Monday, August 5, 2013

Coming Soon: "Gung Ho 2"?

Reading stories like this in the Detroit papers in the 1980s may have planted a seed in the mind of a young man who would grow up to be an economist specializing in exchange rates:

Bill Ford, executive chairman, put it this way when I talked with him Tuesday:

“It’s all about fairness, really,” he said. “I think what this country went through to re-establish our manufacturing base when we almost lost it. … For us now to give that away in a bad trade agreement makes no sense to me.

“I think manufacturing in this country matters a lot,” Ford continued. “It matters to this area. We’re not only just getting back on our feet, but as you know, really hitting on all cylinders. We’re hiring lots of Americans for both blue-collar and white-collar jobs. But a bad trade agreement could jeopardize that, and we will not let that happen.”

Ford executives are rightly proud that their company — without a federal bailout — took steps to right-size itself, boost productivity, rebuild its credit rating and revamp its product lineup to be competitive with the world’s top automakers.

But then, since last November, they’ve watched as their company’s Japanese rivals got a huge boost from a drop of nearly 20% in the value of the Japanese yen compared to the U.S. dollar.
Oh, wait, that's not from the 1980s - its from last week.  What is going on?

Certainly the fall in the Yen is helpful for Japanese exporters.  According to the Washington Post's Neil Irwin:
It’s been a good year so far for automakers. And it’s been an even better year for Toyota. The company reported its second-quarter earnings Friday, which included this whopping number: Sales were up 14 percent over a year earlier. The company hiked its estimate for 2013 earnings by 8 percent. And operating profit rose 88 percent.

The results were enough to spark a 6 percent rise in Toyota’s U.S.-listed shares, and surely to strike fear in the hearts of Toyota’s competitors. As Bloomberg news points out, while Toyota was edged out by General Motors in number of cars and trucks sold, it recorded more than three times the profit....

Of the 272 billion yen in higher earnings that Toyota reported Friday, 260 billion are attributable to foreign exchange swings, according to Toyota’s own estimates. Toyota has taken advantage of costs that are now 25 percent lower on the global marketplace (at least for those cars and parts built in Japan, rather than in satellite plants elsewhere).
The yen has depreciated about 25% relative to the dollar in the past year:
(Note: the graph shows the yen price of a dollar, so a rise is a yen depreciation/dollar appreciation.)

Is this "currency manipulation" as some in Detroit and Washington would have it?  The most straightforward explanation of the yen's decline would be a more expansionary monetary policy under the new Bank of Japan Governor, Haruhiko Kuroda (appointed by the new government of Shinzo Abe).  One of the effects of expanding the quantity of money is to reduce the value of it, both domestically (inflation) and relative to others (depreciation), and since currencies are traded in financial markets, the effects of expansionary policies can show up quickly in exchange rates (indeed, markets are forward-looking, so only a change in expectations is needed).  In the case of Japan, which has suffered from deflationary sluggishness for a couple of decades now, a shift to a more expansionary policy regime seems appropriate.

Taking a longer view, the recent decline is partly retracing the yen's appreciation during the financial crisis (when, even more than the dollar, it was seen as a "safe haven") and afterwards, when the dollar was falling due to the Fed's "quantitative easing" expansionary policies.
"Manipulation" is a loaded term, and determining when it occurs is subjective (I think the term could reasonably be applied when governments intervene in foreign exchange markets - the evidence of this would be in official holdings of currency reserves).  But its common for trading partners to grumble when your currency falls, even if the depreciation results from a monetary policy appropriate for domestic conditions.  The US was on the other side of this type of criticism a few years ago when the Fed was being accused of stoking "currency wars."

Of course, even if one takes the view Japan is (unfairly) "manipulating" its currency, there isn't really a mechanism to do anything about it.  Mirroring the divide in the economics profession where "international trade" is studied by microeconomists and exchange rates ("international finance") is the province of macroeconomists, the world has separate institutions for dealing with "trade" problems and "monetary" ones.  If a country attempts to boost net exports with a tariff, its trading partners have recourse to the WTO (and, in many cases, provisions of preferential trading agreements as well).  Doing the same thing through currency depreciation, well... the institution that has purview over exchange rates, the IMF, doesn't really have any mechanisms to settle grievances, so government officials are left to hector each other, and, on rare occasion, agree to coordinated policies.

