change.
Summing up the philosophy, Luísa Neves, SAOM’s president, said: “You have to respect the user. If they want to use, it is their right.”
Elsewhere in the world, places implementing decriminalization are confronting challenges of their own. In Oregon — where the policy took effect in early 2021 openly citing Portugal as a model — attempts to funnel people with addiction from jail to rehabilitation have had a rough start. Police have shown little interest in handing out toothless citations for drug use, grants for treatment have lagged, and extremely few people are seeking voluntary rehabilitation. Meanwhile, overdoses this year in Portland, the state’s largest city, have surged 46 percent.
Oregon decriminalizes possession of hard drugs, as four other states legalize recreational marijuana
Some places that were early adopters of liberal drug policies have moved to curb permissive laws or backed away from more radical change. Amsterdam — a city long famous for its pot cafes — last month instituted a new ban on smoking marijuana in public places. In Norway, a Portugal-like plan to decriminalize drugs collapsed in 2021, and the country opted instead for a more piecemeal approach.
“When you first back off enforcement, there are not many people walking over the line that you’ve removed. And the public think it’s working really well,” said Keith Humphreys, former senior drug policy adviser in the Obama administration and a professor of psychiatry at Stanford University. “Then word gets out that there’s an open market, limits to penalties, and you start drawing in more drug users. Then you’ve got a more stable drug culture, and, frankly, it doesn’t look as good anymore.”
An eight-minute walk uphill from Porto’s safe drug-use center, in a neighborhood of elegant two-story homes with hedgerows of roses and hibiscus, neighbors talk of an “invasion” of people using drugs since the pandemic. Some gravitated here earlier, from a notorious public housing complex condemned and demolished nearly a decade ago. Others arrived more recently.
Over the last 18 months, a drug encampment sprung up below a school. More homes have been burgled. One neighbor said she found a person, naked from the waist down, shooting up outside her house gate. Another had her laundry stolen three times. Residents have launched U.S.-style neighborhood watches and hired private security guards — something exceedingly rare in Europe. Police deployed in force to the area three months ago to crack down on dealers, who can be and are being arrested. Patrol cars are now stationed in the neighborhood 24 hours a day, scattering people using drugs.
“But for how long?” said Rui Carrapa, one of the founders of the residents’ association Jardim Fluvial Free of Drugs. “We have to do something with the law. We know they can’t stay here forever. What happens when the police leave?”
Porto’s mayor and other critics, including neighborhood activist groups, are not calling for a wholesale repeal of decriminalization — but rather, a limited re-criminalization in urban areas and near schools and hospitals to address rising numbers of people misusing drugs. In a country where the drug policy is seen as sacred, even that has generated pushback — with nearly 200 experts signing an opposition letter after Porto’s city commission in January passed a resolution seeking national-level changes.
Tenuous gains
Experts argue that drug policy focused on jail time is still more harmful to society than decriminalization. While the slipping results here suggest the fragility of decriminalization’s benefits, they point to how funding and encouragement into rehabilitation programs have ebbed. The number of users being funneled into drug treatment in Portugal, for instance, has sharply fallen, going from a peak of 1,150 in 2015 to 352 in 2021, the most recent year available.
João Goulão — head of Portugal’s national institute on drug use and the architect of decriminalization — admitted to the local press in December that “what we have today no longer serves as an example to anyone.” Rather than fault the policy, however, he blames a lack of funding.
After years of economic crisis, Portugal decentralized its drug oversight operation in 2012. A funding drop from 76 million euros ($82.7 million) to 16 million euros ($17.4 million) forced Portugal’s main institution to outsource work previously done by the state to nonprofit groups, including the street teams that engage with people who use drugs. The country is now moving to create a new institute aimed at reinvigorating its drug prevention programs.
Twenty years ago, “we were quite successful in dealing with the big problem, the epidemic of heroin use and all the related effects,” Goulão said in an interview with The Washington Post. “But we have had a kind of disinvestment, a freezing in our response … and we lost some efficacy.”
Of two dozen street people who use drugs and were asked by The Post, not one said they’d ever appeared before one of Portugal’s Dissuasion Commissions, envisioned as conduits to funnel people with addiction into rehab. Police were observed passing people using drugs, not bothering to cite them — a step that is supposed to lead to registration for appearances before those commissions.
“Why?” replied one officer when asked why people were not being cited and referred to commissions. The officer spoke on the condition of anonymity because of not being authorized to speak with the press. “Because we know most of them. We’ve registered them before. Nothing changes if we take them in.”
INDIA IPPON DESU
Sunday, July 09, 2023
Wednesday, June 28, 2023
How big is your Government
How big is your government?The Index of Economic Freedom is directionally correct at best
By Pradyumna Prasad
Jun 27, 2023
The Index of Economic Freedom ignores an important measure of government size: government ownership of the economy. This distorts its measurements of two entrepots: Singapore and Hong Kong
More importantly, it also ignores land ownership and regulations which shape the economy quite strongly in these two places. Hong Kong’s high rents can in part be blamed on its poor land management policy which incentivizes the government to limit the supply of land increasing rents.
It also ignores corporate economic power which hurts economic freedom strongly in economies with high levels of concentration in a few companies. The government isn’t the only entity hurting economic freedom.
And finally, it doesn’t consider infrastructure and other positive freedoms that make an economy worthwhile to invest, work and live in.
Every year the Heritage Foundation releases its Index of Economic Freedom, and every year the results are nearly the same. Singapore, Hong Kong and Ireland are usually at the top. They are then followed by Taiwan, New Zealand, a number of Nordic countries and so on.
But the Index is a flawed indicator in many ways. One of them is that the size of government component ignores an extremely important part of any economy: the ownership of the means of production. This gives a poor impression of the size of government and its effects in the two high-scoring entrepots in the index: Hong Kong and Singapore.
Singapore from the statistics looks as if it is one of the least interventionist states in the world. Tax rates are low, and it is extremely easy to set up a business in the city-state. Government spending is low at 16% of GDP in FY2022 which is lower than any OECD country. Taxes also are low at 13.8% of GDP in FY2022 which is also lower than any OECD country. It takes just two days to start a business in Singapore which is the second-lowest in the world.
And you wouldn’t be wrong entirely. Lots of companies set up their regional headquarters in Singapore because of the regulatory environment and lots of financial firms are present here for the low tax rates and ease of incorporation. But this focus on taxes and government spending as the measure of the size of government obscures an important fact in understanding Singapore’s government: it owns several companies that are essential to the functioning of Singapore.
The government (through holding company Temasek) has a minority stake in DBS Bank which is the largest company on the Singapore Exchange. The government has a majority stake in the two largest telecom companies: Singtel and Starhub, it has a majority stake in the flag carrier Singapore Airlines and it is the owner of CapitaLand (the largest real estate company in Singapore).
Out of the 25 largest companies listed on the Singapore Exchange (as of 26th June 2023, excluding real estate investment trusts) 9 companies were started by the government. It still maintains at least a minority stake in all of them and a majority stake in Singapore Airlines and ST Engineering. For most of them, it is still the largest shareholder.
Singapore’s Government Linked Companies do not appear to get any special advantages according to this 2003 study, and some of them - like SIA, Singtel, DBS and Keppel - have achieved success out of the home market.
Along with this, the government of Singapore owns the vast majority of land in Singapore. I’m not sure of the exact number (this 2021 article says over 80% while this OECD site says 90% without citing it), but it is likely to be above 80 or 90%. Nearly 80% of Singaporeans live in government built housing.
Now both of these facts about land ownership and government linked companies in the economy paint a very different picture of Singapore than the Index of Economic Freedom would give. For academics studying Singapore relying on the Index of Economic Freedom would mean that their data would misrepresent the size of Singapore’s government, and for foreign investors trying to enter Singapore this would mean they fundamentally misunderstand the business climate they are investing in.
Yes, Singapore is a country with low tax rates and a high ease of doing business. But it is also a country where government owned and linked companies are a non-negligible part of the economy and most of the country works, travels and sleeps on government owned land. And not mentioning this devalues the information in the Index of Economic Freedom!
Another country where the Index of Economic Freedom does not show the size of government well is Hong Kong. The Government of Hong Kong owns all land in the SAR, and gains substantial amounts of revenue leasing it. 20.6% of the Hong Kong SAR’s revenue came from land premiums. And this creates perverse incentives for the Hong Kong government, where the government is incentivized to increase land prices to increase its revenue and keep taxes low. As this WSJ article explains:
How does Hong Kong pull it off? Like much else in the city, the answer is down to real estate. The government owns functionally all land in Hong Kong, with leases auctioned off over time to raise revenue. Revenues accruing to the Capital Works Reserve Fund from land sales and premiums made up more than 20% of the government’s total revenues in the past five full fiscal years, almost twice as much as taxes on salaries.
No wonder then, that the top rates of tax for salaries and corporate profit that the Heritage index prioritizes seem unusually low, and yet the government runs up little debt. The city’s residents are effectively paying additional shadow taxes to their landlords and to the city’s leviathan real-estate developers in the form of extremely high house prices and rents, propping up the government’s source of revenue. The system is no free lunch for Hong Kong.
As author Alice Poon noted a decade ago, the land price policy of successive Hong Kong governments is at the root of “ever-deepening economic concentration,” where real-estate developers continually make bumper profits. “Hopes for diversification into a knowledge-based economy have been constantly dashed due to the entrenched land and tax systems.”
And again, if an investor understood this about Hong Kong, she would have a more complete picture of the HK economy and the conditions for investing there. There are other things about Hong Kong that make it a less economically free place: for a long time Hong Kong had little antitrust enforcement, which allowed for monopolies and cartels back in the day. (I’m not sure of the current situation). To quote from my previous post about Asian Godfathers:
Li’s PARKnSHOP and Jardine’s Wellcome control about 70% of the groceries market in Hong Kong. When Jimmy Lai’s ecommerce AdMart tried to set up shop in Hong Kong, their trucks couldn’t enter any building residential or commercial owned by Li. Let me put that into perspective - if you ran a store in any building owned by Li’s real estate business Cheung Kong, you couldn’t get any shipments from AdMart. If you lived in a service apartment owned by Cheung Kong, you couldn’t get a delivery from AdMart
Despite having labour costs far lower than other countries with similar per capita GDP, terminal handling fees in Hong Kong are fairly high - one report estimates them to be double of that in Germany. Why does this happen? Concentration among port berth owners is the reason. Li’s Hutchison owns 14 out of 24 ports and this has remained his “core” business that funds his real estate business
Sure, Hong Kong is economically free in the sense that it doesn’t have onerous amounts of government regulation and taxes. But it isn’t free from corporate power and government land policy, both of which make it a difficult place to live and do business in.
What does the Index actually tell us?
The Index is relatively good at giving a general idea of how friendly a country is to business and investment. That is mostly because in general the indicators that it picks are directionally accurate about the outcomes they intend to measure. If the UK is ranked 28th and Honduras is ranked 94th, you can be sure that the UK has a better business environment than Honduras has.
But beyond that, it isn’t very useful as a measure for businesses or academics in studying economic freedom or understanding the ease of investment in businesses in that country. The first reason is that many of these are subjective judgements made by other people. For example in the property rights sub-component, they use the US Chamber of Commerce’s Country Risk and Insights and the World Bank’s Worldwide Governance Indicators. These indicators are in the end subjective, and their impressions would differ among people.
For example, India has an economic freedom score of just 52.9 which is below Russia’s 53.8. And yet if you saw what the market said about India’s economic freedom in terms of venture capital investments, the number of new and innovative companies coming out of the country and general investor sentiment about their respective economies, it would be far more positive about India than it is about Russia (even before the invasion). Obviously, much of this can be attributed to demographics where India is expected to have a booming population, and Russia a declining one.
But even then India has undergone massive improvements in its digital infrastructure (in large part because of the government and the entry of a new player in the market for online data), and this would be highly relevant to someone considering economic opportunity in India even though it isn’t directly about economic “freedom”. This is another problem I want to highlight about the Index of Economic Freedom: it doesn’t consider positive freedoms at all.
Negative liberties are the absence of obstacles. For example not having exorbitant taxes or laws that restrict economic activity would be an example of negative freedoms. Positive liberties on the other hand is about the possibility of acting out one’s actions. For example building an airport would increase the positive freedom of entrepreneurs in an economy because it gives them the capability to travel and sell to places they previously wouldn’t have had the ability to do so.
