World – USC Economics Review

The Opportunity Cost of Hosting the Olympic Games

2008_beijing_olympics_-_panoramio

According to the Sports Book Review, the modern Olympics were first held in 1896 with only 12 countries. Today, the Games attract thousands of athletes from 206 countries around the world. In ancient times, the Games were always held in Greece. Today, in the spirit of international cooperation, the Games are held in different host cities every four years.

It is commonly believed that hosting the Olympics has a great deal of benefits such as altering the design of the city, improvements in transportation and infrastructure,and international investment. According to the Council on Foreign Relations, in 1984 alone, Los Angeles actually made a profit of $215 million because it already had the sports arenas that were needed for the Olympics, in addition to earning revenue from selling television broadcasting rights.

However, the benefits of hosting the Games are not as great as imagined and there are often many drawbacks. Simply put, for the last 20 years, the Olympics grew too big, too quickly. In the 2016 Rio de Janeiro games, for example, the host city faced a siege of problems such as funding shortfalls, under-equipped police, thousands of dollars of infrastructure that went obsolete as soon as the mega-games ended etc.

Currently, bids for 2024 Games are underway and many wonder whether any city would want to host the Olympic Games anymore. As the International Olympic Committee (IOC) receives fewer bids with each Games, the future of the Olympics is looking uncertain. In this article, I will provide a cost-benefit analysis on the hosting of the Olympic Games on the host city and provide a prediction on what effects hosting the games will have on Los Angeles.

The first downside is that hosting the Olympic Games are a financial drain on the host cities. According to a study conducted by Claremont University, a host city can spend hundreds of millions of dollars to put on the Olympics. The process of bidding alone costs $100,000 in application fees, and a city must pay an additional $500,000 if it is accepted as a candidate city. Then the candidate city has to pay for the onsite inspection, as well as all formal responses and impact studies which cost millions of dollars. The host city must then dedicate hundreds of millions of dollars for marketing, advertising, logistics, infrastructure revision, building future amenities, all to impress international investors and the International Olympic committee, often going over the intended budget.

In 2008, Beijing hosted the most expensive Summer Games to date at $40 billion, building thirty-seven stadiums and venues as sports facilities,which included $1.1 billion on transportation improvements, $200 million to demolish dilapidated housing and urban buildings, and $3.6 billion to transform Beijing into a “digital” city. Due to this expense, cities will spend years paying off debt to host the Olympics. For example, the event cost Montreal more than $6 billion to host in 1976, leading the city to spend the next 30 years paying it off until the debt was forgiven in 2006.

Why do cities spend so much? As cities with the most extravagant bidding plans are awarded hosting privileges, they set higher and higher standards for each subsequent game. Thus, to win over the IOC quicker than competitors, host cities will rush their applications and promise too much without taking the time to understand the impact of hosting the games. According to Robert Barney, a professor at Western University specializing in the study of the Olympic Games, “Cities began to see it [the Olympic Games] in a different light when the cost escalated beyond all reason, and beyond the amount of dollars that they could raise through normal revenue processes.”

The second downside is that the Olympics force host cities to create expensive, overspecialized sports infrastructure and buildings that often fall into disuse. In past years, bid plans have included construction for new hotels and dormitories, media centers, athletic facilities, public transportation, event management, security, airport improvements. The opportunity costs for these projects are enormous with millions that could have been spent on public investment, health, education, defense, and more. Using the Olympics to justify construction is weak because these facilities could be built regardless of the games, without expensive customizations specifically for Olympic events. In Rio de Janeiro, for example, the $700 million athletes village for the 2016 Games was turned into luxury apartments that are now “shuttered” and the Olympic Park is “basically vacant” after failing to attract a buyer.

Finally, the Olympics displace the residents of the host city. According to the Center of Housing Rights and Evictions, the six summer Olympics from the 1988 Seoul Games and Beijing’s 2008 games caused an estimated 2 million people to be forcibly evicted from their homes with minimal compensation. This does not only happen in Beijing but in places like Seoul, Rio, and others. Not only does this move citizens away from friends, family, it effectively turns them into domestic refugees, far away from their homes and place of business.

