The Macroeconomy Bubbles and Bounceback , the US and Japan Presentation made at Kendal of Lexington

1. The MacroeconomyBubbles and Bounceback, the US and JapanPresentation made at Kendal of Lexington Michael Smitka Professor of Economics Washington and Lee University August 25, 2009

2. Business cycles • The Federal Reserve deliberately caused previous post-WWII recessions to dampen inflation • Hence when the Fed eased off on its hikes of interest rates, the economy “V-ed” back • I believe that a “bubble” recession is different • Excess capacity combined with lower asset values but high debt are a potent combination • Rapid adjustment of asset prices in the US is bringing us quickly to a bottom • But recovery will take years, not months

3. Today... • I’ll look at the post-bubble experience of Japan • Then I’ll provide a brief overview of recent data for the US • And at comparable “bubble” data for the US

4. Japan’s Experience • A huge bubble during 1987-1991 • Very easy monetary policy, huge deficits for over a decade • As a Japan specialist, I teach a whole course on this, so dare not start into details! • So how has Japan fared? • See graphs of before & after...

5. Japanese Urban Real Estate Prices vs Consumer Price Index Inflation Commercial Real Estate —6 largest cities— CPI (inflation)

6. Japanese Urban Real Estate Prices vs Consumer Price Index Inflation  18 years!  Commercial Real Estate —6 largest cities— CPI (inflation)

8. Nikkei at 10,500 today

10. 0.9% pa real growth Japan now in 4th post-bubble recession

11. US GDP • GDP (gross domestic product) • is a measure that attempts to count (but not double-count) all economic activity • By dividing the economy into • Personal consumption • Business & residential investment • Government consumption & investment • International trade • Recently the economy has shrunk, not grown

12. Growth (or its lack) – next 2 slides • Investment (red outline) has been dragging the economy down • Government activity (black outline) has only just started pulling activity up • Trade is important — unusual for the postwar US economy, but less unusual the past decade • Note that despite Bush and accompanying demagoguery, the government share of the economy hasn’t shifted much

13. Red outline = investment components Black outline = government components

17. Unemployment – next 6 graphs • In 1933, unemployment was roughly 25% • Or 11.4 million Americans in a population of 127 million • And two-income households were not the norm • In July 2009 unemployment was 9.4% • Or 14.4 million Americans in a population of 307 million • But dual-income households & supplemental income are both more prominent • We don’t (yet?) see 1930s-style homelessness • In normal times voluntary quits and new entry means 4.4 million Americans are counted as unemployed • the recession has thus added “only” 10 million • Nevertheless, we are looking at an economic disaster • that affects as many people as the Great Depression

18. Long-term unemployment is worse than at any time in the past 60 years

20. Job losses (red) dominate the rise in unemployment, but people returning to the job market (blue) – such as spouses seeking work – also matter

21. It’s not just “headline” unemployment, but also people who have had their hours cut or are discouraged about finding a job and are no long counted as unemployed

25. Bubble • Real estate prices zoomed • But only in some metropolitan areas • Particularly those where “supply” is constrained by geography and/or local policy • And lots of debt incurred in the process • But mainly by people with lower credit scores • Over the short run, those with low incomes (or poor track records of self-restraint) got access to credit • But the old rules-of-thumb were appropriate: they are the ones going into default

28. Half! 

30. Prices Have Adjusted Quickly • “This year, in 14 ZIP codes in Southern California, including Moreno Valley’s, median home prices have fallen below 1989 levels, making places like Beth Court affordable for the first time to many new homeowners.” • Jennifer Steinhauer. “Beth Court: A Cul-de-Sac of Lost Dreams, and New Ones.” The New York Times, August 23, 2009. • But recovery requires new construction, not just stable prices – we built a lotof new houses the since 2002

31. Japan comparison: Conclusion • Are we like Japan looking at a decade-plus of 1% growth? • NO, thankfully • Why? • Japan’s labor force is shrinking • Averaged across the business cycle, Japan’s economic growth will therefore inevitably be low • But a low average means even a mild downturn results in negative growth / a recession

32. Much of the world will look like Japan • The children of Japan’s baby boomers aren’t having children • There are fewer toddlers (age 0-4) • than doddlers (age 70-74) • Many countries have the same demographics • Including China, Korea, Taiwan, Spain and Italy • All are at or soon will hit the point where their native-born population will shrink • While immigration may help Spain, it’s hard to imagine 100+ million people moving to China in 2030-2050...