June 20, 2019
(This post first appeared on my Patreon site.)
A theme often repeated in the media is that Japan is suffering terribly because of its low birth rates and shrinking population. This has meant slow growth, labor shortages, and an enormous government debt.
Like many items that are now popular wisdom, the story is pretty much nonsense. Let’s start at the most basic measure, per capita GDP growth. Yeah, I said per capita GDP growth because insofar as we care about growth it is on a per person basis, not total growth. After all, Bangladesh has a GDP that is more than twice as large as Denmark’s, but would anyone in their right mind say that the people of Bangladesh enjoy a higher standard of living? (Denmark’s GDP is more than twelve times as high on a per capita basis.)
On a per capita basis, Japan’s economy has grown at an average annual rate of 1.4 percent since the collapse of its stock and real estate in 1990. That’s somewhat less than the 2.3 percent rate of the U.S. economy, but hardly seems like a disaster. By comparison, per capita growth has averaged just 0.8 percent annually since the collapse of the housing bubble in 2007 in the United States.
But per capita income is just the beginning of any story of comparative well-being. There are many other factors that are as important in determining people’s living standards. To take an obvious one that gets far too little attention, the length of the average work year has declined far more over this period in Japan than in the United States.
According to the OECD, the length of the average work year has declined by almost 16 percent between 1990 and 2017 (the last year for which data are available). By comparison, the length of the average work year in the United States has declined by less than 3 percent over this period. This is a really big deal in terms of peoples’ lives.
If we use a start point of a 40-hour workweek, for 50 weeks a year, a 16 percent reduction in hours would be equivalent to 8 weeks a year of additional vacation. Alternatively, it would mean a 6.4 hour reduction in the length of the average workweek, meaning that people would be working 33.6 hours a week rather than 40 hours. My guess is that most people in the United States would be very happy to see the same sort of reduction in work hours as in disaster Japan.
Turning to health statistics, the OECD reports that life expectancy at birth in Japan increased from 75.9 years in 1990 to 81.0 years in 2016 (the last year for which data are available). In the United States it increased from 71.8 years in 1990 to 76.1 years in 2016. This means that the gap in life expectancy between Japan and the United States has increased from 4.1 years in 1990 to 4.9 years in 2016.
There is an even more dramatic difference in life expectancy at age 65. In Japan, this went from 20.0 years to 24.4 years in 2016. In the U.S., life expectancy at age 65 increased by just 1.7 years over this period, from 18.9 years in 1990 to 20.6 years in 2016.
If we look at unemployment rates, most of us are happy to see that the unemployment rate in the United States has fallen to 3.6 percent, a fifty-year low. By comparison, the unemployment rate in Japan is just 2.4 percent.
If we flip the picture over and look at employment to population ratios (EPOP), the percentage of the working age people (ages 15 to 64) who have jobs, the difference is even more dramatic. The most recent figure for the United States is 71.9 percent. For Japan, it is 77.5 percent. While most of this gap is due to higher EPOPs among men, 84.3 percent in Japan, compared to 76.3 percent in the United States, Japan now has higher EPOPs among women as well. In the most recent data, the EPOP for women was 70.5 percent in Japan, compared to 66.0 percent in the United States. This is due to the fact that Japan, unlike the United States, has made an effort to extend access to quality child care in the last decade.
The OECD does not have good data on inequality extending back beyond the last decade, but just looking at levels, the United States does far worse than Japan. The OECD puts the Gini coefficient (post-tax and transfer) for the United States in 2016 at 39.1, near the top among wealthy countries. It puts Japan’s Gini coefficient at 33.9 in 2015, pretty much in the middle for wealthy countries. It is likely that inequality had increased in Japan over the last three decades, but it started at a lower level than in the United States and remains at a considerably lower level.
In terms of greenhouse gas emissions, Japan is a much better global citizen than the United States emitting a bit more than half as much person as the United States. However, per person emissions have risen modestly in Japan over the last three decades, while they have fallen in the United States. However, part of the decline in the U.S. is due to the growth in our trade deficit, as we now buy more items where the emissions associated with their production take place in our trading partners rather than here.
What about Japan’s scary government debt that is now more than 240 percent of its GDP?[1] That would be equivalent to a debt of $48 trillion for the United States. The conventional story would be that a debt of this size would impose an enormous interest burden, or alternatively would lead Japan’s government to print large amounts of money, leading to massive inflation.
The conventional story doesn’t seem to fit very well. Rather than imposing a huge burden, the debt service for Japan’s debt is trivial. The I.M.F. projects the burden to be roughly 0.1 percent of GDP this year, the equivalent of $20 billion in the United States. By 2021, it projects the debt service burden will be negative. It turns out that, instead of having sky-high interest rates, savers are actually paying the Japanese government to lend it money.
There also is not a run-away inflation story from printing money. Japan’s central bank has actually been struggling to raise its inflation rate, which has hovered near 1.0 percent for the last two decades, at times actually going slightly negative. Rather than having high interest rates and sky-rocketing inflation as a result of its large budget deficits, Japan has extremely low interest rates and concerns about deflation.
Japan’s biggest problem has been the opposite of one ordinarily associated with high budget deficits, it has insufficient demand in its economy. It needs large budget deficits to maintain high levels of employment, because the private sector is not spending enough. It is very hard to see the budget deficit or debt as a problem in this story.
But what about the underlying problem of a declining population and workforce? Again, let’s keep our bearings straight. The standard story of an aging and shrinking population is too few workers to support too many retirees. That is a story of too much demand, which the economy is unable to meet because it doesn’t have a large enough workforce. That doesn’t look like Japan at all.
Economists often like to make things complicated. That is how you create jobs for economists. But it is often helpful to approach things first at the most simple level.
In this case the question is whether the problem is too much demand or too little demand. The standard story of an aging population is too much demand. Japan has an obvious problem of too little demand (secular stagnation).
Policy types are trying desperately to shove this square peg into a round hole, turning Japan’s problems into a demographic one and warning us that we might share the same fate. (The all-time champion here is Robert Samuelson who last week posed this terrifying prospect that “half of Japanese children born in 2007 are expected to live to 107.”)
To be clear, an aging population will pose problems. Society will have to shift more resources to caring for the elderly. But there were also problems associated with a rapidly growing population. When the baby boomers were growing up, there was a serious problem of overcrowded schools. The playground of the public school I attended in Chicago in the mid-1960s filled up with mobile classrooms.
There may be political obstacles to securing the necessary resources to care for the elderly. But this is not due to the economy’s inability to meet the needs, the problem is the resistance of powerful interest groups. If the concern is framed in that way (i.e. powerful groups in the United States will block efforts to meet the needs of a growing elderly population), then it is entirely reasonable. But that is not the picture that we have been getting in the media about Japan or the United States.
There is one final issue that deserves a heaping helping of ridicule. It is true that if we project far enough out in the future, any country with a declining population will cease to exist. Making a policy claim based on this arithmetic truth is to put it simply, nuts.
Japan’s population is shrinking at the rate of 0.2 percent annually. Suppose this continues for the next fifty years. Its population will have declined by almost 10 percent from current levels. That means in 2070, Japan will have roughly nine times the population density of the current U.S. level, rather than ten times. We all have more serious things to worry about.
[1] I should also add that any effort to look at government debt without considering the rents from government granted patent and copyright monopolies deserves only ridicule. Direct spending and the granting of these monopolies are alternative mechanisms the government uses to pay for services. It is not serious to only consider one type of commitment that the government makes for the public and not the other.
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