And this is an enormously important part of evaluating an economy. The lack of government interference is one important part. But positive actions by a government to improve infrastructure (like UPI in India, or the Singapore government’s construction of the large Changi Airport) do increase the capabilities of actors in the economy. Those are important aspects too!
What would I change?
There are some things I would add to the Index of Economic Freedom to improve its usefulness as a measure of economic freedom.
I would include restrictions on land use as part of the regulatory environment. Many countries (for example the United Kingdom) are nominally “somewhat free” but their economic potential is capped because of their restrictive land use laws. Hong Kong and Singapore too have land use laws that should make a difference in their index.
I would add a measure of government ownership of the factors of production as a measure of restricting economic freedom. In many countries governments own companies that they use for political purposes (see my article about Pakistan) which limits the economic potential of the rest of the economy by misallocating resources. This is especially true for Hong Kong as explained above, but much less true for Singapore.
They should account for corporate power which reduces economic dynamism via charging higher prices and restricting entry into new sectors. This is true for Hong Kong, but also South Korea’s chaebol run economy. The government isn’t the only thing restricting people’s economic freedom!
And while perhaps this might be out of the scope of the Index of Economic Freedom, having a “positive freedoms” index which measures what is possible given the infrastructural and financial constraints of the economy is valuable.
By Pradyumna Prasad
Jun 27, 2023
The Index of Economic Freedom ignores an important measure of government size: government ownership of the economy. This distorts its measurements of two entrepots: Singapore and Hong Kong
More importantly, it also ignores land ownership and regulations which shape the economy quite strongly in these two places. Hong Kong’s high rents can in part be blamed on its poor land management policy which incentivizes the government to limit the supply of land increasing rents.
It also ignores corporate economic power which hurts economic freedom strongly in economies with high levels of concentration in a few companies. The government isn’t the only entity hurting economic freedom.
And finally, it doesn’t consider infrastructure and other positive freedoms that make an economy worthwhile to invest, work and live in.
Every year the Heritage Foundation releases its Index of Economic Freedom, and every year the results are nearly the same. Singapore, Hong Kong and Ireland are usually at the top. They are then followed by Taiwan, New Zealand, a number of Nordic countries and so on.
But the Index is a flawed indicator in many ways. One of them is that the size of government component ignores an extremely important part of any economy: the ownership of the means of production. This gives a poor impression of the size of government and its effects in the two high-scoring entrepots in the index: Hong Kong and Singapore.
Singapore from the statistics looks as if it is one of the least interventionist states in the world. Tax rates are low, and it is extremely easy to set up a business in the city-state. Government spending is low at 16% of GDP in FY2022 which is lower than any OECD country. Taxes also are low at 13.8% of GDP in FY2022 which is also lower than any OECD country. It takes just two days to start a business in Singapore which is the second-lowest in the world.
And you wouldn’t be wrong entirely. Lots of companies set up their regional headquarters in Singapore because of the regulatory environment and lots of financial firms are present here for the low tax rates and ease of incorporation. But this focus on taxes and government spending as the measure of the size of government obscures an important fact in understanding Singapore’s government: it owns several companies that are essential to the functioning of Singapore.
The government (through holding company Temasek) has a minority stake in DBS Bank which is the largest company on the Singapore Exchange. The government has a majority stake in the two largest telecom companies: Singtel and Starhub, it has a majority stake in the flag carrier Singapore Airlines and it is the owner of CapitaLand (the largest real estate company in Singapore).
Out of the 25 largest companies listed on the Singapore Exchange (as of 26th June 2023, excluding real estate investment trusts) 9 companies were started by the government. It still maintains at least a minority stake in all of them and a majority stake in Singapore Airlines and ST Engineering. For most of them, it is still the largest shareholder.
Singapore’s Government Linked Companies do not appear to get any special advantages according to this 2003 study, and some of them - like SIA, Singtel, DBS and Keppel - have achieved success out of the home market.
Along with this, the government of Singapore owns the vast majority of land in Singapore. I’m not sure of the exact number (this 2021 article says over 80% while this OECD site says 90% without citing it), but it is likely to be above 80 or 90%. Nearly 80% of Singaporeans live in government built housing.
Now both of these facts about land ownership and government linked companies in the economy paint a very different picture of Singapore than the Index of Economic Freedom would give. For academics studying Singapore relying on the Index of Economic Freedom would mean that their data would misrepresent the size of Singapore’s government, and for foreign investors trying to enter Singapore this would mean they fundamentally misunderstand the business climate they are investing in.
Yes, Singapore is a country with low tax rates and a high ease of doing business. But it is also a country where government owned and linked companies are a non-negligible part of the economy and most of the country works, travels and sleeps on government owned land. And not mentioning this devalues the information in the Index of Economic Freedom!
Another country where the Index of Economic Freedom does not show the size of government well is Hong Kong. The Government of Hong Kong owns all land in the SAR, and gains substantial amounts of revenue leasing it. 20.6% of the Hong Kong SAR’s revenue came from land premiums. And this creates perverse incentives for the Hong Kong government, where the government is incentivized to increase land prices to increase its revenue and keep taxes low. As this WSJ article explains:
How does Hong Kong pull it off? Like much else in the city, the answer is down to real estate. The government owns functionally all land in Hong Kong, with leases auctioned off over time to raise revenue. Revenues accruing to the Capital Works Reserve Fund from land sales and premiums made up more than 20% of the government’s total revenues in the past five full fiscal years, almost twice as much as taxes on salaries.
No wonder then, that the top rates of tax for salaries and corporate profit that the Heritage index prioritizes seem unusually low, and yet the government runs up little debt. The city’s residents are effectively paying additional shadow taxes to their landlords and to the city’s leviathan real-estate developers in the form of extremely high house prices and rents, propping up the government’s source of revenue. The system is no free lunch for Hong Kong.
As author Alice Poon noted a decade ago, the land price policy of successive Hong Kong governments is at the root of “ever-deepening economic concentration,” where real-estate developers continually make bumper profits. “Hopes for diversification into a knowledge-based economy have been constantly dashed due to the entrenched land and tax systems.”
And again, if an investor understood this about Hong Kong, she would have a more complete picture of the HK economy and the conditions for investing there. There are other things about Hong Kong that make it a less economically free place: for a long time Hong Kong had little antitrust enforcement, which allowed for monopolies and cartels back in the day. (I’m not sure of the current situation). To quote from my previous post about Asian Godfathers:
Li’s PARKnSHOP and Jardine’s Wellcome control about 70% of the groceries market in Hong Kong. When Jimmy Lai’s ecommerce AdMart tried to set up shop in Hong Kong, their trucks couldn’t enter any building residential or commercial owned by Li. Let me put that into perspective - if you ran a store in any building owned by Li’s real estate business Cheung Kong, you couldn’t get any shipments from AdMart. If you lived in a service apartment owned by Cheung Kong, you couldn’t get a delivery from AdMart
Despite having labour costs far lower than other countries with similar per capita GDP, terminal handling fees in Hong Kong are fairly high - one report estimates them to be double of that in Germany. Why does this happen? Concentration among port berth owners is the reason. Li’s Hutchison owns 14 out of 24 ports and this has remained his “core” business that funds his real estate business
Sure, Hong Kong is economically free in the sense that it doesn’t have onerous amounts of government regulation and taxes. But it isn’t free from corporate power and government land policy, both of which make it a difficult place to live and do business in.
What does the Index actually tell us?
The Index is relatively good at giving a general idea of how friendly a country is to business and investment. That is mostly because in general the indicators that it picks are directionally accurate about the outcomes they intend to measure. If the UK is ranked 28th and Honduras is ranked 94th, you can be sure that the UK has a better business environment than Honduras has.
But beyond that, it isn’t very useful as a measure for businesses or academics in studying economic freedom or understanding the ease of investment in businesses in that country. The first reason is that many of these are subjective judgements made by other people. For example in the property rights sub-component, they use the US Chamber of Commerce’s Country Risk and Insights and the World Bank’s Worldwide Governance Indicators. These indicators are in the end subjective, and their impressions would differ among people.
For example, India has an economic freedom score of just 52.9 which is below Russia’s 53.8. And yet if you saw what the market said about India’s economic freedom in terms of venture capital investments, the number of new and innovative companies coming out of the country and general investor sentiment about their respective economies, it would be far more positive about India than it is about Russia (even before the invasion). Obviously, much of this can be attributed to demographics where India is expected to have a booming population, and Russia a declining one.
But even then India has undergone massive improvements in its digital infrastructure (in large part because of the government and the entry of a new player in the market for online data), and this would be highly relevant to someone considering economic opportunity in India even though it isn’t directly about economic “freedom”. This is another problem I want to highlight about the Index of Economic Freedom: it doesn’t consider positive freedoms at all.
Negative liberties are the absence of obstacles. For example not having exorbitant taxes or laws that restrict economic activity would be an example of negative freedoms. Positive liberties on the other hand is about the possibility of acting out one’s actions. For example building an airport would increase the positive freedom of entrepreneurs in an economy because it gives them the capability to travel and sell to places they previously wouldn’t have had the ability to do so.
And this is an enormously important part of evaluating an economy. The lack of government interference is one important part. But positive actions by a government to improve infrastructure (like UPI in India, or the Singapore government’s construction of the large Changi Airport) do increase the capabilities of actors in the economy. Those are important aspects too!
What would I change?
There are some things I would add to the Index of Economic Freedom to improve its usefulness as a measure of economic freedom.
I would include restrictions on land use as part of the regulatory environment. Many countries (for example the United Kingdom) are nominally “somewhat free” but their economic potential is capped because of their restrictive land use laws. Hong Kong and Singapore too have land use laws that should make a difference in their index.
I would add a measure of government ownership of the factors of production as a measure of restricting economic freedom. In many countries governments own companies that they use for political purposes (see my article about Pakistan) which limits the economic potential of the rest of the economy by misallocating resources. This is especially true for Hong Kong as explained above, but much less true for Singapore.
They should account for corporate power which reduces economic dynamism via charging higher prices and restricting entry into new sectors. This is true for Hong Kong, but also South Korea’s chaebol run economy. The government isn’t the only thing restricting people’s economic freedom!
And while perhaps this might be out of the scope of the Index of Economic Freedom, having a “positive freedoms” index which measures what is possible given the infrastructural and financial constraints of the economy is valuable.
Tuesday, June 27, 2023
Sunday, May 21, 2023
Turkey Inflation and how was it managed
From The Economist Article
How has Turkey’s economy kept growing despite raging inflation?Many Turkish businesses are struggling to cope
Jul 21st 2022 | GAZIANTEP AND ISTANBUL
On the wall of Savas Mahsereci’s office is a black-and-white photograph of his father and grandfather making shoe soles from recycled tractor tyres. The room is upstairs from his factory on the outskirts of Gaziantep, a city of 2m people in south-eastern Turkey, close to the border with Syria. Like his forebears, Mr Mahsereci is in the recycling business. His family firm, mtm Plastik, makes refuse bags, disposable gloves and pellets for use in moulded products. The business has grown rapidly. It now occupies 20 times as much factory space as it did in 2004, and started exporting in 2016. Supply bottlenecks in China are “a big opportunity for us”, he says. Other industrial firms in Gaziantep are benefiting. The city enjoyed record exports last year, says Mr Mahsereci
than 72 hours, says Mr Mahsereci, compared with a minimum of a month from China. And supply is more reliable. Turkey can also export via the Aegean or the Black Sea.
Yet accelerating inflation poses big challenges for even the most agile business. One is pricing strategy. It is tricky to judge where to pitch prices. Too high, and you risk losing market share to rivals; too low, and you may find you do not cover replacement cost. Hard decisions seem to multiply. “You have to be ready to negotiate with all of your customers and all of your suppliers all of the time,” says a businessman. “It is very, very tiring.” Some prices are slow to adjust. A large share of mobile-phone subscribers have 12-month contracts. Many are still on last year’s prices.
Businesses must protect themselves from inflation to survive. This often means that the cost is pushed onto others. That creates tensions—between landlords and tenants, shops and customers, and firms and their suppliers. No business can afford to defer the settlement of its customers’ bills for very long. “Payment terms of three to six months are down to zero to three months,” says an Istanbul-based investor. And there are other pressure points. Turkey’s external deficit has not gone away. In principle, devaluation is a remedy. It works by stimulating exports and crushing demand for imports. The export fillip is working, but strong consumer demand has kept imports high.