While all these costs must be considered, there are also several benefits to hosting the games. For one, host cities receive direct economic revenue in the short-run from ticketing for spectators, sponsorships and advertising fees from major sports brands, and a share of television broadcasting rights. Meanwhile, infrastructure improvement can provide a form of fiscal stimulus to a city with high unemployment, raising GDP, consumption and economic investment.

In the long-run, there are also several indirect economic benefits. The Olympics increase a country’s global trade status. The very act of bidding for the Olympics is a signal to other countries that the nation commits itself to trade liberalization and lowering protectionist barriers. This advances a reputation for being a center for world class citizens, as well as, for future sporting events, conventions, and tourism. One example was, after a successful 1955 bid for the 1960 Summer Olympics in Rome, Italy joined the United Nations and began the Messina negotiations that led to the creation of the European Economic Community..

Aside from infrastructure, tourism, due to a worldwide advertising campaign, is likely to skyrocket. While this means more tourist revenue in the short run, in the long run it also increases foreign investments and better trade networks. For instance, based on a study by the University of Utah, following the 2002 Olympic in Salt Lake City, there has been a major economic boost in winter sports, with tourists now seeing it as a premier ski destination for athletes.

Despite these benefits, many argue these points do not hold water. With regards to the increase in tourism, it could also be argued that, in the process of preparing the Olympics, it could crowd out the tourism industry, with some non-sports tourists dissuaded from visiting by concerns about Olympic crowds. According to the Council of Foreign Relations, Beijing and London both saw fewer international visitors during the months they were hosting the Olympics in 2008 and 2012 compared to the same months in previous years. With regards to TV rights revenue, this is offset by the fact the International Olympic Committee has been taking larger percentages. In the 1990s, for instance, it took 4% of revenue compared to the 70% it pocketed from the 2016 Rio Games.

In all possibility, it could be that the only reason countries host the Olympics in the first place could be civic pride and a desire to prove to other nations, that their destination is a host city. Meanwhile, after each financial failure and with fewer exceptions, fewer and fewer countries wish to hold the Olympics.

Recently, Los Angeles kicked off its bid to host the 2024 Olympic Games by promising to provide an Olympic experience better than any in the past. Los Angeles has a strong Olympic legacy in 1932 and 1984 to back up its claims, both considered to be among the most successful Olympic Games ever. In 2024, the games, according to a UC Riverside study is expected to generate $14.0 billion in economic output, support 93,566 full-time equivalent jobs, generate between $6.1 billion in labor income, and generate $742.4 million in state and local tax revenue throughout the state of California. To put this into context, the total estimated economic output generated by the 2024 Games is nearly equal to the combined Forbes valuations of Los Angeles’ five largest sports franchises—the Rams ($2.9 billion), the Lakers ($2.7 billion), the Dodgers ($2.5 billion), the Clippers ($2.0 billion), and the Kings ($580 million).

LA 2024 seeks to harness a model that fits the City of Los Angeles with few innovations. The City of Los Angeles is home to a wealth of existing venues and infrastructure that allow LA 2024 to utilize existing world-class venues, creating the best experience for athletes. In an article by the LA times, in an effort to cut the normal deficit expenses, LA plans to make use of existing arenas, dorms at UCLA, the media center of USC, all to cut down on spending and facility investment. Currently, the projected revenue is $5.3 billion, which could be covered from broadcast rights, corporate sponsorships, ticket sales etc.

Los Angeles is constantly finding new innovations to accommodate demand for traffic-easing infrastructure and currently has the largest ongoing transit construction program in the United States. Over the next decade, Los Angeles will invest $88 billion into subway, light rail, rapid bus, LAX, commuter rail etc, connect every corner of Los Angeles. Los Angeles also aims to deliver the first energy-positive Olympic Games and through this commitment realize long term outcomes in local water, local power, local solar power, energy-efficient buildings, carbon and climate leadership, and waste and landfills.

