Economics
Free Exchange
LOST DECADES: The real lesson from Japan
By A.C.S | NEW YORK
IT HAS become the worst fear of politicians in America and Europe: after the immediate crisis passes, the developed world will settle into a lost decade (or more) of low growth and deflation, just like Japan. Japan is used as a cautionary tale of ineffective and/or inept economic policy, which failed to revive its economy after a bad recession. But as my colleague points out and as an article from our print edition this week suggests, there’s not much more that short-term fiscal and monetary policy could have done. A large share of Japan’s woes can be blamed on its aging population.
In aggregate, Japan’s economy grew at half the pace of America’s between 2001 and 2010. Yet if judged by growth in GDP per person over the same period, then Japan has outperformed America and the euro zone (see chart 1). In part this is because its population has shrunk whereas America’s population has increased.
Though growth in labour productivity fell slightly short of America’s from 2000 to 2008, total factor productivity, a measure of how a country uses capital and labour, grew faster, according to the Tokyo-based Asian Productivity Organisation. Japan’s unemployment rate is higher than in 2000, yet it remains about half the level of America and Europe.
Anemic Japanese growth rates resulted from having fewer young, productive workers, and from the redirection of an increasing share of resources to the elderly exiting the labour force as opposed to the younger, still productive population. This can also be seen in Japan’s high debt to GDP ratio.
To be sure, its government is a large debtor; its net debt as a share of GDP is one of the highest in the OECD. However, the public debt has been accrued not primarily through wasteful spending or “bridges to nowhere”, but because of ageing, says the IMF. Social-security expenditure doubled as a share of GDP between 1990 and 2010 to pay rising pensions and health-care costs. Over the same period tax revenues have shrunk.
This suggests that Japan’s low growth was not entirely a failure of economic policy. My colleague calls the demographic issue bad luck; I think he lets the Japanese government off too easy. True, as your population ages by definition you have fewer workers and a greater share of resources channelled toward retirees, and both of these factors lower growth. But it sounds as though Japan could have done some things to ease its burden, including cutting pension benefits or allowing more trade and immigration.
Officials say the elderly resist higher taxes or benefit cuts, and the young, who are in a minority, do not have the political power to push for what is in their long-term interest. David Weinstein, professor of Japanese economy at Columbia University in New York, says the elderly would rather give money to their children than pay it in taxes. Ultimately that may mean that benefits may shrink in the future. “If you want benefits to grow in line with income, as they are now, you need a massive increase in taxes of about 10% of GDP,” he says.
The article points out that the lost years were not so bad for the older Japanese, but the young paid the price. The same political problems face America and Europe, if somewhat less dramatically. Voters and politicians tend to be focused on the short term and on pleasing powerful political lobbies. But they've been less willing to revisit an intergenerational social contract which leads workers to expect ever longer and more comfortable retirements.
Raising the retirement age for future retirees is a good start, and several European countries have donethis , but it is not enough. Governments may need to continue raising the age of retirement and encourage part-time work well into retirement. Cuts to retirement benefits, even if they do not impact current retirees, tend to be very unpopular, especially among older citizens with the time and resources to mobilise. I’ve said before that I’d love to see the Occupy Wall Street movement focus their energy on generational wealth disparities. Right now they will be burdened, most of their working lives, with paying for someone else’s retirement.
Americans can take some comfort in the fact that their demographic situation is not as bad as Japan's, but Europeans are not as lucky. Right now European leaders have an acute crisis to deal with, but after the dust settles they will likely face a long period of low growth. Policy makers on both sides of the Atlantic would do well to learn a lesson from Japan. While short-term stimulus is important, long-term stagnation is an enemy that should also be fought. If they are not open to making hard choices, as the likely failure of the America's supercommittee suggests, then trouble looms.
Copyright © The Economist Newspaper Limited 2011.
______________________________________________________________
Credit: Reports and photographs are property of owners of intellectual rights.
Seniors World Chronicle, a not-for-profit, serves to chronicle and widen their reach.
The article points out that the lost years were not so bad for the older Japanese, but the young paid the price. The same political problems face America and Europe, if somewhat less dramatically. Voters and politicians tend to be focused on the short term and on pleasing powerful political lobbies. But they've been less willing to revisit an intergenerational social contract which leads workers to expect ever longer and more comfortable retirements.
Raising the retirement age for future retirees is a good start, and several European countries have donethis , but it is not enough. Governments may need to continue raising the age of retirement and encourage part-time work well into retirement. Cuts to retirement benefits, even if they do not impact current retirees, tend to be very unpopular, especially among older citizens with the time and resources to mobilise. I’ve said before that I’d love to see the Occupy Wall Street movement focus their energy on generational wealth disparities. Right now they will be burdened, most of their working lives, with paying for someone else’s retirement.
Americans can take some comfort in the fact that their demographic situation is not as bad as Japan's, but Europeans are not as lucky. Right now European leaders have an acute crisis to deal with, but after the dust settles they will likely face a long period of low growth. Policy makers on both sides of the Atlantic would do well to learn a lesson from Japan. While short-term stimulus is important, long-term stagnation is an enemy that should also be fought. If they are not open to making hard choices, as the likely failure of the America's supercommittee suggests, then trouble looms.
Copyright © The Economist Newspaper Limited 2011.
______________________________________________________________
Credit: Reports and photographs are property of owners of intellectual rights.
Seniors World Chronicle, a not-for-profit, serves to chronicle and widen their reach.
