Again, the key argument was the need to avoid a repeat of Japan’s "lost decade." Policy making is often dominated by simple "lessons learned" from economic history. But the lesson learned from the case of Japan is largely a myth.
The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US. The difference is actually much smaller than often assumed, but at first sight a growth rate of 0.6% qualifies as a lost decade. According to that standard, one could argue that a good part of Europe also "lost" the last decade, since Germany achieved about the same growth rates as Japan (0.6%) and Italy did even worse (0.2%); only France and Spain performed somewhat better.
This last element is important because only the working-age population represents an economy’s productive potential. If two countries achieve the same growth in average WAP income, one should conclude that both have been equally efficient in using their potential, even if their overall GDP growth rates differ.
When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population. The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates -- more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.
Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade. By contrast, the US unemployment rate has almost doubled, now approaching 10%.One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential.
A good rule of thumb for the average growth rates of the G-7 countries would be to attribute about one percentage point in productivity gains to the growth rate of the working-age population. The US has done slightly worse than suggested by this rough measure; Japan has done a bit better; and most other rich countries come pretty close.
Looking to the decade ahead, this analysis suggests that one can predict the rich countries’ relative growth rates based on the growth pattern of their working-age populations, which one already knows today, given that anybody starting to work over the next two decades has already been born. On this basis, Japan’s relative decline as a major economic power will continue, as its working-age population will continue to shrink by about 1% per year.
Germany and Italy increasingly show Japanese patterns of decline in their working-age populations, and are thus likely to grow very little as well. In the case of Germany, one observes an interesting kink in its demography: from 2005-2015, the working-age population is temporarily stabilized. But this will be followed by accelerating decline, as the working age population declines even faster than in Japan. The current strength of the German economy is also partly due to this temporary demographic stabilization.
First, the idea of a Japanese-style "lost decade" is misleading -- even when applied to Japan. Slow growth in Japan over the last decade was due not to insufficiently aggressive macroeconomic policies, but to an unfavorable demographic trend.Second, a further slowdown in rich countries’ growth rates appears inevitable, given that even in the more dynamic countries the growth rates of the working-age population is declining. In the less dynamic ones, like Japan, Germany, and Italy, near-stagnation seems inevitable. (Business World Online)