In the case of the relative lack of US presence in the Japanese auto market, which has been consistent throughout the ups and downs of the yen-dollar exchange rate, the culprit (to the extent its driven by policy, not consumer preferences) is more likely in "non-tariff barriers" (NTBs).  While tariffs are easy to see, analyze and bargain over, imports can be impeded in more subtle ways that are more difficult to identify and deal with.  Often, what some see as a non-tariff barrier can be defended as a safety or environmental regulation.  In his "proposal to level the playing field" this is how Sander Levin (D-MI; my old congressman) characterizes Japan's auto sector NTBs:
These barriers have included: a discriminatory system of taxes; onerous and costly vehicle certification procedures for imported automobiles; a complex and changing set of safety, noise, and pollution standards, many of which do not conform to international standards and add significant development and production costs for automobiles exported to Japan; an unwillingness by Japanese dealerships to carry foreign automobiles and insufficient enforcement of competition laws to address anti-competitive practices; zoning restrictions that make it difficult, if not impossible, to establish new dealerships in important markets; and exclusionary consumer preferences shaped by decades of government policies directed at promoting the national car companies. 
Of course, that's not exactly an unbiased source (methinks "exclusionary consumer preferences" a bit of a stretch).  The occasion for Levin's proposal is Japan's entry into the negotiations over the "Trans Pacific Partnership" (TPP) trade agreement.  Overall, these preferential trade agreements are somewhat of a mixed bag.  They represent a "deeper" form of integration than the WTO and, as such, tend to extend further into areas typically thought of as "domestic" policy and may include such things as harmonization of regulations.  Whatever else one may think of it, the TPP negotiations may therefore be a good vehicle for addressing NTBs.  The US Trade Representative's office is promising to work on it, and already claiming some progress:
On April 12th, Japan announced its unilateral decision to more than double the number of motor vehicles eligible for import under its Preferential Handling Procedure (PHP), a simpler and faster certification method often used by U.S. auto manufacturers to export to Japan. In the near term, U.S. auto producers will be allowed to export up to 5,000 vehicles annually of each vehicle “type” under the PHP program, compared with the current annual ceiling of 2,000 vehicles per vehicle type. The United States and Japan have agreed to address a broad range of non-tariff measures in Japan’s automotive sector –including those related to transparency in regulations, standards, certification, “green” and new technology vehicles, and distribution – in a bilateral negotiation parallel to the TPP talks. In addition, they agreed to negotiate a special motor vehicle safeguard provision, as well as a mechanism to “snap back” tariffs as a remedy in dispute settlement cases.
Moreover, it appears that the Abe government plans to use the TPP as a cudgel to overcome domestic resistance to various domestic "reforms" that it wants to achieve as part of the "third arrow" of Abenomics.

Nonetheless, I don't think the US automakers should expect a big increase in the number their products cruising the roads of Japan anytime soon.  Issues of "currency manipulation" and non-tarriff barriers are invariably sticky ones - separating currency manipulation from valid monetary policy is subjective, and distinguishing legitimate regulations from disguised trade barriers is often very tricky.  Voluntary export restraints, anyone?

The post title is a reference to this, from the 80s.

Saturday, August 3, 2013


According to the BEA's first version (the "advance estimate") of the second-quarter GDP numbers, which were released this past week, the US economy grew at a lackluster 1.7% annual rate in April-June.  That's an acceleration from the first quarter (1.1%) and the last quarter of 2012 (0.1%). But its still pretty disappointing - a treading-water-ish growth rate at best when we need faster-than-normal growth to make meaningful progress towards something resembling "full employment".

Although the unemployment rate has been falling, other measures like the employment-population ratio highlight how the labor market is far from fully recovered from the 2008-09 recession, and a 1.7% growth rate isn't nearly fast enough to really help.
Second-quarter growth was boosted by investment, which increased at a 9% rate (including 13.4% growth rate in residential investment; inventory accumulation also contributed).  Net exports were a minus, with imports growing faster than exports (9.8% versus 5.4%).  Government expenditures were a small drag, falling 0.4% (the federal government was at -1.5%, while state and local grew 0.3%).  It was the third consecutive quarter that the federal government has made a negative contribution (though less so than in the previous two).

The interesting thing in the release was not the second-quarter numbers, but rather the "comprehensive revision" of all the past data that came with it.  The BEA does this about every 5 years to incorporate changes in definitions and methodology.  By its new reckoning, US GDP is about $550 billion (3.4%) larger.

