Japanese Lesson for U.S.: Demographics Matter a Lot

The U.S. has been trying to learn from Japan, but keeps on getting all of the lessons wrong. In the early 1990’s Japan’s economy quickly transitioned from being an “economic miracle” to an economic “basket case”. The conventional economic wisdom is that the Japanese economic disaster was caused by a combination of a bursting real estate bubble, a banking crisis and ineffective government policy. Unfortunately, the conventional wisdom is wrong. The reason that the Japanese economy tanked was an aging and shrinking domestic work force and no amount of banking reform or fiscal stimulus will cure that problem. Over the long term, demographics matter more than anything else to economic growth and well being, and the Japanese demographic time bomb that began to explode in the early 1990s is the primary reason that the land of the rising sun is in a national eclipse. The Japanese lesson that U.S. policy makers should learn is that demographic stagnation kills economic growth.

Japan has been sitting on a slowly detonating demographic bomb for several decades. 1993 was the year that the Japanese economy lost its “mojo” and that is the year that the Japanese labor force stopped growing. In the 18 years prior to 1993, the Japanese labor force grew at an average rate of 1.25% per annum and only had one year of anemic work force growth (and that year was 1985 during an acute oil crisis when people voluntarily withdrew from the labor force because of a lack of jobs). On the other hand, in the 16 years beginning in 1993 the Japanese labor force grew at an average rate of 0.04% and had 7 years of negative growth in the labor force (which didn’t happen at all in the previous 18 years). The Japanese labor force in 2009 has essentially the same number of people as in 1993.

Fundamentally, there are only two ways for a nation to have a sustainable increase in GDP. Either it has to have more people in the labor force or it must increase the productivity of each person in the labor force. Because Japan’s labor force hasn’t grown in 16 years it isn’t surprising that its GDP has stagnated. Even worse, because Japan’s work force has grown older in the last 16 years, productivity growth has been anemic at best.

Demographics have thrown Japan a “double action spit ball”. In additional to the supply of goods and services being constrained by the lack of workers and weak sustainable productivity growth, demand has stagnated because of the large increase of older citizens relative to younger citizens. Japan has one of the oldest populations in the developed world with the proportion of elderly citizens exploding in recent years. Older citizens tend to consume less than younger citizens and, as a result, Japanese consumer demand has been stagnant. And, the growth rate of the total population in Japan has slowed to essentially 0.00% per annum with its population projected to shrink in future years. Consumer demand in Japan is only going in one direction and that is down.

The U.S. has exhibited similar, but less severe, demographic trends as Japan since 2001. From 1981 until 2000, the average annual growth rate of the U.S. civilian labor force was 1.439%. However, from 2001 through 2008 the U.S. civilian labor force growth rate dropped to an average of 0.989% per annum. Just like in Japan, a slowdown in the growth of the labor force is correlated with national GDP being under pressure.

And, a fall off of population growth destroys demand in the U.S. just like it does in Japan. For example, there are certain regions in the U.S. that suddenly hit a demographic wall and went from being a rapid growth region to a no-growth region. Not surprisingly, these regions have had a myriad of economic issues not seen since the Great Depression.

I live in Southeast Florida which is one of the U.S. regions that hit a population growth wall and I have witnessed firsthand the corrosive effect of population stagnation. Since 2004 Southeast Florida went from one of the fastest population growth regions to zero population growth. Net migration into Southeast Florida died after a series of hurricanes pushed up property insurance rates to unaffordable levels for many families. As a result of being unaffordable population growth died and Southeast Florida became “ground zero” for the real estate crisis.

The demographic data is clear. Palm Beach County’s annual population growth went from 2.5% per annum in 2004 to 0.0% per annum in 2008. For all of 2008 the number of new residents for all of Palm Beach County was less than the number of new residents that moved into the county in a single day in 2004.