In this review, it would appear that the benefits of hosting the games weigh less than the costs, than other public services like health and education. The fact that Los Angeles is expected to profit in 2024 from these games lends evidence to claims the Games are transformative. However, this is an expensive gambit to the host

While the future of the Olympic Games seem bleak, the International Olympic Committee is working to resolve problems by evaluating cities based on key opportunities and existing, built-in infrastructure. This will ideally reduce the coast of bidding and promote sustainability in all aspects of the Olympics Games. Although this idea is untested, it does look promising.

Morality aside, refugee acceptance is a matter of economic benefit

Between Donald Trump Jr. comparing Syrian refugees to poisoned Skittles and a camerawoman kicking and tripping refugees fleeing the Hungary-Serbia border, the resettlement of refugees from Syria to Western countries has faced much derision and scrutiny. Since March 2011, approximately 470,000 Syrians have been killed in their ongoing civil war and more than ten million have been internally displaced or forced to leave the country. This crisis has caused millions of Syrians to seek asylum in other countries, with many of them dying trying to reach refuge. When it comes to the resettlement of refugees into the United States, unwarranted hate, groundless fear and false information have been rampant. More subversively, when it comes to economic research, refugees may actually posit direct, long run economic benefits.

According to the U.S. Department of State, during the 2016 fiscal year, 84,995 refugees from 79 different countries were admitted into the United States. 70 percent of those refugees came from the Democratic Republic of Congo, Syria, Burma, Iraq, and Somalia. Over 72 percent of those resettled were women and children. The screening process can take between 12 and 18 months, with those in desperate situations receiving priority. Less than one percent of the global refugee population passes the first application for resettlement in the U.S.

Of those refugees who were granted residency in the U.S. this year, 46 percent were Muslim and 44 percent were Christian. Since September 2001, about 785,000 refugees entered the U.S. and fewer than 20 were arrested or expunged for terrorist related activities. A risk analysis done by the Cato Institute found that between 1975 and 2015 the chance of being killed in a terrorist attack on American soil conducted by a refugee was 1 in 3.64 billion a year.

A study conducted by Kalena E. Cortes, Associate Professor of Public Policy at Texas A&M University, compared the fiscal growth of refugees to that of economic immigrants, those who enter a country to improve their standard of living and job opportunities. The research found, “In 1990, refugees from the 1975-1980 arrival cohort earned 20 percent more, worked 4 percent more hours, and improved their English skills by 11 percent relative to economic immigrants.” While these refugees initially had lower annual earnings, they greatly outpaced the economic immigrants in economic gains.

Since refugees lack the option of returning to their home country, their time horizon in the host country is much longer than that of economic immigrants. A longer time horizon means refugees have a higher likelihood to assimilate to the earnings growth of native-born citizens. They are incentivized to invest in “country-specific” human capital, such as learning the language or enrolling in the country’s education system. Also, they have a longer period of time to recoup their human capital investments. Not only do refugees add to the economy with labor, they also contribute through consumption. At a local level, refugees exercise their purchasing power, increasing the demand for goods and services.

In Cleveland, 598 refugees were resettled in 2012, with approximately 4,000 more resettled in the decade prior. The Refugee Services Collaborative of Cleveland spent approximately $4.8 million on refugee services in 2012 and the economic impact of refugees on the city during that year is estimated to be $48 million and 650 more jobs. A report by Chmura Economics and Analytics observed that, on average, the refugees found employment within five months of their resettlement, despite their lack of proficiency in the English language. As the labor market participation and income of refugees increased, the reliance and need for government assistance decreased substantially.

The resettlement of refugees can be viewed as an tool for economic development and regrowth. Cities and regions that accept refugees see an influx of laborers who are initially willing to work for lower wage rates, giving an area stuck in an economic trough the chance to re-energize. The Rust Belt city of Utica, NY lost about a third of its population in the second half of the 20th century when local factories closed, stunting economic growth. However, in the past four decades the Mohawk Valley Resource Center for Refugees resettled about 15,000 refugees from 74 different countries into Utica, completely revitalizing the area. The largest group of refugees, Bosnians who sought asylum during the Balkan conflict, have renovated hundreds of neglected houses and opened their own businesses.