Against the flow
Turkey must either attract fresh foreign capital or draw on its existing reserves of foreign currency. Both are becoming harder. The quality of capital inflows to Turkey has steadily degraded over the past 20 years. Foreign direct investment (fdi), the “stickiest” form of capital inflow, has not matched the levels of the mid-2000s, when Turkey followed more orthodox policies (see chart 5).
Some European bosses now see Turkey as a potential alternative to China as they seek to shorten and diversify their supply chains. Last year ikea said it would move production of some of its furniture from Asia to Turkey. Hugo Boss, a clothing firm, said it would add capacity to its factory in Izmir to reduce reliance on Asia. But Turkey’s monetary instability—and a deterioration in governance and the rule of law—is a bar to another fdi boom. Portfolio flows into Turkish bonds and shares have evaporated. That leaves Turkey ever more reliant on short-term syndicated loans extended to local banks. As interest rates go up worldwide, these are harder to come by.
The situation for reserves is also perilous. Turkey’s central bank has burned through tens of billions of dollars trying to prop up the lira. Official reserves of foreign currency are negative if swaps with local banks are taken into account. (The central bank still has holdings of gold.) Meanwhile private-sector demand for dollars and euros has risen. At their peak last year, two-thirds of bank deposits were held in foreign currency. The growing illiquidity in currency markets means exporters have every incentive to hoard dollars and euros from their overseas sales.
The authorities are striving to curb this creeping dollarisation and to stop the lira from falling further. A scheme has been in place since December which indemnifies deposits switched out of dollars or euros and into lira from exchange-rate losses. In January Turkish exporters were ordered to hand over 25% of their hard-currency earnings to the central bank. That figure was raised to 40% in April. Complaints from corporate treasurers that they needed a float of dollars and euros to pay for vital imports or to service debts had no effect.
In a sign of growing desperation, the authorities went further. On June 24th Turkey’s bank regulator said it would ban loans to firms that cling to significant hard-currency holdings. This measure was to stop companies borrowing lira on the cheap to speculate in dollars. The initial reaction in Istanbul was shock. Suddenly the main concern of corporate Turkey was not inflation but a potential credit crunch.
If the regulation is strictly enforced, says one executive, banks will be unwilling to lend and firms will be forced to cut back on non-essential spending. Some may struggle even to get enough trade credit to finance their working capital. It may not come to that. Noises from Ankara are that the banks will not bear the burden of verifying whether borrowers are complying with the new regulation.
Still, companies are turning cautious and big investments are being put on hold. “Everybody is waiting for the elections,” says an investment banker. Mr Erdogan’s ak Party is clearly behind an alliance of six opposition parties in opinion polls. He trails in polls against the plausible opposition candidates for the presidency. His defeat would probably mean a return to monetary orthodoxy.
Taming inflation would be a big and painful job, but Turkey’s experience after 2001 shows that, with the right policies, it can be done. fdi could rebound to take advantage of Turkey’s position as a low-cost manufacturing hub on Europe’s doorstep. A rally in the stockmarket is plausible, given how cheap Turkish shares have become. Yet electoral defeat for Mr Erdogan is far from certain. He has jailed political opponents, bullied the media, sought to suppress free speech and could resort to all manner of chicanery to cling to office. Many of the people interviewed for this article did not want to be named.
And before then, the exchange-rate crisis might enter a new, more combustible phase. Once the summer is gone, and the boost to hard-currency earnings from tourism starts to fade, things could get dicey. A tranche of protected lira deposits matures at the end of August. The state has $6bn of external debt payments due in the second half of this year, according to Morgan Stanley, a bank; big companies and banks have $23bn coming due. It seems unlikely that all these debts will be fully rolled over. Yet somehow the diminishing stock of foreign exchange must be augmented—or husbanded. In a worst-case scenario, limits might be placed on withdrawals of householders’ dollar deposits.
Perhaps the economy will somehow muddle through until the elections. As strange as Mr Erdogan’s approach to monetary policy has been, his fiscal policy has been quite conservative. The public debt-to-gdp ratio was 41.6% of gdp last year. This is comfortably below the debt burden of Turkey’s emerging-market peers. Given the country’s low solvency risk, perhaps its friends in the Gulf might stump up some of their petrodollars.
Turkey has withstood some remarkable strains. Now, more than ever, Turkish businesses are focused on survival. Inflation breeds uncertainty and uncertainty breeds caution. The things you must do, you keep doing, says a businessman. The rest can wait. “You live another day.” ■
This article appeared in the Briefing section of the print edition under the headline "Inflation nation"
How has Turkey’s economy kept growing despite raging inflation?Many Turkish businesses are struggling to cope
Jul 21st 2022 | GAZIANTEP AND ISTANBUL
On the wall of Savas Mahsereci’s office is a black-and-white photograph of his father and grandfather making shoe soles from recycled tractor tyres. The room is upstairs from his factory on the outskirts of Gaziantep, a city of 2m people in south-eastern Turkey, close to the border with Syria. Like his forebears, Mr Mahsereci is in the recycling business. His family firm, mtm Plastik, makes refuse bags, disposable gloves and pellets for use in moulded products. The business has grown rapidly. It now occupies 20 times as much factory space as it did in 2004, and started exporting in 2016. Supply bottlenecks in China are “a big opportunity for us”, he says. Other industrial firms in Gaziantep are benefiting. The city enjoyed record exports last year, says Mr Mahsereci
than 72 hours, says Mr Mahsereci, compared with a minimum of a month from China. And supply is more reliable. Turkey can also export via the Aegean or the Black Sea.
Yet accelerating inflation poses big challenges for even the most agile business. One is pricing strategy. It is tricky to judge where to pitch prices. Too high, and you risk losing market share to rivals; too low, and you may find you do not cover replacement cost. Hard decisions seem to multiply. “You have to be ready to negotiate with all of your customers and all of your suppliers all of the time,” says a businessman. “It is very, very tiring.” Some prices are slow to adjust. A large share of mobile-phone subscribers have 12-month contracts. Many are still on last year’s prices.
Businesses must protect themselves from inflation to survive. This often means that the cost is pushed onto others. That creates tensions—between landlords and tenants, shops and customers, and firms and their suppliers. No business can afford to defer the settlement of its customers’ bills for very long. “Payment terms of three to six months are down to zero to three months,” says an Istanbul-based investor. And there are other pressure points. Turkey’s external deficit has not gone away. In principle, devaluation is a remedy. It works by stimulating exports and crushing demand for imports. The export fillip is working, but strong consumer demand has kept imports high.
Against the flow
Turkey must either attract fresh foreign capital or draw on its existing reserves of foreign currency. Both are becoming harder. The quality of capital inflows to Turkey has steadily degraded over the past 20 years. Foreign direct investment (fdi), the “stickiest” form of capital inflow, has not matched the levels of the mid-2000s, when Turkey followed more orthodox policies (see chart 5).
Some European bosses now see Turkey as a potential alternative to China as they seek to shorten and diversify their supply chains. Last year ikea said it would move production of some of its furniture from Asia to Turkey. Hugo Boss, a clothing firm, said it would add capacity to its factory in Izmir to reduce reliance on Asia. But Turkey’s monetary instability—and a deterioration in governance and the rule of law—is a bar to another fdi boom. Portfolio flows into Turkish bonds and shares have evaporated. That leaves Turkey ever more reliant on short-term syndicated loans extended to local banks. As interest rates go up worldwide, these are harder to come by.
The situation for reserves is also perilous. Turkey’s central bank has burned through tens of billions of dollars trying to prop up the lira. Official reserves of foreign currency are negative if swaps with local banks are taken into account. (The central bank still has holdings of gold.) Meanwhile private-sector demand for dollars and euros has risen. At their peak last year, two-thirds of bank deposits were held in foreign currency. The growing illiquidity in currency markets means exporters have every incentive to hoard dollars and euros from their overseas sales.
The authorities are striving to curb this creeping dollarisation and to stop the lira from falling further. A scheme has been in place since December which indemnifies deposits switched out of dollars or euros and into lira from exchange-rate losses. In January Turkish exporters were ordered to hand over 25% of their hard-currency earnings to the central bank. That figure was raised to 40% in April. Complaints from corporate treasurers that they needed a float of dollars and euros to pay for vital imports or to service debts had no effect.
In a sign of growing desperation, the authorities went further. On June 24th Turkey’s bank regulator said it would ban loans to firms that cling to significant hard-currency holdings. This measure was to stop companies borrowing lira on the cheap to speculate in dollars. The initial reaction in Istanbul was shock. Suddenly the main concern of corporate Turkey was not inflation but a potential credit crunch.
If the regulation is strictly enforced, says one executive, banks will be unwilling to lend and firms will be forced to cut back on non-essential spending. Some may struggle even to get enough trade credit to finance their working capital. It may not come to that. Noises from Ankara are that the banks will not bear the burden of verifying whether borrowers are complying with the new regulation.
Still, companies are turning cautious and big investments are being put on hold. “Everybody is waiting for the elections,” says an investment banker. Mr Erdogan’s ak Party is clearly behind an alliance of six opposition parties in opinion polls. He trails in polls against the plausible opposition candidates for the presidency. His defeat would probably mean a return to monetary orthodoxy.
Taming inflation would be a big and painful job, but Turkey’s experience after 2001 shows that, with the right policies, it can be done. fdi could rebound to take advantage of Turkey’s position as a low-cost manufacturing hub on Europe’s doorstep. A rally in the stockmarket is plausible, given how cheap Turkish shares have become. Yet electoral defeat for Mr Erdogan is far from certain. He has jailed political opponents, bullied the media, sought to suppress free speech and could resort to all manner of chicanery to cling to office. Many of the people interviewed for this article did not want to be named.
And before then, the exchange-rate crisis might enter a new, more combustible phase. Once the summer is gone, and the boost to hard-currency earnings from tourism starts to fade, things could get dicey. A tranche of protected lira deposits matures at the end of August. The state has $6bn of external debt payments due in the second half of this year, according to Morgan Stanley, a bank; big companies and banks have $23bn coming due. It seems unlikely that all these debts will be fully rolled over. Yet somehow the diminishing stock of foreign exchange must be augmented—or husbanded. In a worst-case scenario, limits might be placed on withdrawals of householders’ dollar deposits.
Perhaps the economy will somehow muddle through until the elections. As strange as Mr Erdogan’s approach to monetary policy has been, his fiscal policy has been quite conservative. The public debt-to-gdp ratio was 41.6% of gdp last year. This is comfortably below the debt burden of Turkey’s emerging-market peers. Given the country’s low solvency risk, perhaps its friends in the Gulf might stump up some of their petrodollars.
Turkey has withstood some remarkable strains. Now, more than ever, Turkish businesses are focused on survival. Inflation breeds uncertainty and uncertainty breeds caution. The things you must do, you keep doing, says a businessman. The rest can wait. “You live another day.” ■
This article appeared in the Briefing section of the print edition under the headline "Inflation nation"
Sunday, May 14, 2023
Monday, May 01, 2023
Higher interest rates to tackle inflation
John H Cochrane - On Interest rates as a fiscal policy
A few days ago I gave a short talk on the subject. I was partly inspired by a little comment made at a seminar, roughly "of course we all know that if prices are sticky, higher nominal rates raise higher real rates, that lowers aggregate demand and lowers inflation." Maybe we "know" that, but it's not as readily present in our models as we think. This also crystallizes some work in the ongoing "Expectations and the neutrality of interest rates" project.
The equations are the utterly standard new-Keynesian model. The last equation tracks the evolution of the real value of the debt, which is usually in the footnotes of that model.
OK, top right, the standard result. There is a positive but temporary shock to the monetary policy rule, u. Interest rates go up and then slowly revert. Inflation goes down. Hooray. (Output also goes down, as the Phillips Curve insists.)
The next graph should give you pause on just how you interpreted the first one. What if the interest rate goes up persistently? Inflation rises, suddenly and completely matching the rise in interest rate! Yet prices are quite sticky -- k = 0.1 here. Here I drove the persistence all the way to 1, but that's not crucial. With any persistence above 0.75, higher interest rates give rise to higher inflation.
