Fiscal and Monetary Policy Next...

I'm almost thinking of renaming the course, for the next couple of parts, Future Issues in the UK Economy Based on Contemporary Issues in the Japanese Economy.

You'll perhaps be aware that the reason you've had a little break from me in econ217b is that I'm in Japan currently, and Japan just happens to, right now, be experimenting with both expansionary monetary and fiscal policy.

For a bit of context, Japan has been generally in the economic doldrums since 1990:

That picture shows that since 1990, real GDP growth has tended to hover around zero, whereas before then Japan was known for its stellar economic growth - in the 1960s averaging nearer 10%, and even in the late 1980s nearer 5%.

However, in early 1990 the Japanese stock market suffered a dramatic crash, which can be seen by looking at the following graph:

In the 1960s, 70s and 80s, the Nikkei (the Japanese stock market) rose dramatically (the late 1990s growth makes the earlier growth look quite miniscule, but plotting this in logarithms shows that actually growth was stronger in the 1950s and 60s than in the 1990s).

However, in 1990 the stock market stopped rising and started falling dramatically - by February 1990 5% had been lost, by the start of April more than 20% and by November about 40% (see here for the data, downloaded from http://stooq.de/q/d/?s=^nkx). By the start of 1993 the market had lost more than half its value - half of the wealth in the Japanese economy had been wiped out.

Since then, as the first graph above shows, GDP growth has barely recovered. Moreover, other economic statistics have taken very distinct patterns since then too. For example, pretty much since 1990, the price level stopped rising:

In this graph, Japan's price level is the red line, the UK's is blue. The UK's shows a fairly standard pattern - persistent inflation over many years (particularly the 1970s) means that the price level keeps on rising. In Japan, however, this stopped in the aftermath of the stock market crash in the 1990s.

Japanese government debt has also grown dramatically over this time (get gross data since 1980 from here and net data from here):

Gross debt is the number usually heard about in reference to Japan, as that has topped 200% recently (in the UK we haven't reached 100% yet), although many argue net debt (which takes into account assets) is a better measure of indebtedness anyhow. The interesting thing in the FT article linked is that it notes Japan's finance minister (equivalent of Chancellor) saying in 1995 he felt debt was already nearing its sustainable limit.

The point often made in the light of the global financial crisis is that the UK (and US and Europe) is following Japan into a long period of economic stagnation (a Google search for "Japan 2.0" should give some flavour to these fears).

So given the UK's experiment with austerity since 2010, which is an attempt to reduce government spending to reduce the deficit and debt, it is interesting that in 2013 Japan's government is experimenting again with fiscal stimulus. This has not been lost on a number of interested observers, most notably Paul Krugman and Adam Posen (worth reading both).

We'll be visiting many of the kinds of arguments made by both of these commentators when thinking about fiscal policy and monetary policy in the next few weeks for the UK.

New paper on Financial Fair Play

You'll recall from last term we look at the economics of sport, and touched upon reforms aimed at the financial side of the game, and the potential for them to backfire. Stefan Szymanski, one of the big names in the economics of sport, has just written a paper with Thomas Peeters on precisely this, arguing that actually, Financial Fair Play in football will reduce competition. It's a fascinating read and will certainly help you as you think about this crucial aspect of regulation in sport.