Refugees bring fresh energy, innovation and the desire to rebuild to their new hometowns. A study from 2000 on the fiscal impact of refugees in Utica and Oneida county conducted by Hamilton College found that while resettling the refugees required an upfront cost, it was primarily front-loaded and created a net fiscal benefit for the community in the long run. The study also found little evidence that the resettlement of refugees negatively affected employment of native laborers.

Jeffrey Sachs, a senior UN advisor and director of the Earth Institute at Columbia University, observed that the refugees entering the United States currently are more educated than a typical person from their country. New refugees are also expected to be younger, giving them a greater chance to “make it” in the American economy. An investment in refugees not only saves people from dangerous and dire situations, but also brings new life and value into the local, regional and national economy.

Ireland’s Brexit Dilemma: How Britain’s Decision to Leave the E.U. Could Impact the Irish Economy

BRITAIN-IRELAND-POLITICS-DIPLOMACY-BREXIT — British Prime Minister Theresa May speaks to Irish Taoiseach (PM) Enda Kenny

In the months leading up to the UK’s Brexit vote, Irish officials advocated for Britain to remain in the EU and stressed the close ties that Britain and Ireland have. However, the Brexit vote did not go as many in the Irish government had hoped. As the UK prepares to trigger Article 50 and formally begin the process of exiting the EU by March of next year, the Irish government is preparing to deal with the effects of one of their closest trade partners and neighbors leaving the largest trade block in the world.

In assessing the effects of Brexit, many analysts focus primarily on how the British economy would be impacted. Yet the effects of Brexit extend far beyond Britain itself. Ireland and Britain have close ties due to shared history and geographic proximity. Furthermore, when Britain and Ireland joined the European Economic Community in 1973, the Irish economy was still heavily reliant on Britain for many products that it was unable to produce itself. While Ireland has become much less dependent on the British economy over the last few decades, the two countries still have close economic relationships, and for Ireland, it looks like Britain’s departure from the EU is going to hurt. A recent study by the Irish Department of Finance estimates that Britain’s departure would cause Ireland’s GDP to drop by as much as four percent, with negative effects on wages and employment in Ireland lasting for the next 10 years.

Britain and Ireland trade heavily with one another, and a Brexit will likely damage the Irish export market and lead to higher import prices. Every week, Ireland and Britain trade approximately €1 billion worth of goods and services. Ireland sends 16 percent of its exports to the UK, the most it sends to any one country, and Ireland’s Economic and Social Research Institute estimates that bilateral trade between the two countries could decrease by as much as 20 percent after Britain leaves the EU. Overall, Ireland has a trade deficit in merchandise with the United Kingdom, and its agricultural and metals sectors heavily depend on exporting to the UK.

For instance, 50 percent of Irish beef exports go to Britain, as do 55 percent of construction and timber exports. The UK is also Ireland’s greatest source for merchandise imports, and as Ireland’s economy is small, it has fewer opportunities to substitute imports with locally produced goods. Once the UK leaves the EU, it will likely be subject to the EU’s import tariffs for imports coming from “third countries.” The institution of tariffs for imports into the UK from Ireland and vice versa, therefore, will likely lead to higher prices for goods sold in Ireland.

Both Ireland and the UK have expressed interest in keeping the Common Travel Area (CTA) that has existed along the border of Ireland and Northern Ireland since 1923. Over the past 90 years, this invisible border has facilitated trade between the two nations, allowed citizens to work in each others’ countries, and has contributed to political stability in Northern Ireland. However, once Britain leaves the EU, the border between Ireland and Northern Ireland will become the western border of the EU, which may require passport controls that would greatly restrict movement between the two countries. Currently, the British and Irish governments are exploring ways to keep the CTA after the Brexit occurs.