What's going on? Prices are sticky, but inflation is not sticky. In the Calvo model only a few firms can change price in any instant, but they change by a large amount, so the rate of inflation can jump up instantly just as it does. I think a lot of intuition wants inflation to be sticky, so that inflation can slowly pick up after a shock. That's how it seems to work in the world, but sticky prices do not deliver that result. Hence, the real interest rate doesn't change at all in response to this persistent rise in nominal interest rates. Now maybe inflation is sticky, costs apply to the derivative not the level, but absolutely none of the immense literature on price stickiness considers that possibility or how in the world it might be true, at least as far as I know. Let me know if I'm wrong. At a minimum, I hope I have started to undermine your faith that we all have easy textbook models in which higher interest rates reliably lower inflation.
(Yes, the shock is negative. Look at the Taylor rule. This happens a lot in these models, another reason you might worry. The shock can go in a different direction from observed interest rates.)
Panel 3 lowers the persistence of the shock to a cleverly chosen 0.75. Now (with sigma=1, kappa=0.1, phi= 1.2), inflation now moves with no change in interest rate at all. The Fed merely announces the shock and inflation jumps all on its own. I call this "equilibrium selection policy" or "open mouth policy." You can regard this as a feature or a bug. If you believe this model, the Fed can move inflation just by making speeches! You can regard this as powerful "forward guidance." Or you can regard it as nuts. In any case, if you thought that the Fed's mechanism for lowering inflation is to raise nominal interest rates, inflation is sticky, real rates rise, output falls and inflation falls, well here is another case in which the standard model says something else entirely.
Panel 4 is of course my main hobby horse these days. I tee up the question in Panel 1 with the red line. In that panel, the nominal interest are is higher than the expected inflation rate. The real interest rate is positive. The costs of servicing the debt have risen. That's a serious effect nowadays. With 100% debt/GDP each 1% higher real rate is 1% of GDP more deficit, $250 billion dollars per year. Somebody has to pay that sooner or later. This "monetary policy" comes with a fiscal tightening. You'll see that in the footnotes of good new-Keynesian models: lump sum taxes come along to pay higher interest costs on the debt.
Now imagine Jay Powell comes knocking to Congress in the middle of a knock-down drag-out fight over spending and the debt limit, and says "oh, we're going to raise rates 4 percentage points. We need you to raise taxes or cut spending by $1 trillion to pay those extra interest costs on the debt." A laugh might be the polite answer.
So, in the last graph, I ask, what happens if the Fed raises interest rates and fiscal policy refuses to raise taxes or cut spending? In the new-Keynesian model there is not a 1-1 mapping between the shock (u) process and interest rates. Many different u produce the same i. So, I ask the model, "choose a u process that produces exactly the same interest rate as in the top left panel, but needs no additional fiscal surpluses." Declines in interest costs of the debt (inflation above interest rates) and devaluation of debt by period 1 inflation must match rises in interest costs on the debt (inflation below interest rates). The bottom right panel gives the answer to this question.
Review: Same interest rate, no fiscal help? Inflation rises. In this very standard new-Keynesian model, higher interest rates without a concurrent fiscal tightening raise inflation, immediately and persistently.
Fans will know of the long-term debt extension that solves this problem, and I've plugged that solution before (see the "Expectations" paper above).
The point today: The statement that we have easy simple well understood textbook models, that capture the standard intuition -- higher nominal rates with sticky prices mean higher real rates, those lower output and lower inflation -- is simply not true. The standard model behaves very differently than you think it does. It's amazing how after 30 years of playing with these simple equations, verbal intuition and the equations remain so far apart.
The last two bullet points emphasize two other aspects of the intuition vs model separation. Notice that even in the top left graph, higher interest rates (and lower output) come with rising inflation. At best the higher rate causes a sudden jump down in inflation -- prices, not inflation, are sticky even in the top left graph -- but then inflation steadily rises. Not even in the top left graph do higher rates send future inflation lower than current inflation. Widespread intuition goes the other way.
In all this theorizing, the Phillips Curve strikes me as the weak link. The Fed and common intuition make the Phillips Curve causal: higher rates cause lower output cause lower inflation. The original Phillips Curve was just a correlation, and Lucas 1972 thought of causality the other way: higher inflation fools people temporarily to producing more.
Here is the Phillips curve (unemployment x axis, inflation y axis) from 2012 through last month. The dots on the lower branch are the pre-covid curve, "flat" as common wisdom proclaimed. Inflation was still 2% with unemployment 3.5% on the eve of the pandemic. The upper branch is the more recent experience.
I think this plot makes some sense of the Fed's colossal failure to see inflation coming, or to perceive it once the dragon was inside the outer wall and breathing fire at the inner gate. If you believe in a Phillips Curve, causal from unemployment (or "labor market conditions") to inflation, and you last saw 3.5% unemployment with 2% inflation in February 2021, the 6% unemployment of March 2021 is going to make you totally ignore any inflation blips that come along. Surely, until we get well past 3.5% unemployment again, there's nothing to worry about. Well, that was wrong. The curve "shifted" if there is a curve at all.
But what to put in its place? Good question.
Update:
Lots of commenters and correspondents want other Phillips Curves. I've been influenced by a number of papers, especially "New Pricing Models, Same Old Phillips Curves?" by Adrien Auclert, Rodolfo Rigato, Matthew Rognlie, and Ludwig Straub, and "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications" by Emi Nakamura and Jón Steinsson, that lots of different micro foundations all end up looking about the same. Both are great papers. Adding lags seems easy, but it's not that simple unless you overturn the forward looking eigenvalues of the system; "Expectations and the neutrality of interest rates" goes on in that way. Adding a lag without changing the system eigenvalue doesn't work. John H. Cochrane at 5:17 PM
A few days ago I gave a short talk on the subject. I was partly inspired by a little comment made at a seminar, roughly "of course we all know that if prices are sticky, higher nominal rates raise higher real rates, that lowers aggregate demand and lowers inflation." Maybe we "know" that, but it's not as readily present in our models as we think. This also crystallizes some work in the ongoing "Expectations and the neutrality of interest rates" project.
The equations are the utterly standard new-Keynesian model. The last equation tracks the evolution of the real value of the debt, which is usually in the footnotes of that model.
OK, top right, the standard result. There is a positive but temporary shock to the monetary policy rule, u. Interest rates go up and then slowly revert. Inflation goes down. Hooray. (Output also goes down, as the Phillips Curve insists.)
The next graph should give you pause on just how you interpreted the first one. What if the interest rate goes up persistently? Inflation rises, suddenly and completely matching the rise in interest rate! Yet prices are quite sticky -- k = 0.1 here. Here I drove the persistence all the way to 1, but that's not crucial. With any persistence above 0.75, higher interest rates give rise to higher inflation.
What's going on? Prices are sticky, but inflation is not sticky. In the Calvo model only a few firms can change price in any instant, but they change by a large amount, so the rate of inflation can jump up instantly just as it does. I think a lot of intuition wants inflation to be sticky, so that inflation can slowly pick up after a shock. That's how it seems to work in the world, but sticky prices do not deliver that result. Hence, the real interest rate doesn't change at all in response to this persistent rise in nominal interest rates. Now maybe inflation is sticky, costs apply to the derivative not the level, but absolutely none of the immense literature on price stickiness considers that possibility or how in the world it might be true, at least as far as I know. Let me know if I'm wrong. At a minimum, I hope I have started to undermine your faith that we all have easy textbook models in which higher interest rates reliably lower inflation.
(Yes, the shock is negative. Look at the Taylor rule. This happens a lot in these models, another reason you might worry. The shock can go in a different direction from observed interest rates.)
Panel 3 lowers the persistence of the shock to a cleverly chosen 0.75. Now (with sigma=1, kappa=0.1, phi= 1.2), inflation now moves with no change in interest rate at all. The Fed merely announces the shock and inflation jumps all on its own. I call this "equilibrium selection policy" or "open mouth policy." You can regard this as a feature or a bug. If you believe this model, the Fed can move inflation just by making speeches! You can regard this as powerful "forward guidance." Or you can regard it as nuts. In any case, if you thought that the Fed's mechanism for lowering inflation is to raise nominal interest rates, inflation is sticky, real rates rise, output falls and inflation falls, well here is another case in which the standard model says something else entirely.
Panel 4 is of course my main hobby horse these days. I tee up the question in Panel 1 with the red line. In that panel, the nominal interest are is higher than the expected inflation rate. The real interest rate is positive. The costs of servicing the debt have risen. That's a serious effect nowadays. With 100% debt/GDP each 1% higher real rate is 1% of GDP more deficit, $250 billion dollars per year. Somebody has to pay that sooner or later. This "monetary policy" comes with a fiscal tightening. You'll see that in the footnotes of good new-Keynesian models: lump sum taxes come along to pay higher interest costs on the debt.
Now imagine Jay Powell comes knocking to Congress in the middle of a knock-down drag-out fight over spending and the debt limit, and says "oh, we're going to raise rates 4 percentage points. We need you to raise taxes or cut spending by $1 trillion to pay those extra interest costs on the debt." A laugh might be the polite answer.
So, in the last graph, I ask, what happens if the Fed raises interest rates and fiscal policy refuses to raise taxes or cut spending? In the new-Keynesian model there is not a 1-1 mapping between the shock (u) process and interest rates. Many different u produce the same i. So, I ask the model, "choose a u process that produces exactly the same interest rate as in the top left panel, but needs no additional fiscal surpluses." Declines in interest costs of the debt (inflation above interest rates) and devaluation of debt by period 1 inflation must match rises in interest costs on the debt (inflation below interest rates). The bottom right panel gives the answer to this question.
Review: Same interest rate, no fiscal help? Inflation rises. In this very standard new-Keynesian model, higher interest rates without a concurrent fiscal tightening raise inflation, immediately and persistently.
Fans will know of the long-term debt extension that solves this problem, and I've plugged that solution before (see the "Expectations" paper above).
The point today: The statement that we have easy simple well understood textbook models, that capture the standard intuition -- higher nominal rates with sticky prices mean higher real rates, those lower output and lower inflation -- is simply not true. The standard model behaves very differently than you think it does. It's amazing how after 30 years of playing with these simple equations, verbal intuition and the equations remain so far apart.
The last two bullet points emphasize two other aspects of the intuition vs model separation. Notice that even in the top left graph, higher interest rates (and lower output) come with rising inflation. At best the higher rate causes a sudden jump down in inflation -- prices, not inflation, are sticky even in the top left graph -- but then inflation steadily rises. Not even in the top left graph do higher rates send future inflation lower than current inflation. Widespread intuition goes the other way.
In all this theorizing, the Phillips Curve strikes me as the weak link. The Fed and common intuition make the Phillips Curve causal: higher rates cause lower output cause lower inflation. The original Phillips Curve was just a correlation, and Lucas 1972 thought of causality the other way: higher inflation fools people temporarily to producing more.
Here is the Phillips curve (unemployment x axis, inflation y axis) from 2012 through last month. The dots on the lower branch are the pre-covid curve, "flat" as common wisdom proclaimed. Inflation was still 2% with unemployment 3.5% on the eve of the pandemic. The upper branch is the more recent experience.
I think this plot makes some sense of the Fed's colossal failure to see inflation coming, or to perceive it once the dragon was inside the outer wall and breathing fire at the inner gate. If you believe in a Phillips Curve, causal from unemployment (or "labor market conditions") to inflation, and you last saw 3.5% unemployment with 2% inflation in February 2021, the 6% unemployment of March 2021 is going to make you totally ignore any inflation blips that come along. Surely, until we get well past 3.5% unemployment again, there's nothing to worry about. Well, that was wrong. The curve "shifted" if there is a curve at all.
But what to put in its place? Good question.