It isn’t surprising, therefore, that Palm Beach County had a real estate crash. Builders constructed new homes for people that were supposed to migrate to Florida in 2005 and 2006 but never arrived. When the population stagnated, real estate developers discovered that they had overbuilt and prices collapsed. If net migration to Palm Beach County hadn’t died, home prices might have gone down but not nearly by the amount that actually occurred. Just like in Japan, a fall off in population growth destroyed demand and pushed real estate into a deflationary spiral. And, the story of Palm Beach County played itself out throughout the state.

Last week President Obama started a national debate on immigration. More than anything else, bad immigration policy is bad economic policy. Immigration reform is essential to keep the U.S. economy growing and competitive. Stories abound about how the U.S. is losing its place as the destination of choice for immigrants that want to become educated, work hard and raise their families. Work visas are harder to obtain and even bringing foreign nationals into the U.S. for legitimate business training trips is a hit and miss affair. I think that the U.S.’s post 9/11 backlash against foreign workers is correlated to work force stagnation and is one of the causes of the current economic problems.

Policy makers need to understand that immigration policy is an economic tool to promote everyone’s welfare. As an example, one way that the real estate crisis could be quickly resolved is to allow more immigrants to come into the U.S.; but only if the new residents agree to purchase homes in the U.S. Every year the population of the U.S. grows by approximately 3 million people. Another 3 or 4 million immigrants will suck up excess residential real estate and could cure the real estate crisis quickly.

I’m not sure what form immigration reform should take, but I do know that the lesson that we should learn from the Japanese experience is that demographics matter - and they matter a lot. Bad demographic trends will always lead to bad economic conditions.

Comments

[huangjin:]

U.S. immigration policy blocks high-skilled legal immigrants through the visa system, but allows as many unskilled high-school and grade school dropouts who enter illegally. The plan now is to keep all the unskilled dropouts (not all are unskilled, but a lot are) here permanently, a plan opposed by 70% of the public. The result will be a slamming door for ALL immigrants because people can only accept so much cultural change at a time. The only politically viable way to get more high skilled immigrants into this country is to deport the unskilled immigrants.

Apr 16 01:02 PM

[John Lounsbury:]

Steven H. - - -

Interesting comment.

With respect to robotics, the problem there is that robots are not consumers. The demographic problem has more to do with demand (consumption) than supply (production). This has two aspects:
1. Declining working population decreases demand (macro). A person earning $30,000 - $60,000 a year consumes much more goods and services than someone who is homeless or surviving on subsistance entitlements.
2. If working population declines at a faster rate than total population, then supporting those that are not producing becomes a bigger and bigger proportion of the economy. That produces a downward spiral.

Mark - - -

Very good article discussing of the demographic problem, which has not been getting a lot of ink.

Apr 16 02:19 PM

[mplaut:]

To Steven H - thanks for the links.

This is a key quote from Bloom: "Moreover, Bloom argued, national
policies can capitalize on a country’s demographic makeup to spur higher economic growth. “There are two things to remember,” said Bloom. “First, that population matters to the pace and growth of
economic development. Second, that it matters a lot.”

No one today wants to think about the fact that the size of people's families has a lot of effect on the whole country.

Apr 16 02:43 PM

[Zee4Money:]

If you extend the point to the world economy then economic growth is dependent on population growth. The question then becomes when do we reach the end of the earths ability to support an increasing population? This is the point when population and the economy will decline.

Apr 16 02:46 PM

[rosey99:]

I must confess to being somewhat puzzled, and I tend to agree with the comments of Kelm, and BerkelyBob, above. I was still under the impression that a feature of the current economic landscape is/was over-consumption and under-production. We consumed plenty, but produced relatively little (outside of financial products, i.e., debt). It is also worth mentioning that the relatively recent reduction in China's population growth (beginning around 1980) correlates well with dramatic economic growth in China.

And then there is the common sense argument that additional consumption in the US will not spur domestic production, because the higher return on investment offered by China, for example. All in all, this sounds like a variation on a theme, remarkably similar to the diagnoses offered in Washington, and on Wall Street: we will consume our way out of this.