No one has a greater potential to gain from Brexit, however, than Ireland’s financial sector. The UK has the largest inward FDI (Foreign Direct Investment) stock of any nation in Europe and has a powerful financial services sector. Leaving the EU’s single market will likely damage that financial vitality and could spur many firms to relocate all or part of their operations to cities in other countries. As an educated, English speaking city that already has a sizeable financial sector, Dublin is definitely a strong candidate. Currently, Ireland is home to €3 trillion of investment and money market funds. With some additional investments in housing, communications and infrastructure, Ireland and Dublin especially would likely benefit from firms in Britain relocating abroad.

In her speech at the Conservative Party Conference in October, Theresa May declared that “Brexit means Brexit — and we’re going to make a success of it.” Both the Irish and the British certainly hope so. The less dramatic Britain’s departure from the EU is, the better off Ireland will be. As Irish political commentator Johnny Fallon notes, “Some in Europe would be very happy to see post-Brexit Britain collapse. Not Ireland. We’re very eager to see Britain hold up.”

The economic case against slavery

In 1981, Mauritania became the last country in the world to abolish slavery, putting a supposed end to the archaic institution, yet there are an estimated 30 million people illegally enslaved across the globe today. The abhorrent ethics of the practice have not stopped many governments from letting modern slavery slip through the cracks. In order to convince governments to take real action, we must prove that slavery is an economic burden, and an investment in eradicating it will produce returns.

Slaves were once an expensive capital purchase, but rapid population growth in the mid-twentieth century has led to a sharp decrease in the cost of slave labor. Furthermore, unregulated migration systems in many countries have left a lot migrants with minimal information about legal migration and their rights. This has made it easier for criminals to exploit and traffic migrant labor. The International Labour Organization researched the flow of migrant workers into forced labor and found that migrant workers encompass a large percentage of trafficking victims. Business owners who wish to utilize this cheap, disposable labor can achieve higher profits compared to those that pay their laborers a wage, preventing money from flowing naturally from employers to employees and back into the economy by consumption. However, while slavery is profitable for criminal business, it is a drag on the economy as a whole.

Many impoverished, uneducated civilians who are desperate for money are tricked into taking out a loan where labor is demanded as repayment. According to Anti-Slavery International, bonded labor has become the most widespread form of modern slavery in the world. Bonded slaves become illegally trapped in servitude as that loan is extremely difficult to repay and the debt passes down each generation. Slavery flourishes in places with extreme poverty. In fact, it perpetuates poverty as slave labor decreases the wages for unskilled, free laborers, reducing the disposable income of free families. The research of Kevin Bales, co-founder of the human rights organization Free the Slaves, has shown that the first investment former slaves want to make is putting their children in schools. Education is crucial in combating poverty. First, education helps prevent the spread of poverty between generations. Second, learning to read, write, and think critically greatly increases one’s economic rate of return. As long as governments will not do anything to stop the illegal use of slavery, freedman labor remains an untapped resource in an economy.

The article “Slavery is Bad for Business” by Monti Narayan Datta and Kevin Bales states that the production output of slave labor is remarkably low due to a lack of incentives, lack of human development and lower life expectancy. They are not working to their full capacity and, consequently, have low economic value. When slaves are freed, the local economy booms as these people now act as economic agents. There is a greater incentive to increase productivity and their human capital since they are now supporting their families and exercising labor autonomy. Not only do they contribute to the economy through work, but also through consumption as active members of society with purchasing power.

Despite slavery’s persistence, education and legislation designed to hold businesses accountable for their use of servitude in the lower end of their supply chains have proven effective. For example, the California Transparency in Supply Chain Act mandates that any company with worldwide annual revenue above $100 million publicly discloses what they are doing to eradicate human trafficking and forced labor from their supply chain. If companies consciously work to stop purchasing intermediate goods produced by slaves, the demand for slave labor will decrease.