Update:
Lots of commenters and correspondents want other Phillips Curves. I've been influenced by a number of papers, especially "New Pricing Models, Same Old Phillips Curves?" by Adrien Auclert, Rodolfo Rigato, Matthew Rognlie, and Ludwig Straub, and "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications" by Emi Nakamura and Jón Steinsson, that lots of different micro foundations all end up looking about the same. Both are great papers. Adding lags seems easy, but it's not that simple unless you overturn the forward looking eigenvalues of the system; "Expectations and the neutrality of interest rates" goes on in that way. Adding a lag without changing the system eigenvalue doesn't work. John H. Cochrane at 5:17 PM
Friday, April 28, 2023
Lowe Post : Bucks Collapse
Interesting to see how he listed all the mistakes that Bucks did in their playoffs against Miami despite being the far better team
Sunday, April 23, 2023
Ireland Housing Crisis
From the substack - The Fitzwilliam written by Robert Tolan on 19 April 2023
Ireland has one of the most acute housing shortages in the world. It has the lowest number of dwellings per head in the OECD, and average house prices are now eight times mean income (compared to three times as much in 2010). The situation is so bad that 70% of young people in Ireland say that they are considering emigrating due to the cost of living, which is mainly driven by housing costs. On Daft, Ireland’s most popular property website, fewer than 1,100 properties are available to rent in Ireland, a country of over 5 million people.1 Homeownership has collapsed: the Economic and Social Research Institute estimates that one in three people will never own a home. Recent polls suggest housing is Ireland’s main political issue: the next election might well be decided on how each party proposes to fix the housing crisis.
There are many reasons for the housing shortage, but one fundamental cause is simple: construction has negative effects on neighbours (such as noise and a strain on local services) so measures to block construction are often locally popular. There is a tension between the need for new homes and local objections to development. But international experience suggests the circle can be squared. By giving locals the power to enable extra construction, and get a share of the resulting economic benefits, other countries have delivered large increases in housing supply with popular support.
For decades, the Irish planning system has not allowed enough homebuilding. The process of getting planning permission is tortuous: First, each new home needs the land to be zoned for housing. Then the homes must get planning permission from the local authority. Currently, almost all significant developments are appealed, which means further approval by An Bord Pleanála (ABP) is necessary for the project to proceed. At this stage, there is a risk of a judicial review, which can be brought by an objector living anywhere in the country. To bring a case to judicial review, applicants must argue before the High Court that a proposed development violates some part of the Planning and Development Act (2000). Judges in the High Court can block the development (or not), but their decision can, if a development is deemed to be of national importance, be appealed further to the Supreme Court. Critically, Ireland is unique in that it is the only country in the developed world with both American-style zoning and British-style local planning. This creates what Francis Fukuyama calls a ‘vetocracy’ – rule by veto.
In Ireland and abroad, development is blocked by those who may want to see building in theory, but not near them. Proposals providing desperately needed housing in Ireland’s urban areas (especially Dublin) are most at risk of these objections.
International solutions
Other countries have faced similar problems, and have had some success in solving them. South Korea pioneered bottom-up planning as a way to increase community involvement in the housing supply. Seoul’s Joint Redevelopment Projects (JRPs) give Koreans the right to redevelop their neighbourhoods at higher levels of density if at least 75% of homeowners agree. Introduced in 1983, every area of Seoul that has been designated for JRPs has opted to use the scheme, and around 50% of the new apartments built in the mid-1990s were delivered through JRPs. Over that time, living space per capita has increased by more than two and a half times.
Though the policy has been a huge success on the housing supply front — showing how communities will often opt for housing if given a choice — there has been some popular opposition. One major reason for opposition is that since only homeowners got the vote, tenants are evicted to allow homeowners to develop. The scheme also permits very tall developments that have substantial impacts on nearby areas whose residents haven’t had the chance to vote.
Similarly, the Squamish First Nation of Canada voted in 2019 to build Sen̓áḵw, a 6,000-home development on its sovereign tribal lands near Vancouver. The aim was to help address Vancouver’s housing shortage in a way that allowed the Squamish to reap the economic benefit of economic development. It is estimated that this project will generate billions of dollars for members of the tribe. Once again, this was able to go ahead where other large projects in Vancouver failed, because the Squamish residents have the power to permit development where they stand to benefit from it.
Another example is Israel’s approach to urban densification. Israel increased apartment supply in Tel Aviv by around half through a rule known as ‘TAMA 38’. Under this rule, if 80% of a given apartment block’s residents agree, they can vote for redevelopment, demolish the block, and build a larger one. A 66% threshold must be reached to enable extensions of the existing structure without demolition. The latter is the most common application of the rule. From 2018-20 in Tel Aviv, TAMA 38 was responsible for an average of 31% of the new homes built.2 Like JRPs, it works because the residents are given both the power and good reason to vote for more homes. It has many lessons: an Irish scheme should take considerably more care of neighbours, and ensure that more value is captured for local government to improve local services and infrastructure. As the current density of housing is lower in Dublin than in Tel Aviv, gentle infill, building on underutilised land, would be much easier while protecting the neighbours.
Not all community-led schemes have been about local agreement or votes, as recent developments in California illustrate. Even small-scale infill development in California tends to be controversial, and localities enforce some of the strictest zoning rules in the world. This has led to California having some of the world’s highest house prices, especially in Silicon Valley suburbs and cities like San Francisco. Since 2016, however, Californians have been allowed to build Accessory Dwelling Units (ADUs): small homes added by householders in their back gardens. This has had a striking impact: by 2021, ADUs made up 22% of new homes built in Los Angeles. ADUs have succeeded where other ideas have failed for two reasons: first, they are small-scale and visually unintrusive, so by their nature, most of the negative effects are borne by the homeowner. That homeowner has a strong reason to keep harm to a minimum. Second, ADUs are seen as benefiting local residents by improving property values, rather than delivering profits to a large developer or outsiders.
Houston has also followed a decentralised approach to planning, but this time based on opt-outs, rather than opt-ins. Like essentially all American cities, Houston has long required each new home to have its own minimum area of land to prevent developers from subdividing sites.3 This ‘minimum plot size’ was 5,000 square feet until the 1990s. In 1998 the city sought to reduce the minimum plot size to 1,400 square feet, to allow more homes per acre, but it faced opposition from homeowners who feared change. To assuage concerns, Houston provided that streets or blocks could choose to opt out of these reforms. If at least 51% of residents opted out, the city granted a ‘Special Minimum Lot Size’ application, exempting the area from the new rules. As it turns out, many areas have not opted out, and Houston has seen many attractive new homes built as a result.
Applying these lessons in Ireland
Not all of these schemes should transfer naturally to Ireland without adaptation. Korea’s scheme, for example, had no height limit, meaning that one-storey shantytowns were often replaced with high-rise towers. This would probably be politically unacceptable in any society without a tradition of high-rise urbanism, and may be aesthetically unattractive. But all these schemes demonstrate that giving locals more power to permit development can result in much more of it, and some of them show how development can be popular and uncontroversial.
The challenge in learning from these examples is coming up with a scheme that works with our special historical, geographic, and cultural circumstances. Such an approach would need to respect traditional Irish development patterns, generating development that was generally low or mid-rise, made up of detached, semi-detached and terraced houses, and clothed in vernacular materials such as stucco, brick, and stone, such as on Merrion Square.
The Georgian Merrion Square is significantly denser than most of Dublin’s more modern housing stock. Source. I believe that one such idea, called street votes, checks all of these boxes, and that it could be successful here. I have been working with the help of many experts to adapt it for Ireland. Street votes have attracted considerable interest internationally, winning support from the American Planning Association and the UK’s Royal Town Planning Institute. To date, the policy has been endorsed by John Fingleton, former chair of the Competition Authority, and Andrew Montague, former Lord Mayor of Dublin. Indeed, street votes will likely become law in England and given the similarity between the Irish and English housing markets, street votes would be the simplest way of trying bottom-up planning here. The idea is simple: following the example of the international precedents, Ireland should give small local areas the power to develop more, if they wish to. In the Irish context, the most appropriate geographical unit for such decisions is the street. But, learning from the international experiments, we should restrict those powers to allow only development that is consistent with Irish history and tradition, and which imposes minimal spillover costs on neighbours on other streets. This would still add the capacity for many more homes – but in a popular way, meaning that the policy will survive over time.
This means requiring streets to achieve something like a two-thirds majority to use these powers, to ensure that there is a broad consensus for change. And it means rediscovering traditional planning tools like ‘light planes’, which rule out development that risks blocking out too much light for neighbours. Such rules were a feature of the development systems under which Georgian Dublin and Limerick were built, as well as many of the most treasured international cities, like Belle Epoque Paris and early 20th century Boston. It means having strict rules on parking and driving, ensuring congestion doesn’t increase. And, crucially, it means having a strong land value capture system so that local government, and the wider community, benefit.
If you think these contributions and restrictions would remove the scheme’s benefits, think again. The constraints on housing supply are so tight in Ireland right now that many small developments can still deliver huge financial uplift; the median price to purchase a dwelling is at a record €310,000. The constraints on construction are not primarily economic, but regulatory: local people do not capture enough of the benefits of development to win their support, and even if they did, they would have no method to create a mandate for it. It is these constraints that street votes address by providing a less bureaucratic way to gain planning permission. Additionally, Ireland’s architectural heritage will be preserved, as listed buildings will be exempt from street votes, and potentially emulated. Georgian Dublin has as much as four times more housing space per hectare than the mid-century semi-detached housing street votes are best placed to replace.
Consider an average South Dublin street consisting of two-storey detached and semi-detached houses. Street votes would allow residents to choose a street plan that allows each home to add three more storeys, adding tens of additional units. Homeowners could sell or rent out the additional units thereby realising significant returns at current property levels.
In my research, I have built a detailed model of exactly how much street votes could lower the cost of housing in Ireland. Taking a random sample of different areas, I applied building regulations, included the additional floor area required to create separate entrances for the new homes, and estimated the floor area street votes would allow Irish homeowners to add. I then used the average dwelling size in Ireland to estimate the number of additional homes that would be created. With a height limit of four storeys for urban areas and two storeys for rural areas, and assuming residents will not pass a street vote unless the benefits are large enough to make it worth the build cost of redevelopment several times over, I find that the policy would permit an additional 25,000 homes per year on top of the 30,000 delivered through the rest of the system in 2022.
To be politically workable, these proposals must be refined carefully: we need to work out precise proposals around parking, energy efficiency, biodiversity and ensuring local infrastructure can cope with higher density. I will be spending the next several months working on developing the details of the policy, working with an array of young people and experts who want better housing and planning in Ireland. Our hope is that by the end of summer, we will have the details of a scheme that is ready to be implemented.
It’s possible that I’m wrong: maybe residents won’t be interested in passing a street vote, and the policy will have little uptake. Of course, street votes should not be our only tool for tackling Ireland’s terrible and growing housing troubles. But it could hardly make things worse, and if residents grasp the enormous opportunities street votes would offer them, it could make things significantly better. Experiments from around the world have shown us that giving locals the power to say yes to extra housing can deliver more and better homes in a popular way. Let’s try street votes in Ireland too.
Ireland has one of the most acute housing shortages in the world. It has the lowest number of dwellings per head in the OECD, and average house prices are now eight times mean income (compared to three times as much in 2010). The situation is so bad that 70% of young people in Ireland say that they are considering emigrating due to the cost of living, which is mainly driven by housing costs. On Daft, Ireland’s most popular property website, fewer than 1,100 properties are available to rent in Ireland, a country of over 5 million people.1 Homeownership has collapsed: the Economic and Social Research Institute estimates that one in three people will never own a home. Recent polls suggest housing is Ireland’s main political issue: the next election might well be decided on how each party proposes to fix the housing crisis.
There are many reasons for the housing shortage, but one fundamental cause is simple: construction has negative effects on neighbours (such as noise and a strain on local services) so measures to block construction are often locally popular. There is a tension between the need for new homes and local objections to development. But international experience suggests the circle can be squared. By giving locals the power to enable extra construction, and get a share of the resulting economic benefits, other countries have delivered large increases in housing supply with popular support.
For decades, the Irish planning system has not allowed enough homebuilding. The process of getting planning permission is tortuous: First, each new home needs the land to be zoned for housing. Then the homes must get planning permission from the local authority. Currently, almost all significant developments are appealed, which means further approval by An Bord Pleanála (ABP) is necessary for the project to proceed. At this stage, there is a risk of a judicial review, which can be brought by an objector living anywhere in the country. To bring a case to judicial review, applicants must argue before the High Court that a proposed development violates some part of the Planning and Development Act (2000). Judges in the High Court can block the development (or not), but their decision can, if a development is deemed to be of national importance, be appealed further to the Supreme Court. Critically, Ireland is unique in that it is the only country in the developed world with both American-style zoning and British-style local planning. This creates what Francis Fukuyama calls a ‘vetocracy’ – rule by veto.
