At least five interesting things to start your week (#3)

Japan's electronics boom; patriotism and economic policy; the disappointment of VR; the UK stagnation; macroeconomics goes micro

Photo by Andy Kelly on Unsplash

I’m still getting the hang of these roundups, but I think they’re going pretty well! Remember, if you’re a paid subscriber, and if you see interesting papers or news stories or anything else that you want me to blog about, drop them in the comments, and I’ll write something the following week if I think I have anything interesting to say.

1. Japan is back!! …maybe.

It’s now fairly common knowledge that Japan has fallen off economically. Its living standards now look more like Italy’s than like Germany’s:

Some piece of this is just population aging; Japan is the world’s oldest country, so there are fewer working age people to add to GDP. But Japan’s productivity performance has been truly atrocious, and aging probably only accounts for a small piece of that:

I wrote a series of posts about this last year, and there are probably multiple factors. But one factor that’s under-discussed is what economists call trade diversion. When Japan was at its relative economic peak in the 70s and 80s, it benefitted from having a unique niche in the global trading system — it could produce a vast array of high-tech, high-quality electronics at low cost, which few other countries could do. When South Korea and Taiwan learned to do the same, it created competition for Japan — think back to the Sony-Samsung wars — but when China began to do similar things at a truly massive scale, Japan lost much of its uniqueness in the global economy. (This was compounded by a corporate culture that was unable to pivot into new niches like software, and which maintained too much of a domestic-market focus.) When you get cut out of global supply chains, your measured productivity levels and GDP growth will take a hit.

If trade diversion is a problem, then Japan is in luck, because it could be a big beneficiary of the scramble to get electronics production out of China. In fact, since Taiwanese production would also be cut off in the event of a Chinese attack, and since South Korea is menaced by North Korea, Japan may be uniquely well-positioned to retake some of its old role as the center of the East Asian high-tech electronics cluster. And so it doesn’t surprise me that I’m seeing more stories like this:

CEOs are warming to Japan because it is the un-China.

It is a democracy, a U.S. ally and a safe place to share technology. Memory-chip maker Micron Technology just said it would put $3.6 billion into its Japanese plant, with Tokyo kicking in a chunk…

On Friday, the Nikkei Stock Average hit its highest level since 1990….

Japan’s politics may be dull, but for investors and CEOs, that beats the mercurial crackdowns led by China’s authoritarian leader or the game of chicken in the U.S. over whether to pay its debts…

IBM just said it would put $100 million into a partnership with the University of Tokyo and the University of Chicago to build a better quantum computer—a deal that would be impossible in China.

Don’t want to build your new fab in America, where construction costs are sky-high, skilled labor is scarce, and the lawsuit-driven permitting system takes years to navigate? Just build it in low-cost Japan, with its efficient bureaucratically-administered regulation and low-ish salaries! This logic is obviously compelling for companies like Taiwan’s TSMC and America’s Micron, both of which are now building fabs in the Land of the Rising Sun. Japan’s GDP growth in the first quarter was very robust, driven in part by high levels of private investment.

The weak yen should be a tailwind for these efforts. Despite the word “weak”, a cheap currency makes it very easy for foreign companies to invest in factories in your country, and to buy the products those factories produce.

Anyway, there are plenty of obstacles here — a shortage of skilled labor, the aforementioned ossified corporate culture, deficiencies in software, etc. — but for now, it’s enough to note that Japan has a huge opening here.

2. Some evidence on how to make people love their country

I’m a big advocate of leveraging patriotic sentiment, both to win political victories and to improve the provision of public goods. When people believe in their country, it can make them more willing to support policies that benefit the entire nation, rather than just their own small slice of the populace.

But anyway, that idea takes existing patriotic sentiment as a given. There’s also the question of how to actually increase that sentiment in the first place. Usually we emphasize cultural forces — politicians’ rhetoric, race relations, flags and symbology, etc. — in addition to external events like wars. But I also think there’s an economic dimension here — when people get economic assistance from the government, it can help convince them that the nation is on their side, and thus make them more patriotic.

As a demonstration of this, check out Caprettini and Voth (2022). The authors look at how much people benefitted more from New Deal spending in the years before WW2, and they found that people who benefitted from more spending tended to demonstrate more patriotic behavior later during the war. Importantly, they were more likely to join the military and to win decorations for their service. Here’s the paper’s abstract:

We demonstrate an important complementarity between patriotism and public good provision. After 1933, the New Deal led to an unprecedented expansion of the US federal government’s role. Those who benefited from social spending were markedly more patriotic during WWII: they bought more war bonds, volunteered more and, as soldiers, won more medals. This pattern was new — WW I volunteering did not show the same geography of patriotism. We match military service records with the 1940 census to show that this pattern holds at the individual level. Using geographical variation, we exploit two instruments to suggest that the effect is causal: droughts and congressional committee representation predict more New Deal agricultural support, as well as bond buying, volunteering, and medals.

The increase held in both rich and poor areas of the country, which is honestly pretty impressive. The paper doesn’t deal with the postwar G.I. Bill, but my bet is that this had something to do with the postwar upswing in patriotism.

This result implies two things. First of all, if they expect Americans to ask what they can do for their country, policymakers need to ask what they can do for Americans. We need to be thinking about how to craft policies that will convince the average American that their country stands solidly behind them.

Second, it implies that the relationship between patriotism and public goods provision is a two-way street — there can be a virtuous cycle where patriotic sentiment leads to more broadly beneficial government policies, which then make people more patriotic, etc. That’s a cycle we need to harness.

3. Why hasn’t VR succeeded yet?