The second, critical step is to invest in freeing slaves and giving them a real chance at living a productive, healthy life. This step is crucial in ensuring the long-term success of those freed from slavery. Bales describes the freeing of slaves in the United States as the “botched emancipation of 1865” where millions of former slaves were left without access to education or political autonomy. Instead they were faced with discrimination and violence, which continues to resonate through society today. Without giving people some sort of chance, they are more likely to fall victim to other types of exploitation.

Ethics aside, slavery is not being addressed aggressively enough by governments around the world. If they looked honestly at the economic ramifications of a monstrous system that refuses to die, only then may governments be coerced to act.

A Time for Peace, A Time for Debt: The Cost of Colombian Reconstruction

After 54 months of peace talks in Havana between the FARC (Armed Revolutionary Forces of Colombia) and the Colombian government, a tentative deal was signed with the intention of ending the longest civil war in modern history. The conflict began in the mid-1960s as a byproduct of the Cold War and served as a proxy battleground for Soviet and U.S. forces. After their ties to the Soviet Union were severed, however, the FARC turned to drug-running, kidnapping, extortion, and even all-out territorial war to fund their campaign. This delegitimized their political claims and turned them into what many agreed was just another violent, rent-seeking group in Colombia, masked under the guise of political ideology.

As of 2012 (the year peace talks began and a ceasefire was agreed upon), over 220,000 people had been killed in the conflict, and around 6 million more had been displaced from their homes. The deal was therefore of critical importance to the future of the nation, and it was the first of its kind to have any real chance of success. Nevertheless, the treaty was, at that stage, merely symbolic, and Colombians would have to ratify it in a plebiscite set for Oct. 2, 2016. The results were unexpected, as the “No” vote won by less than half a percentage point. The president and 2016 Nobel Peace Prize laureate, Juan Manuel Santos, urged his citizens not to lose faith in the process; his predecessor, Alvaro Uribe, basked in the failure of what he had called “a fraudulent peace.”

One of the most controversial and distorted aspects of the agreement was its possible impact on the Colombian economy. While it is difficult to ascertain the potential economic consequences of the deal, there are some figures that can be analyzed and truths which can be pieced together to forecast what could happen if peace were to be signed under similar circumstances.

First, we must acknowledge that reconstruction is a costly affair. The Colombian minister of finance, Mauricio Cardenas, pegged the amount at around $30 billion USD; Capital Economics, an economic research firm, said it would be around $60 billion; and Global Risk Insights, a political risk analysis group, put the price tag at $90 billion. A study conducted by BBC Mundo found that costs would come from three major sources over a 10-year period. The authors estimate that the per-year cost would be at least $3.5 billion in subsidies and programs for victims, $1.8 billion for agricultural reform and investment, and $2 billion for the integration of rebel combatants into society. Their estimate, therefore, came to around $73 billion over the next decade.

Despite this massive price tag, the “Sí” campaign believed other factors would counterbalance the new debt issued as a result of the deal. They touted the possible upsurge in foreign and domestic investment, arguing that a more stable business environment would foster improved consumer confidence, leading to more jobs for incoming ex-fighters and other Colombians. The reality, however, is not so straightforward.

Counterinsurgency experts David Kilcullen and Greg Mills explain in their feature for the Center for Complex Operations that “most campaigns struggle with connecting improvements in security with sustainable employment creation, especially in rural areas” and that “job creation is key, because it will help dissipate much of the sense of grievance that has historically fueled conflict.” Most rebel combatants are from rural areas of the country, and the $18 billion or so dedicated to this routinely overlooked sector might be in vain if the funds are not strategically invested. Past public investments in agriculture have been plagued by unmet deadlines, corruption, and the misuse of funds. There was little evidence public agents could be trusted again with such a complicated and expensive task, and many saw the probable failure of this endeavor as an opportunity for ex-rebels to join gangs and other guerilla groups when the legal route failed.