In Ireland and abroad, development is blocked by those who may want to see building in theory, but not near them. Proposals providing desperately needed housing in Ireland’s urban areas (especially Dublin) are most at risk of these objections.
International solutions
Other countries have faced similar problems, and have had some success in solving them. South Korea pioneered bottom-up planning as a way to increase community involvement in the housing supply. Seoul’s Joint Redevelopment Projects (JRPs) give Koreans the right to redevelop their neighbourhoods at higher levels of density if at least 75% of homeowners agree. Introduced in 1983, every area of Seoul that has been designated for JRPs has opted to use the scheme, and around 50% of the new apartments built in the mid-1990s were delivered through JRPs. Over that time, living space per capita has increased by more than two and a half times.
Though the policy has been a huge success on the housing supply front — showing how communities will often opt for housing if given a choice — there has been some popular opposition. One major reason for opposition is that since only homeowners got the vote, tenants are evicted to allow homeowners to develop. The scheme also permits very tall developments that have substantial impacts on nearby areas whose residents haven’t had the chance to vote.
Similarly, the Squamish First Nation of Canada voted in 2019 to build Sen̓áḵw, a 6,000-home development on its sovereign tribal lands near Vancouver. The aim was to help address Vancouver’s housing shortage in a way that allowed the Squamish to reap the economic benefit of economic development. It is estimated that this project will generate billions of dollars for members of the tribe. Once again, this was able to go ahead where other large projects in Vancouver failed, because the Squamish residents have the power to permit development where they stand to benefit from it.
Another example is Israel’s approach to urban densification. Israel increased apartment supply in Tel Aviv by around half through a rule known as ‘TAMA 38’. Under this rule, if 80% of a given apartment block’s residents agree, they can vote for redevelopment, demolish the block, and build a larger one. A 66% threshold must be reached to enable extensions of the existing structure without demolition. The latter is the most common application of the rule. From 2018-20 in Tel Aviv, TAMA 38 was responsible for an average of 31% of the new homes built.2 Like JRPs, it works because the residents are given both the power and good reason to vote for more homes. It has many lessons: an Irish scheme should take considerably more care of neighbours, and ensure that more value is captured for local government to improve local services and infrastructure. As the current density of housing is lower in Dublin than in Tel Aviv, gentle infill, building on underutilised land, would be much easier while protecting the neighbours.
Not all community-led schemes have been about local agreement or votes, as recent developments in California illustrate. Even small-scale infill development in California tends to be controversial, and localities enforce some of the strictest zoning rules in the world. This has led to California having some of the world’s highest house prices, especially in Silicon Valley suburbs and cities like San Francisco. Since 2016, however, Californians have been allowed to build Accessory Dwelling Units (ADUs): small homes added by householders in their back gardens. This has had a striking impact: by 2021, ADUs made up 22% of new homes built in Los Angeles. ADUs have succeeded where other ideas have failed for two reasons: first, they are small-scale and visually unintrusive, so by their nature, most of the negative effects are borne by the homeowner. That homeowner has a strong reason to keep harm to a minimum. Second, ADUs are seen as benefiting local residents by improving property values, rather than delivering profits to a large developer or outsiders.
Houston has also followed a decentralised approach to planning, but this time based on opt-outs, rather than opt-ins. Like essentially all American cities, Houston has long required each new home to have its own minimum area of land to prevent developers from subdividing sites.3 This ‘minimum plot size’ was 5,000 square feet until the 1990s. In 1998 the city sought to reduce the minimum plot size to 1,400 square feet, to allow more homes per acre, but it faced opposition from homeowners who feared change. To assuage concerns, Houston provided that streets or blocks could choose to opt out of these reforms. If at least 51% of residents opted out, the city granted a ‘Special Minimum Lot Size’ application, exempting the area from the new rules. As it turns out, many areas have not opted out, and Houston has seen many attractive new homes built as a result.
Applying these lessons in Ireland
Not all of these schemes should transfer naturally to Ireland without adaptation. Korea’s scheme, for example, had no height limit, meaning that one-storey shantytowns were often replaced with high-rise towers. This would probably be politically unacceptable in any society without a tradition of high-rise urbanism, and may be aesthetically unattractive. But all these schemes demonstrate that giving locals more power to permit development can result in much more of it, and some of them show how development can be popular and uncontroversial.
The challenge in learning from these examples is coming up with a scheme that works with our special historical, geographic, and cultural circumstances. Such an approach would need to respect traditional Irish development patterns, generating development that was generally low or mid-rise, made up of detached, semi-detached and terraced houses, and clothed in vernacular materials such as stucco, brick, and stone, such as on Merrion Square.
The Georgian Merrion Square is significantly denser than most of Dublin’s more modern housing stock. Source. I believe that one such idea, called street votes, checks all of these boxes, and that it could be successful here. I have been working with the help of many experts to adapt it for Ireland. Street votes have attracted considerable interest internationally, winning support from the American Planning Association and the UK’s Royal Town Planning Institute. To date, the policy has been endorsed by John Fingleton, former chair of the Competition Authority, and Andrew Montague, former Lord Mayor of Dublin. Indeed, street votes will likely become law in England and given the similarity between the Irish and English housing markets, street votes would be the simplest way of trying bottom-up planning here. The idea is simple: following the example of the international precedents, Ireland should give small local areas the power to develop more, if they wish to. In the Irish context, the most appropriate geographical unit for such decisions is the street. But, learning from the international experiments, we should restrict those powers to allow only development that is consistent with Irish history and tradition, and which imposes minimal spillover costs on neighbours on other streets. This would still add the capacity for many more homes – but in a popular way, meaning that the policy will survive over time.
This means requiring streets to achieve something like a two-thirds majority to use these powers, to ensure that there is a broad consensus for change. And it means rediscovering traditional planning tools like ‘light planes’, which rule out development that risks blocking out too much light for neighbours. Such rules were a feature of the development systems under which Georgian Dublin and Limerick were built, as well as many of the most treasured international cities, like Belle Epoque Paris and early 20th century Boston. It means having strict rules on parking and driving, ensuring congestion doesn’t increase. And, crucially, it means having a strong land value capture system so that local government, and the wider community, benefit.
If you think these contributions and restrictions would remove the scheme’s benefits, think again. The constraints on housing supply are so tight in Ireland right now that many small developments can still deliver huge financial uplift; the median price to purchase a dwelling is at a record €310,000. The constraints on construction are not primarily economic, but regulatory: local people do not capture enough of the benefits of development to win their support, and even if they did, they would have no method to create a mandate for it. It is these constraints that street votes address by providing a less bureaucratic way to gain planning permission. Additionally, Ireland’s architectural heritage will be preserved, as listed buildings will be exempt from street votes, and potentially emulated. Georgian Dublin has as much as four times more housing space per hectare than the mid-century semi-detached housing street votes are best placed to replace.
Consider an average South Dublin street consisting of two-storey detached and semi-detached houses. Street votes would allow residents to choose a street plan that allows each home to add three more storeys, adding tens of additional units. Homeowners could sell or rent out the additional units thereby realising significant returns at current property levels.
In my research, I have built a detailed model of exactly how much street votes could lower the cost of housing in Ireland. Taking a random sample of different areas, I applied building regulations, included the additional floor area required to create separate entrances for the new homes, and estimated the floor area street votes would allow Irish homeowners to add. I then used the average dwelling size in Ireland to estimate the number of additional homes that would be created. With a height limit of four storeys for urban areas and two storeys for rural areas, and assuming residents will not pass a street vote unless the benefits are large enough to make it worth the build cost of redevelopment several times over, I find that the policy would permit an additional 25,000 homes per year on top of the 30,000 delivered through the rest of the system in 2022.
To be politically workable, these proposals must be refined carefully: we need to work out precise proposals around parking, energy efficiency, biodiversity and ensuring local infrastructure can cope with higher density. I will be spending the next several months working on developing the details of the policy, working with an array of young people and experts who want better housing and planning in Ireland. Our hope is that by the end of summer, we will have the details of a scheme that is ready to be implemented.
It’s possible that I’m wrong: maybe residents won’t be interested in passing a street vote, and the policy will have little uptake. Of course, street votes should not be our only tool for tackling Ireland’s terrible and growing housing troubles. But it could hardly make things worse, and if residents grasp the enormous opportunities street votes would offer them, it could make things significantly better. Experiments from around the world have shown us that giving locals the power to say yes to extra housing can deliver more and better homes in a popular way. Let’s try street votes in Ireland too.
Saturday, April 22, 2023
Sunday, April 09, 2023
Fertility in the heart of Covid19
In New York City the epicentre of the pandemic in the US, the fall in birthrate was quite dramatic in Spring 2020.A rcent report found that the birth rate fell by c. 19% among 10 New york hospitals during the period Dec20 to Feb 21.Other researchers have cast doubt over a "baby bust" as there was a decline even before the pandemic esp among the foreign born mothers due to decreased immigration.The decline was followed by a large increase in 2021 which suggests a baby bump rather than bust.
In this analysis we explore how the Covid 19 pandemic impacted the reproductive choices In NY region. First the economic and health shocks to the city were much larger and precipitous than the rest of the US.Second, NY City has been the entry point for foreign nationals.49% of all births in NY city were to foreign born nationals.If decreased immigration and not pandemic has led to the decrase in births then there should little deviation in birth rates of US born women. Thirs we have data to indicate whether the change in behavior like induced abortions led to the change.Fourth analysing the data by month of conception which could suggest any patterns in reproductive behavior.
Based on the data, it is found that the borths of NY residents that were privately financed did not deviate from the trend till nov'20. Wehn we plot these by month of conception the abrupt drop happens in Mar'20. The percent of births to NY residents delivered outside the city jumped from 6 to 12 percent and was concentrated among affluent women. Finally we report a steep drop in induced terminations (abortions). This would usually tend to increased births but the decline is also concistent with fewer conceptions.All totalled the precipitous drop in brths in New York Cioty in the early phase of the pandemic and it srapid rebound is ocncistent with the parallel spike in deaths and economic shutdown in Covid 19.
The results of the data shows that the decline in birth rates was much greater in the NY city than among the women in the rest of the country.The birth rates of NY resident women was 22 percent below the projected trend at their trough in Dec20.It also masked a much larger difference by nativity where the foreign born women fell sharply as compared to their US counterparts.
The sharp drop and rapid recovery in borth rates to NY city appears more closely linked to the perceived health risk than the unemployment rate. This is evidenced in the analysis of the month of conception which had the largest drop in Mar'20. Also further stratification of the data suggests that the birth rates of NY residents outside the city increased among affluent women
Conclusion : The spike in death due to Covid 19 , the extreme economic contraction and the intense public health response in New York City were more sudden and more extreme than in the rest of the US. The severity of the shock made possible the disentanglement of the pre-existing trends in fertility from changes in repsonse to the pandemic. We could not definitively identify whether the abrupt drop in borths was due to the fear of Covid 19 or the uncertain consequences from the economic shutdown and its indeterminate length. Yet the simultaneous spikes in deaths and drop in conceptions along with their brief duration suggested that people responded more to the unknown health risks than the economic contraction. This reponse was consistent with fall in birth rates following the outbreaks of Ebola and Zika.
Also unclear was whether the dramtic fall in induced terminations prevented an even greater fall in births than was observed. Women, for example may have used medication abortion to avoid a sugical procedure or couples may have practiced more effective contraception to prevent unintended pregnancies. The rapid rebound in births is more difficult to be attributed to the reversal of negative health shocks. The changes in fertility that occured in NY were sudden, large but brief.
From the research paper published by Daniel Dench,Wenhui Li,Theodore Joyce,Howard Minkoff,Gretchen Van Wye *****
In this analysis we explore how the Covid 19 pandemic impacted the reproductive choices In NY region. First the economic and health shocks to the city were much larger and precipitous than the rest of the US.Second, NY City has been the entry point for foreign nationals.49% of all births in NY city were to foreign born nationals.If decreased immigration and not pandemic has led to the decrase in births then there should little deviation in birth rates of US born women. Thirs we have data to indicate whether the change in behavior like induced abortions led to the change.Fourth analysing the data by month of conception which could suggest any patterns in reproductive behavior.