For now I'll stick with the more or less conventional notion that the issue is one of global over-capacity stemming from rampant credit growth. Interesting perspective though.

Apr 16 03:06 PM

[CaptainJJack:]

The US is, by far, the largest manufacturing economy in the world. As a population that is 5% of the world, we consistently produce 20% of the worlds stuff.

While it IS true that manufacturing employment has been falling for years, it is primarily due to huge manufacturing productivity increases over the last few decades, not that we are losing share.


On Apr 16 03:06 PM rosey99 wrote:

> I must confess to being somewhat puzzled, and I tend to agree with
> the comments of Kelm, and BerkelyBob, above. I was still under the
> impression that a feature of the current economic landscape is/was
> over-consumption and under-production. We consumed plenty, but produced
> relatively little (outside of financial products, i.e., debt). It
> is also worth mentioning that the relatively recent reduction in
> China's population growth (beginning around 1980) correlates well
> with dramatic economic growth in China.
>
> And then there is the common sense argument that additional consumption
> in the US will not spur domestic production, because the higher return
> on investment offered by China, for example. All in all, this sounds
> like a variation on a theme, remarkably similar to the diagnoses
> offered in Washington, and on Wall Street: we will consume our way
> out of this.
>
> For now I'll stick with the more or less conventional notion that
> the issue is one of global over-capacity stemming from rampant credit
> growth. Interesting perspective though.

Apr 16 03:25 PM

[Steven Hales:]

On Apr 16 02:19 PM John Lounsbury wrote:

> Steven H. - - -
>
> Interesting comment.
>
> With respect to robotics, the problem there is that robots are not
> consumers. The demographic problem has more to do with demand (consumption)
> than supply (production). This has two aspects:
> 1. Declining working population decreases demand (macro). A person
> earning $30,000 - $60,000 a year consumes much more goods and services
> than someone who is homeless or surviving on subsistance entitlements.
>
> 2. If working population declines at a faster rate than total population,
> then supporting those that are not producing becomes a bigger and
> bigger proportion of the economy. That produces a downward spiral.

John, I think you have to think of robotics in terms of capital available per worker. Capital investment causes worker productivity to increase returns to capital decrease and returns to labor increase. The evolution of our economy to a service economy will be more rapid with robotics more widely deployed but that doesn't mean that production of goods will not have ready domestic markets. I think also that robotics has implications for where factories are located.

The ratio of working age population to total population will level off this century, even for the developing world. This does not mean that population does not continue to grow. It will grow from increases in longevity and from a birth rate at or slightly above replacement for the US and from immigration. A fall in aggregate demand in the developed world is possible but it is at least a century or more away for the US. There are US states where birth rates are low like Vermont. Europe is possibly facing Demographic Winter see www.demographicwinter.... (The film, from what I saw, uses incorrect data and comes to wrong conclusions.) A falling birth rate has many causes like growing affluence. But a falling birth rate does not mean it will fall forever. In the US ours has risen and fallen and is rising again.

China's fertility rate is 1.79 live births per female. Does this mean that their fertility rate will continue to fall? It could just as easily increase in future decades. But they have a saying in China, 4 2 1, four grandparents, two parents and one child. That is demographic disaster in about 40 years. You can't maintain the world's largest military by manpower if the demographics don't favor you.

Apr 16 05:46 PM

[TeresaE:]

You are drop dead wrong.

We are no longer the top manufacturer of anything. Heck, we ship our apples to China so that they can turn them into juice.

Come to Michigan to see reality.

Or, keep believing the bs that is guaranteeing our children will live with a much lower standard of living, unless of course they work for the government.

And we CONSUME 25% of the world's stuff, not make it. Or, at least we used to, now we can't afford to.