The $20 billion allocated for “integration” was a very vague and controversial point in the deal as well. Identity changes, safety nets, and police protection for common rebel soldiers were included in the agreement, but the extent to which these safeguards would be implemented was dubious at best. Would a company know whether a potential employee was a member of a Marxist guerilla movement? Why were taxpayer dollars being put in the pockets of individuals who were killing Colombian soldiers not a month ago? These were all bitter pills to swallow for the average hard-working Colombian, especially given the country’s already exorbitant tax rates (Colombia has the fifth highest tax-to-GDP ratio in the world). There was also uncertainty about the skills these ex-rebel fighters had (or lack thereof), and how they would translate into a formal economy where gunfighting and survival skills aren’t in much demand.

This may seem like a bleak prognosis, but it is important to consider the alternative. Since its independence in 1810, Colombia has rarely experienced a moment of peace. It is a historically violent country with an inherited propensity for war, and only extreme measures can break the cycle. The U.S. government invested in and made concessions to the Confederate states after the Civil War, as did the U.K. after its deal with the IRA – peace is as difficult as it is necessary. Though Colombians weren’t convinced by this particular agreement, they must not lose hope for a peaceful future. War is an unsustainable and expensive activity, which hinders more lives than any price tag, tax increase, or awkward labor environment ever will.

Conservative fiscal policy in Japan prevents rise in inflation

The Japanese economy is facing an unusual series of problems which have proved difficult for officials to address. Low birth rates and strict nationalization policies have resulted in an aging, shrinking population. Although Japan has the third largest Gross Domestic Product (GDP) in the world, it has had virtually no growth in the past two decades. Structural problems and, as we will examine in this article, overly cautious monetary policy have caused deflation in recent years.

Negative interest rates, the promise of 0% interest on a 10-year bond, and attempts at actively discrediting the Bank of Japan (BOJ) have all failed to raise inflation rates in Japan. Even in a world where developed countries are stuck in a state of secular stagnation due to sky-high corporate savings rates, Japan stands out. If one adheres to Ben Bernanke’s prescription that the mission of a central bank is to “strive for low and stable inflation,” and “promote stable growth in output and employment,” then it is the responsibility of the BOJ to fix the problem of zero growth and deflation.

According to Martin Wolf at Financial Times, corporations in Japan are saving over 20% of their capital. This makes up nearly 8% of Japanese GDP. When money is being held in banks instead of invested, money changes hands less frequently, effectively decreasing the money supply. Like with most things, the less money there is in circulation, the more it is worth. Wolf refers to this as a “savings glut.” Conservative corporate policy is currently causing deflation in Japan and hindering growth.

This negative externality created by the private sector should clearly be disincentivized. By creating seigniorage — profit created by issuing currency — the BOJ could effectively tax this stockpiling of yen. Printing more bank notes would increase the money supply and therefore decrease its value. This currency devaluation would create more incentives to invest rather than save, and, as an added benefit, would create much-needed growth in the manufacturing sector.

Issuing currency with nothing to back it may seem bold, but it has been tried before. In 2011, the European debt crisis caused the euro to crash. Believing that it was a strong, safe currency, many investors began trading their euros for Swiss francs. Switzerland’s currency began to gain value very rapidly. In order to prevent the massive appreciation of the franc, the Swiss central bank committed to printing as many francs, and purchasing as many euros, as needed to keep the franc to euro ratio above 1.20. As shown below, the franc first depreciated due to the announcement itself, but the policy was first put to the test in January 2012.

Data from: Global Financial Data

Capping the franc turned out to be a success. The creation of seigniorage stopped the growth in deflation and even managed to create some small inflation. The policy would not be put to the test again until the franc began to appreciate again in late 2014. This time, however, the Swiss central bank did not remain as astute. Instead of allowing the policy to take effect, they lifted the cap, and as a result, deflation skyrocketed.

Data From: http://www.inflation.eu

If the BOJ adopted a similar policy, it could jump start its countries slow economy and move towards its goal of consistent growth. Savings rates would decrease, spurring more investment. The yen would depreciate, spurring growth in the manufacturing sector. Finally, this printed money could be used to pay for additional social programs for the aging population, or to pay back some of the massive debt the country has acquired.