Based on the data, it is found that the borths of NY residents that were privately financed did not deviate from the trend till nov'20. Wehn we plot these by month of conception the abrupt drop happens in Mar'20. The percent of births to NY residents delivered outside the city jumped from 6 to 12 percent and was concentrated among affluent women. Finally we report a steep drop in induced terminations (abortions). This would usually tend to increased births but the decline is also concistent with fewer conceptions.All totalled the precipitous drop in brths in New York Cioty in the early phase of the pandemic and it srapid rebound is ocncistent with the parallel spike in deaths and economic shutdown in Covid 19.
The results of the data shows that the decline in birth rates was much greater in the NY city than among the women in the rest of the country.The birth rates of NY resident women was 22 percent below the projected trend at their trough in Dec20.It also masked a much larger difference by nativity where the foreign born women fell sharply as compared to their US counterparts.
The sharp drop and rapid recovery in borth rates to NY city appears more closely linked to the perceived health risk than the unemployment rate. This is evidenced in the analysis of the month of conception which had the largest drop in Mar'20. Also further stratification of the data suggests that the birth rates of NY residents outside the city increased among affluent women
Conclusion : The spike in death due to Covid 19 , the extreme economic contraction and the intense public health response in New York City were more sudden and more extreme than in the rest of the US. The severity of the shock made possible the disentanglement of the pre-existing trends in fertility from changes in repsonse to the pandemic. We could not definitively identify whether the abrupt drop in borths was due to the fear of Covid 19 or the uncertain consequences from the economic shutdown and its indeterminate length. Yet the simultaneous spikes in deaths and drop in conceptions along with their brief duration suggested that people responded more to the unknown health risks than the economic contraction. This reponse was consistent with fall in birth rates following the outbreaks of Ebola and Zika.
Also unclear was whether the dramtic fall in induced terminations prevented an even greater fall in births than was observed. Women, for example may have used medication abortion to avoid a sugical procedure or couples may have practiced more effective contraception to prevent unintended pregnancies. The rapid rebound in births is more difficult to be attributed to the reversal of negative health shocks. The changes in fertility that occured in NY were sudden, large but brief.
From the research paper published by Daniel Dench,Wenhui Li,Theodore Joyce,Howard Minkoff,Gretchen Van Wye *****
Friday, April 07, 2023
Tuesday, April 04, 2023
Sunday, March 05, 2023
Sunday, February 05, 2023
Wednesday, January 25, 2023
Japan has actually changed
By Noah Smith
Reading the widely discussed farewell essay by the BBC’s outgoing Tokyo correspondent, Rupert Wingfield-Hayes, I felt a deep sense of frustration. The veteran journalist summed up his impression of Japan — where he has lived and worked since 2012 — as one of stagnation and stasis, declaring that “after a decade here I have got used to the way Japan is and come to accept the fact that it is not about to change.”
And yet as someone who has lived in Japan, and who has gone back there for about a month out of every year since 2011, and who has written fairly extensively about the country’s economy, I can tell you that it absolutely has changed, in important and highly visible ways.
But before I go through Wingfield-Hayes’ article and explain all the things I think it gets wrong, I should say that although I’ve never met him, he seems like a good guy who honestly wants to see Japan do better than it’s doing. And some of the criticisms he makes are both accurate and very important.
For example, I think he’s absolutely right to identify gerontocracy as Japan’s fundamental problem. Wingfield-Hayes points to political gerontocracy — elderly voters maintaining the power of an elderly, ossified political class — but I think an equally or even more important problem is corporate gerontocracy. The near-universal practice of seniority-based promotion, combined with low startup rates and population aging, has led to an ossified class of corporate executives and managers who would rather preside comfortably over declining little empires than embrace new technologies and business models and take new risks. That in turn has caused Japanese companies to fall behind foreign rivals as they miss technological revolution after revolution — microprocessors, smartphones, semiconductor foundries, battery-powered cars, etc.
Wingfield-Hayes is also right to decry the low-productivity menial jobs that Japan has in abundance. Hiring 6 people to do the job of 2 is sadly common in Japan, and it’s a big reason why Japanese people earn such low and stagnant wages. The heart of the problem is the lack of new high-growth companies, which is due to deficiencies in R&D, lack of late-stage startup funding, and (especially) Japanese companies’ failure to tap export markets in lieu of their shrinking home market.
So Wingfield-Hayes is right to see Japan as a country that used to embrace the future and no longer does, and he’s right to point the finger at gerontocracy as the key problem. But his broader characterization of Japan as a stagnant, static society is very much off the mark. And I worry that this kind of article leads Western readers to think about Japan in terms of the cliches of the 1980s and 1990s — the postwar manufacturing successes, the bubble economy, the lost decade, etc., all of which Wingfield-Hayes repeatedly mentions. Those events were certainly important, but they don’t really define modern Japan or the challenges it faces in the 2020s.
Anyway, now let’s talk about some of the big recent changes in Japan that I think Wingfield-Hayes failed to appreciate.
Japan builds and builds and builds
The BBC correspondent’s most baffling argument is — if I read him right — that the built environment of Japanese cities has stagnated. This would be very strange indeed for a country that famously tears down its buildings after 30 years. Every time I go to Japan, I’m stunned at how many new buildings there are.
Wingfield-Hayes’ waxes nostalgic about the urban landscape of early 1990s Japan:
When I arrived in Japan for the first time in 1993…[what struck me was] how exquisitely clean and orderly Tokyo was…Tokyo was a concrete jungle, but it was a beautifully manicured one…In front of the Imperial Palace in Tokyo, the skyline was dominated by the glass towers of the country's corporate titans - Mitsubishi, Mitsui, Hitachi, Sony.
This was true enough, but in fact Tokyo is much more like this now than it was in 1993. The city is actually much more beautifully manicured than when I first saw it two decades ago. Grungy “shitamachi” areas have been modernized, many dowdy old “Showa” style apartment buildings have been replaced with modern construction, sculptures and decorations have been added everywhere.
Meanwhile, the glittering signs and soaring towers that we associate with urban Japan have only multiplied. If you’re impressed by big buildings, for example, it’s impossible to miss the vast, towering structures that the Mori Building Company is putting up all over the city. The biggest one, shown in the photo at the top of this post, is due to open this year. But it’s not just big towers getting built. Shopping centers, bars, clubs, and glittering zakkyo buildings (the ones with all the signs) continue to multiply. How could you live in Tokyo for a decade and miss all that?
In fact, Japan’s fervor for constant scrap-and-build construction is a major reason why rent there is so affordable, and why local politics haven’t halted dense development as they have in the West. Wingfield-Hayes opens his article by complaining that Japanese houses tend to depreciate instead of appreciate:
In Japan, houses are like cars.
As soon as you move in, your new home is worth less than what you paid for it and after you've finished paying off your mortgage in 40 years, it is worth almost nothing.
It bewildered me when I first moved here as a correspondent for the BBC - 10 years on, as I prepared to leave, it was still the same.
Weirdly, this is presented as a chronic problem — something Japan should have fixed long ago, but hasn’t. But in reality, depreciating real estate is one of Japan’s biggest strengths. Because Japanese people don’t use their houses as their nest eggs, as they do in much of the West, there is not nearly as much NIMBYism in Japan — people don’t fight tooth and nail to prevent any local development that they worry might reduce their property values, because their property values are going to zero anyway.
As a result, Japanese cities like Tokyo have managed to build enough housing to make housing costs fall, even as people continued to stream from the countryside into the city. If you think Japan is stagnant, consider this comparison between Tokyo and some leading Western cities:
In the bubble era that Wingfield-Hayes pines for, Japanese urban apartments were widely derided as “rabbit hutches”, but four decades later their floor space per person is similar to European standards and higher than in the UK.
Why does Wingfield-Hayes think depreciating housing is a problem? Perhaps he believes this means the Japanese middle class is unable to build wealth. But when property tends to depreciate, it means that houses don’t cost as much to buy in the first place; that lower price frees up household cash that can be put into stocks and bonds.
Basing wealth on productive assets instead of unproductive land is good for the economy — housing scarcity might pump up prices and build individual wealth for homeowners, but at the national level it simply holds back economic growth. And as it turns out, it’s good for middle-class wealth as well — in 2022, Japan’s median wealth per adult was about $120,000, compared to around $93,000 in the U.S. (And this is despite the fact that Japan’s once-legendary household savings rate has collapsed!)
So Japan’s somewhat unusual choice not to tie middle-class wealth to housing prices seems like a smart one. Over the past two decades, the country has done better in terms of housing policy, construction, landscaping and urbanism than just about any country in the West. And it did this by embracing constant change rather than the physical stagnation that has prevailed in Western cities.
Babies, immigrants, and women in management: more than you think Wingfield-Hayes, like many others, dings Japan for its low birth rate:
A third of Japanese people are over 60, making Japan home to the oldest population in the world, after tiny Monaco. It is recording fewer births than ever before.
As I wrote in a post earlier this week, aging is a real problem. But it’s a problem that every developed country is dealing with. What few people seem to know is that Japan’s fertility rate is actually higher than any of the other countries in its region:
As Bloomberg’s Gearoid Ready has noted, the only reason we associate the low fertility trend with Japan is that it started there first.
The BBC correspondent also claims that Japan has not embraced immigration as a solution to its aging problem:
[Japan’s] hostility to immigration has not wavered. Only about 3% of Japan's population is foreign-born, compared to 15% in the UK…If you want to see what happens to a country that rejects immigration as a solution to falling fertility, Japan is a good place to start.
This would have been a very fair characterization in the 1990s or the 2000s. But during Wingfield-Hayes’ decade in the country, Japan’s immigration policy changed substantially, and he ought to have noticed. Here’s a Bloomberg article I wrote in 2019 about the changes implemented by the late Prime Minister Abe Shinzo:
In recent years, the Abe administration has adopted major changes that will probably sustain the influx of immigrants. In 2017 Japan implemented fast-track permanent residency for skilled workers. In 2018 it passed a law that will greatly expand the number of blue-collar work visas, and -- crucially -- provide these workers with a path to permanent residency if they want it.
These changes thus represent true immigration, as opposed to temporary guest-worker policies (despite the common use of the term “guest worker law” to describe the new visas). In time, it will mean a more ethnically diverse Japanese citizenry. Permanent residents are allowed to apply for Japanese citizenship after five years.
The BBC even reported on some of these changes when they happened.
As a result of these policies and some others, the number of foreign-born workers in Japan doubled in the first few years Abe was in power.
The 3% number that Wingfield-Hayes cites represents a dramatic increase over the 1% of just a few years earlier. Tokyo itself is an international city now; in 2018, 1 out of 8 people turning 20 in the city proper wasn’t born in the country.
Yet another example is the role of women in the workforce. Wingfield-Hayes rightfully dings Japan for not having enough women in corporate management, but neglects to mention that the percentage increased from 11% to 15% during his time there — not a massive social transformation, but not a picture of stasis either.
And this was accompanied by a large-scale movement of women into the workforce, such that Japan’s female employment rate now exceeds America’s.
Out with the old cliches
In other words, although Wingfield-Hayes lived in Japan during the 2010s, his assessment of the country seems very much stuck in the 1990s. Despite the fact that (by his own admission) he does not speak much Japanese, he really ought to have noticed the big changes that were happening all around him.
Anyway, perhaps you’re asking: Why does any of this matter? I admit that part of my determination to rebut charges of Japanese stasis is just personal pique — irritation at the cliched cultural essentialism that still defines Japan in the minds of too many Westerners. I suppose thinking of Japan in terms of the bubble and crash of the 80s is less ridiculous than thinking of it in terms of samurai traditions and The Chrysanthemum and The Sword. But still. Come on.
Perhaps, though, there actually might be a little bit at stake here. As Japan becomes a more open, globalized country, Western ideas and opinions have the potential to change Japan for the better. Outside perspectives could help Japan to solve the very real problems of the 2020s — corporate ossification, technological slowness, etc. But if Westerners essentialize Japan — if they think of it as a country and culture frozen in amber — they won’t have much to offer the country in the here and now. Japan is, in fact, a very dynamic and changeable place.
Reading the widely discussed farewell essay by the BBC’s outgoing Tokyo correspondent, Rupert Wingfield-Hayes, I felt a deep sense of frustration. The veteran journalist summed up his impression of Japan — where he has lived and worked since 2012 — as one of stagnation and stasis, declaring that “after a decade here I have got used to the way Japan is and come to accept the fact that it is not about to change.”
