June 23, 2014
When economies have lots of excess capacity and idle workers, as is the case following a recession, they tend to grow very rapidly. When they are near their potential level of output growth tends to be slower.
This is why the United States economy was able to grow at a 5.6 percent rate in 1978 or a 7.3 percent rate in 1984. In both cases the economy was operating far below its potential so it had lots of room to grow simply to get back to potential. Once it reaches potential, an economy can only grow at the rate of labor force growth plus the rate of productivity growth.
If the Wall Street Journal understood this simple fact it might not have tried to imply that Japan faces some economic disaster because it is projected to have a lower rate of growth in 2015 than the other major western economies. Japan’s economy is much closer to its potential than most of the other economies on the list.
Japan’s unemployment rate is under 4.0 percent. And the percentage of prime age people (ages 25-54) who are employed is now 81.9 percent, 1.3 percentage points above the pre-recession level. By comparison in the United States employment among prime age workers is still down by 2.5 percentage points from pre-recession levels at 76.4 percent. Given this difference in where these economies are in relation to their potential output it would be very surprising if the U.S. economy were not growing more rapidly.
The piece also implies that a low growth rate is a major problem. Economists usually look at per capita GDP, that is why they generally think that Denmark is wealthier than Indonesia. Japan’s population is shrinking at the rate of roughly 0.1 percent annually. By contrast, the U.S. population is growing at a rate of 0.8 percent annually. This means that, on a per capita basis, the 1.0 percent growth projected for Japan is equivalent to 1.9 percent growth in the United States. That is roughly the long-run potential growth rate that many analysts now project for the United States.
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