Re: Japan 1973 Re: Concept of a "Growth Equilibrium"

[JSAlbus@xxxxxxx]

In response to Gernot Kohler's question:

>The same source (Economist. Guide....) has the following additional data:
>
>                  Japan, average annual growth rates
>
>                       1960-68 68-73 73-79 79-89
>Consumer expenditure     9.0    8.4    3.9   3.1
>Real fixed investment   15.2   12.5    1.5   5.3
>
>Real GDP                10.1    8.8    3.6   4.1(=79-90)
>
>
>The 1973 drop in investment growth is from 12.5 to 1.5% per annum.
>Which theory explains such a drop in investment growth,
>considering the fact that similar changes occurred throughout OECD?


Albus replies:
There are at least two ways to look at this data.
One is to say that consumer demand collapsed, causing business to stop
investing.

The other is to say that investment fell, causing economic activity to slow,
and consumer demand to fall as well.

Of course, both could happen simultaneously, and did.  And since the economy
is a giant loop, each one both causes, and is caused by,  the other.  The
effect is called positive feedback whereby events reinforce and amplify each
other.

I would suggest that the triggering event was that in early 1973 the price of
oil more than doubled.  This profoundly affected Japan which has no domestic
source of fuel.   Both businesses and consumers had to pay much more for
fuel, and hence less for other consumer goods and less on investment.

The immediate effect was on consumer spending power, and on the cost of good
produced by energy.  The longer term effect was that spending less on
investment produced slower productivity growth, and correspondingly slower
economic growth.

The long term failure of Japan's GDP growth to recover from the oil price
shocks can adequately be accounted for by slower productivity growth caused
by lower rates of investment.

Jim Albus