On Apr 16 03:25 PM CaptainJJack wrote:

> The US is, by far, the largest manufacturing economy in the world.
> As a population that is 5% of the world, we consistently produce
> 20% of the worlds stuff.
>
> While it IS true that manufacturing employment has been falling for
> years, it is primarily due to huge manufacturing productivity increases
> over the last few decades, not that we are losing share.

Apr 16 11:33 PM

[carey_jim:]

You're forgetting that people like to make babies.

If America had good, free schools (including universities,) people would have more babies. The rich aren't afraid to have them.

Tax laws could encourage more babies also.

It's pathetic to think that so many people think immigration is the only way America can reproduce itself.

Has the push for homosexual marriage gone that far? Is America really THAT bankrupt?

Apr 17 12:34 AM

[Rhunzzz:]

Actually, the US does manufacture lots of things still. It's just that they're not all that visible, or that they hide in plain sight.

www.sfgate.com/cgi-bin...

Think of it this way - it is retirees who liquidate assets like stocks and houses (or consume the cash flows therefrom instead of re-investing, which amounts to the same thing), and it is working adults who accumulate assets. So an economy where there are more people retiring than entering the workforce should see a tendency towards falling asset prices (a BAD, bad thing).

China started its one-child policy around 1979... now, in 2009, the first generation born since that year would be 30, newly-entered into the workforce and still behind their prime earning years (typically around 46). The generation before would be in their 40s. When this pre-one-child-policy generation hits retirement age... watch out. That's why China is forecast to grow old before it gets rich.

Demographics really is destiny.

Apr 17 05:43 AM

[wavelength:]

Demographics are the core of many of Dent's arguments (and yes, I KNOW he has made some bad calls and lots of you are gunning for him) as to why we are facing a sustained downturn and I don't see how anyone can duck the issue. An aging population really does have economic consequences and housing and consumer spending are driven by demographics. The US is indeed failing to learn, not just from Japan but from just about everywhere. Australia made the transition from family-based "chain" migration to an immigration policy that favors the educated and skilled just in time. The US is failing to do so, and is actually going to reward illegal and unskilled immigrants whilst continuing to make it almost impossible for skilled workers to move here. Bad immigration policy is indeed bad economic policy. This administration is so obsessed with social engineering, but not in any way that will help us dig ourselves out of our hole. Mr Sunshine has done a great job here of showing how social and economic issues are connected - and how we are currently following the wrong path on nearly every count.

Apr 17 02:13 PM

[Larry House:]

This is a very real factor. Russia and China are heading toward the same demographic problems down the road--Russia before China. America will precede both.

Apr 17 04:14 PM

[Fred Swartz:]

It's Ponzinomics to base economic well-being on population growth. The earth's resources are finite and will support only a finite population. There are various estimates of how many people can be supported by the earth's resources in a sustainable way, but we aren't too far from most of them.

What would a stable economy in a country with a high retired to worker population be like? But it's unrealistic to expect populations to stabilize in a rational manner -- some populations will continue explosive growth and competition for resources will have nasty consequences.

Apr 17 04:19 PM

[Steven Hales:]

Larry,

China has a fertility rate of 1.79 and Russia about 1.4 and the US has a fertility rate of 2.05. How can America precede Russia and China when it has a near replacement fertility rate?


On Apr 17 04:14 PM Larry House wrote:

> This is a very real factor. Russia and China are heading toward the
> same demographic problems down the road--Russia before China. America
> will precede both.

Apr 17 08:30 PM

[William Cowie:]

The article, while making a good point, is incomplete without corresponding data showing the increases in productivity, which have been substantial, and which, alone will continue to make for positive economic growth. The economy, after all, is more than just buying houses.

I do agree with a previous commenter that current policy, or actually the current implementation of policy, is causing an imbalance between contributors to society and those who consume more than they produce. Canada has a sound model IMHO: they allow unlimited immigration of people who either buy a business that employs others or brings in a certain amount of capital. Those are obviously not the only immigrants allowed, it's just that there is no limitation at all on that class of immigrants. It wouldn't surprise me if in 20 years or so we find our brethren to the north a better country than ours (other, of course, than having to speak that funny sounding language).