This shows how much the revisions have added to GDP over time (the percent difference between the new and previous versions of the series, constructed using vintage data from Alfred):
The main changes are to treat research and development as well as the creation of movies, TV programs, books and music (which the BEA is calling "entertainment, literary and artistic originals") as forms of investment.  These appear in the tables as a new subcategory of investment called "intellectual property products" which also includes software (formerly part of "equipment and software"; now there's a separate "equipment" subcategory).

Slate's Matthew Yglesias had a nice explanation of rationale for the changes:
Government statisticians draw a distinction between money a company spends as the cost of doing business and money a company spends on investing for the future. When a moving company buys a new truck, that’s an investment. You expect the truck to last for years and generate an ongoing stream of income. The truck purchase is part of GDP. Each year the truck depreciates in value, with the depreciation subtracting from GDP as what’s known as “consumption of fixed capital.” When a moving company buys gasoline to fuel the truck, that’s just the cost of doing business. The expense incurred is subtracted from the company’s income when calculating how profitable it was in any given year.

Right now we treat filming a season of Game of Thrones or having researchers work on a new pharmaceutical as being similar to filling up the truck’s gas tank. The new method is to treat them as similar to buying the truck.

Conceptually, the new way is clearly correct. Game of Thrones is to HBO as a truck is to a moving company: part of its stock of capital. Accounting for artistic originals in that way will add about half a percentage point to the size of America’s overall economy. Doing the same for research and development spending will add slightly more than two percentage points. And here, too, the new system is more sound in theory. A drug company is going to own plenty of physical capital goods, but its most important investments are the ones it makes in researching new products.
At Econbrowser, James Hamilton used a "Robinson Crusoe" story to explain the changes, Dean Baker and Jared Bernstein used the occasion to consider some of the other limitations of GDP in a NYT op-ed.

Overall, the revisions do not significantly change the "macro" picture of the behavior of the US economy.  With the new series, the average growth rate is slightly faster: 3.16% versus 3.11% since 1947 (when the quarterly data begins) and 2.50% versus 2.42% since 1993.  The standard deviation of growth is a tiny bit lower in the new series, and inflation, measured by the GDP deflator, is reduced a smidge by the revisions.  The "extra" output added in the revision is acyclical for the 1947-2013 period as a whole - the correlation of the addition to GDP with the growth rate is -0.04 - but slightly pro-cyclical over the last 20 years, with a correlation between growth and the addition of 0.19.

The new series makes the 2008-09 recession look slightly less bad, and the subsequent expansion a little bit better, as can be seen looking at both series normalized to 100 at the previous business cycle peak of fourth-quarter 2007:
At his FT blog, Gavyn Davies puts the new numbers in the context of economic policy.

Another change was to treat traditional, defined-benefit pensions on an "accrual" basis, which means they will be counted as income as the obligations to workers rise, rather than when employers put money in their pension funds.  This boosts the measured saving rate, which the Washington Post's Jim Tankersley thinks is problematic:
That money isn’t necessarily real. The Bureau of Economic Analysis didn’t find hundreds of billions of dollars stuffed in Americans’ mattresses. It decided to start counting all pension promises as savings in the bank....

The promises that aren’t backed by an income stream are called unfunded liabilities, and by changing how it counts them, the government added almost $200 billion to the nation’s personal savings for 2012.

The catch is, what if those promises don’t come true? The accounting change was made shortly after Detroit became the largest U.S. city to file for bankruptcy, in part due to the unfunded liabilities in its pension plan, raising questions over whether pensioners will actually receive the benefits they’ve been promised. Signs point to more strains on state and local government pension funds down the road.
(It's worth noting that some, including Paul Krugman, argue that the hand-wringing about under-funded pensions is overblown).

Another change is that some expenses associated with property transfers like attorney's fees and title insurance are also going to be treated as investments (the idea is that when you pay for these, you're not consuming a service, but rather paying for something that generates a flow of services - keeping the rain off your head - over a period of time).

The BEA also moved the "base year" to 2009 - i.e., real GDP is now expressed at 2009 prices (before it was 2005).

The BEA has more information about the comprehensive revision here; I found this article from the March Survey of Current Business (pdf) particularly helpful.

The revised "second estimate" of second-quarter GDP is due on Aug. 29.