And yet as someone who has lived in Japan, and who has gone back there for about a month out of every year since 2011, and who has written fairly extensively about the country’s economy, I can tell you that it absolutely has changed, in important and highly visible ways.
But before I go through Wingfield-Hayes’ article and explain all the things I think it gets wrong, I should say that although I’ve never met him, he seems like a good guy who honestly wants to see Japan do better than it’s doing. And some of the criticisms he makes are both accurate and very important.
For example, I think he’s absolutely right to identify gerontocracy as Japan’s fundamental problem. Wingfield-Hayes points to political gerontocracy — elderly voters maintaining the power of an elderly, ossified political class — but I think an equally or even more important problem is corporate gerontocracy. The near-universal practice of seniority-based promotion, combined with low startup rates and population aging, has led to an ossified class of corporate executives and managers who would rather preside comfortably over declining little empires than embrace new technologies and business models and take new risks. That in turn has caused Japanese companies to fall behind foreign rivals as they miss technological revolution after revolution — microprocessors, smartphones, semiconductor foundries, battery-powered cars, etc.
Wingfield-Hayes is also right to decry the low-productivity menial jobs that Japan has in abundance. Hiring 6 people to do the job of 2 is sadly common in Japan, and it’s a big reason why Japanese people earn such low and stagnant wages. The heart of the problem is the lack of new high-growth companies, which is due to deficiencies in R&D, lack of late-stage startup funding, and (especially) Japanese companies’ failure to tap export markets in lieu of their shrinking home market.
So Wingfield-Hayes is right to see Japan as a country that used to embrace the future and no longer does, and he’s right to point the finger at gerontocracy as the key problem. But his broader characterization of Japan as a stagnant, static society is very much off the mark. And I worry that this kind of article leads Western readers to think about Japan in terms of the cliches of the 1980s and 1990s — the postwar manufacturing successes, the bubble economy, the lost decade, etc., all of which Wingfield-Hayes repeatedly mentions. Those events were certainly important, but they don’t really define modern Japan or the challenges it faces in the 2020s.
Anyway, now let’s talk about some of the big recent changes in Japan that I think Wingfield-Hayes failed to appreciate.
Japan builds and builds and builds
The BBC correspondent’s most baffling argument is — if I read him right — that the built environment of Japanese cities has stagnated. This would be very strange indeed for a country that famously tears down its buildings after 30 years. Every time I go to Japan, I’m stunned at how many new buildings there are.
Wingfield-Hayes’ waxes nostalgic about the urban landscape of early 1990s Japan:
When I arrived in Japan for the first time in 1993…[what struck me was] how exquisitely clean and orderly Tokyo was…Tokyo was a concrete jungle, but it was a beautifully manicured one…In front of the Imperial Palace in Tokyo, the skyline was dominated by the glass towers of the country's corporate titans - Mitsubishi, Mitsui, Hitachi, Sony.
This was true enough, but in fact Tokyo is much more like this now than it was in 1993. The city is actually much more beautifully manicured than when I first saw it two decades ago. Grungy “shitamachi” areas have been modernized, many dowdy old “Showa” style apartment buildings have been replaced with modern construction, sculptures and decorations have been added everywhere.
Meanwhile, the glittering signs and soaring towers that we associate with urban Japan have only multiplied. If you’re impressed by big buildings, for example, it’s impossible to miss the vast, towering structures that the Mori Building Company is putting up all over the city. The biggest one, shown in the photo at the top of this post, is due to open this year. But it’s not just big towers getting built. Shopping centers, bars, clubs, and glittering zakkyo buildings (the ones with all the signs) continue to multiply. How could you live in Tokyo for a decade and miss all that?
In fact, Japan’s fervor for constant scrap-and-build construction is a major reason why rent there is so affordable, and why local politics haven’t halted dense development as they have in the West. Wingfield-Hayes opens his article by complaining that Japanese houses tend to depreciate instead of appreciate:
In Japan, houses are like cars.
As soon as you move in, your new home is worth less than what you paid for it and after you've finished paying off your mortgage in 40 years, it is worth almost nothing.
It bewildered me when I first moved here as a correspondent for the BBC - 10 years on, as I prepared to leave, it was still the same.
Weirdly, this is presented as a chronic problem — something Japan should have fixed long ago, but hasn’t. But in reality, depreciating real estate is one of Japan’s biggest strengths. Because Japanese people don’t use their houses as their nest eggs, as they do in much of the West, there is not nearly as much NIMBYism in Japan — people don’t fight tooth and nail to prevent any local development that they worry might reduce their property values, because their property values are going to zero anyway.
As a result, Japanese cities like Tokyo have managed to build enough housing to make housing costs fall, even as people continued to stream from the countryside into the city. If you think Japan is stagnant, consider this comparison between Tokyo and some leading Western cities:
In the bubble era that Wingfield-Hayes pines for, Japanese urban apartments were widely derided as “rabbit hutches”, but four decades later their floor space per person is similar to European standards and higher than in the UK.
Why does Wingfield-Hayes think depreciating housing is a problem? Perhaps he believes this means the Japanese middle class is unable to build wealth. But when property tends to depreciate, it means that houses don’t cost as much to buy in the first place; that lower price frees up household cash that can be put into stocks and bonds.
Basing wealth on productive assets instead of unproductive land is good for the economy — housing scarcity might pump up prices and build individual wealth for homeowners, but at the national level it simply holds back economic growth. And as it turns out, it’s good for middle-class wealth as well — in 2022, Japan’s median wealth per adult was about $120,000, compared to around $93,000 in the U.S. (And this is despite the fact that Japan’s once-legendary household savings rate has collapsed!)
So Japan’s somewhat unusual choice not to tie middle-class wealth to housing prices seems like a smart one. Over the past two decades, the country has done better in terms of housing policy, construction, landscaping and urbanism than just about any country in the West. And it did this by embracing constant change rather than the physical stagnation that has prevailed in Western cities.
Babies, immigrants, and women in management: more than you think Wingfield-Hayes, like many others, dings Japan for its low birth rate:
A third of Japanese people are over 60, making Japan home to the oldest population in the world, after tiny Monaco. It is recording fewer births than ever before.
As I wrote in a post earlier this week, aging is a real problem. But it’s a problem that every developed country is dealing with. What few people seem to know is that Japan’s fertility rate is actually higher than any of the other countries in its region:
As Bloomberg’s Gearoid Ready has noted, the only reason we associate the low fertility trend with Japan is that it started there first.
The BBC correspondent also claims that Japan has not embraced immigration as a solution to its aging problem:
[Japan’s] hostility to immigration has not wavered. Only about 3% of Japan's population is foreign-born, compared to 15% in the UK…If you want to see what happens to a country that rejects immigration as a solution to falling fertility, Japan is a good place to start.
This would have been a very fair characterization in the 1990s or the 2000s. But during Wingfield-Hayes’ decade in the country, Japan’s immigration policy changed substantially, and he ought to have noticed. Here’s a Bloomberg article I wrote in 2019 about the changes implemented by the late Prime Minister Abe Shinzo:
In recent years, the Abe administration has adopted major changes that will probably sustain the influx of immigrants. In 2017 Japan implemented fast-track permanent residency for skilled workers. In 2018 it passed a law that will greatly expand the number of blue-collar work visas, and -- crucially -- provide these workers with a path to permanent residency if they want it.
These changes thus represent true immigration, as opposed to temporary guest-worker policies (despite the common use of the term “guest worker law” to describe the new visas). In time, it will mean a more ethnically diverse Japanese citizenry. Permanent residents are allowed to apply for Japanese citizenship after five years.
The BBC even reported on some of these changes when they happened.
As a result of these policies and some others, the number of foreign-born workers in Japan doubled in the first few years Abe was in power.
The 3% number that Wingfield-Hayes cites represents a dramatic increase over the 1% of just a few years earlier. Tokyo itself is an international city now; in 2018, 1 out of 8 people turning 20 in the city proper wasn’t born in the country.
Yet another example is the role of women in the workforce. Wingfield-Hayes rightfully dings Japan for not having enough women in corporate management, but neglects to mention that the percentage increased from 11% to 15% during his time there — not a massive social transformation, but not a picture of stasis either.
And this was accompanied by a large-scale movement of women into the workforce, such that Japan’s female employment rate now exceeds America’s.
Out with the old cliches
In other words, although Wingfield-Hayes lived in Japan during the 2010s, his assessment of the country seems very much stuck in the 1990s. Despite the fact that (by his own admission) he does not speak much Japanese, he really ought to have noticed the big changes that were happening all around him.
Anyway, perhaps you’re asking: Why does any of this matter? I admit that part of my determination to rebut charges of Japanese stasis is just personal pique — irritation at the cliched cultural essentialism that still defines Japan in the minds of too many Westerners. I suppose thinking of Japan in terms of the bubble and crash of the 80s is less ridiculous than thinking of it in terms of samurai traditions and The Chrysanthemum and The Sword. But still. Come on.
Perhaps, though, there actually might be a little bit at stake here. As Japan becomes a more open, globalized country, Western ideas and opinions have the potential to change Japan for the better. Outside perspectives could help Japan to solve the very real problems of the 2020s — corporate ossification, technological slowness, etc. But if Westerners essentialize Japan — if they think of it as a country and culture frozen in amber — they won’t have much to offer the country in the here and now. Japan is, in fact, a very dynamic and changeable place.
Jerome Powell Speech
I will address three main points. First, the Federal Reserve's monetary policy independence is an important and broadly supported institutional arrangement that has served the American public well. Second, the Fed must continuously earn that independence by using our tools to achieve our assigned goals of maximum employment and price stability, and by providing transparency to facilitate understanding and effective oversight by the public and their elected representatives in Congress. Third, we should "stick to our knitting" and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.
Central bank independence and transparency
On the first point, the case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations.1 Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors. I believe that the benefits of independent monetary policy in the U.S. context are well understood and broadly accepted.2
In a well-functioning democracy, important public policy decisions should be made, in almost all cases, by the elected branches of government. Grants of independence to agencies should be exceedingly rare, explicit, tightly circumscribed, and limited to those issues that clearly warrant protection from short-term political considerations.
With independence comes the responsibility to provide the transparency that enables effective oversight by Congress, which, in turn, supports the Fed's democratic legitimacy. At the Fed, we treat this as an active, not passive, responsibility, and over the past several decades we have steadily broadened our efforts to provide meaningful transparency about the basis for, and consequences of, the decisions we make in service to the American public. We are tightly focused on achieving our statutory mandate and on providing useful and appropriate transparency.3
Sticking to our mandate
It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day.4 Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.
In the area of bank regulation, too, the Fed has a degree of independence, as do the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.5 Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates.
Addressing climate change seems likely to require policies that would have significant distributional and other effects on companies, industries, regions, and nations. Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections.
At the same time, in my view, the Fed does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision.6 The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.
But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.7 We are not, and will not be, a "climate policymaker."
Central bank independence and transparency
On the first point, the case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations.1 Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors. I believe that the benefits of independent monetary policy in the U.S. context are well understood and broadly accepted.2
In a well-functioning democracy, important public policy decisions should be made, in almost all cases, by the elected branches of government. Grants of independence to agencies should be exceedingly rare, explicit, tightly circumscribed, and limited to those issues that clearly warrant protection from short-term political considerations.
With independence comes the responsibility to provide the transparency that enables effective oversight by Congress, which, in turn, supports the Fed's democratic legitimacy. At the Fed, we treat this as an active, not passive, responsibility, and over the past several decades we have steadily broadened our efforts to provide meaningful transparency about the basis for, and consequences of, the decisions we make in service to the American public. We are tightly focused on achieving our statutory mandate and on providing useful and appropriate transparency.3
Sticking to our mandate
It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day.4 Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.
In the area of bank regulation, too, the Fed has a degree of independence, as do the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.5 Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates.
Addressing climate change seems likely to require policies that would have significant distributional and other effects on companies, industries, regions, and nations. Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections.
At the same time, in my view, the Fed does have narrow, but important, responsibilities regarding climate-related financial risks. These responsibilities are tightly linked to our responsibilities for bank supervision.6 The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.
But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.7 We are not, and will not be, a "climate policymaker."
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