Apr 17 08:54 PM

[Zoltan L. K...:]

Further growth in productivity will depend on the degree and quality of competition. This is currently massively influenced by state intervention. It seems, the US is building a new economic model and it will be very interesting to see it unfolding.

Apr 18 02:55 AM

[snorake:]

are you suggesting that getting rid of the boomers would solve the problem?


On Apr 16 09:29 AM kelm wrote:

> Japan's demographic trends have certainly exacerbated its economic
> degradation since the bubble burst but they did not cause it and
> despite your assertion that they did, you offer zero evidence. Looked
> at another way you ask us to believe that their labor force hitting
> zero growth AFTER the bubble burst caused the bubble to burst. You
> have shown no evidence of cause and effect. I suggest some solid
> reading on the financial and market shenanigans that went on in Japan.
> "Devil Take the Hindmost" has a great section on the Japanese bubble
> years.
>
> To your point about the impact of changing demographics on future
> US growth this is a serious issue. US real estate developers failed
> to look at the demographic trends and plan accordingly. That gave
> you the overbuilt situation. Even if we had not had the sub-prime
> debacle the fact that there was a large demographic bulge that was
> aging and would inevitably "downsize" with fewer workers coming behind
> them meant the market for new McMansions was set to head downwards.
> The real estate industry did not recognize this. Demographics did
> not cause the current economic crisis but they will exacerbate it.
>
>
> If US population continues to grow through immigration then we will
> indeed have new, young spenders entering the consumer economy but
> they will face an increasing head wind of higher taxes and other
> liabilities as the demographic bulge of the boomers ages. The statistics
> on the percent of workers funding the retirees is set to degrade
> badly.
>
> I agree completely that immigration reform is urgently needed. It
> is incredible the barriers we put up against people who are highly
> trained and skilled entering this country even when they have gone
> to school here.

Apr 18 08:38 PM

[Danny Newton:]

Local demand for goods and services might not be a fatal condition if Japan could go elsewhere for their demand, like the third world. And, they are doing that. Japan's economy is heavily controlled and they are protective of their domestic producers. This command and control mentality might also be a factor in their situation. Their actions to pick high value added products to produce does not seem flawed but they are obviosly not being blessed by the totality of their policy. I think the demographic angle is a good point but I don't think it is the single most importatant factor. Old folks are excellent consummers of medical care, are they not? Why does that not bless their economy?

Apr 18 09:42 PM

[prairiedog555:]

I have tech co-workers that tried for years to get to US, legally. These people are law abiding producers and consumers.
But the powers, Dem and Rep, all want to let in unskilled, criminal types that drain our society.
The Dems want voters, the Rep want slaves to work cheap.
When both parties agree on something it must be suspect.

Apr 19 09:17 AM

[Moon Kil Woong:]

You can improve demographics substantially by decreasing crime, improving rehabilitation, and not imprisoning people for minor and unintentional offenses. You can also cut down on the money you spend on keeping them in prison learning how to be unproductive and more violent every day.

Rather than doing this we import cheap labor like Rome. When we cease to make anything and don't wiosh to do the basic tasks to ceep our civilization operating we certainly have proven that we have not learned much from the past. About all we need then is gladiator fights to garner us the tiotle of the New Roman Empire.

The Fed and Treasury are already drinking from lead pipes and our politicians are largely about as selfish and hedonistic as you can get.

Although artificial population growth can add to the labor pool and give some economic steam in the short run the energy it produces often escapes over the border though capital outflows. With a giant trade imbalance and a national deficit that depends on foreign treasury bond consumption I don't think increased immigration is really too prudent. Rather asking citizens to stay out of trouble, clean up their own mess, enrich themselves through education, and live more prudently is a better long term solution.

Apr 21 02:18 PM