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http://www.project-

syndicate.org/commentary/the-cost-of-america-s-free-lunch

JAN 6, 2011

The Japan MythBRUSSELS – The first decade of this century started with the so-called dot-com

bubble. When it burst, central bans mo!ed a""ressi!ely to ease monetary #olicy in

order to #re!ent a #rolon"ed #eriod of $a#anese-style slow "rowth. But the #rolon"ed

#eriod of low interest rates that followed the %&&' recession instead contributed to theemer"ence of another bubble, this time in real estate and credit.

With the colla#se of the second bubble in a decade, central bans a"ain acted (uicly,

lowerin" rates to )ero *or close to it+ almost e!erywhere. Recently, the United States

ederal Reser!e has e!en en"a"ed in an un#recedented round of (uantitati!e easin"

in an effort to accelerate the reco!ery. /"ain, the ey ar"ument was the need to a!oid a

re#eat of $a#an0s lost decade.

1olicymain" is often dominated by sim#le lessons learned from economic history.

But the lesson learned from the case of $a#an is lar"ely a myth. The basis for the scare

story about $a#an is that its 231 has "rown o!er the last decade at an a!era"e annual

rate of only &.45 com#ared to '.6 5 for the US. The difference is actually much

smaller than often assumed, but at first si"ht a "rowth rate of &.4 5 (ualifies as a lost

decade.

 /ccordin" to that standard, one could ar"ue that a "ood #art of Euro#e also lost the

last decade, since 2ermany achie!ed about the same "rowth rates as $a#an *&.45+

and 7taly did e!en worse *&.% 5+8 only rance and S#ain #erformed somewhat better.

But this #icture of sta"nation in many countries is misleadin", because it lea!es out an

im#ortant factor, namely demo"ra#hy.

9ow should one com#are "rowth records amon" a "rou# of similar, de!elo#ed

countries: The best measure is not o!erall 231 "rowth, but the "rowth of income #erhead of the worin"-a"e #o#ulation *not per capita+. This last element is im#ortant

because only the worin"-a"e #o#ulation re#resents an economy0s #roducti!e

#otential. 7f two countries achie!e the same "rowth in a!era"e W/1 income, one

should conclude that both ha!e been e(ually efficient in usin" their #otential, e!en if

their o!erall 231 "rowth rates differ.

When one loos at 231;W/1 *defined as #o#ulation a"ed %&-4&+, one "ets a

sur#risin" result< $a#an has actually done better than the US or most Euro#ean

countries o!er the last decade. The reason is sim#le< $a#an0s o!erall "rowth rates ha!e

been (uite low, but "rowth was achie!ed des#ite a ra#idly shrinin" worin"-a"e

#o#ulation.

http://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunchhttp://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunchhttp://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunchhttp://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunchhttp://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunchhttp://www.project-syndicate.org/commentary/the-cost-of-america-s-free-lunch

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The difference between $a#an and the US is instructi!e here< in terms of o!erall 231

"rowth, it was about one #ercenta"e #oint, but lar"er in terms of the annual W/1

"rowth rates – more than '.= #ercenta"e #oints, "i!en that the US worin"-a"e

#o#ulation "rew by &.>5, whereas $a#an0s has been shrinin" at about the same rate.

 /nother indication that $a#an has fully used its #otential is that the unem#loyment rate

has been constant o!er the last decade. By contrast, the US unem#loyment rate has

almost doubled, now a##roachin" '&5. ?ne mi"ht thus conclude that the US should

tae $a#an as an e@am#le not of sta"nation, but of how to s(uee)e ma@imum "rowth

from limited #otential.

3emo"ra#hic differences are rele!ant not Aust in com#arin" $a#an and the US, but also

in e@#lainin" most of the differences in lon"er-term "rowth rates across de!elo#ed

economies. / "ood rule of thumb for the a!era"e "rowth rates of the 2-6 countries

would be to attribute about one #ercenta"e #oint in #roducti!ity "ains to the "rowth rate

of the worin"-a"e #o#ulation. The US has done sli"htly worse than su""ested by this

rou"h measure8 $a#an has done a bit better8 and most other rich countries come #rettyclose.

Looin" to the decade ahead, this analysis su""ests that one can #redict the rich

countries0 relati!e "rowth rates based on the "rowth #attern of their worin"-a"e

#o#ulations, which one already nows today, "i!en that anybody startin" to wor o!er

the ne@t two decades has already been born.

?n this basis, $a#an0s relati!e decline as a maAor economic #ower will continue, as its

worin"-a"e #o#ulation will continue to shrin by about '5 #er year. 2ermany and 7taly

increasin"ly show $a#anese #atterns of decline in their worin"-a"e #o#ulations, and

are thus liely to "row !ery little as well.

7n the case of 2ermany, one obser!es an interestin" in in its demo"ra#hy< from%&&=-%&'=, the worin"-a"e #o#ulation is tem#orarily stabili)ed. But this will be

followed by acceleratin" decline, as the worin" a"e #o#ulation declines e!en faster

than in $a#an.

The current stren"th of the 2erman economy is also #artly due to this tem#orary

demo"ra#hic stabili)ation. But a $a#anese-style scenario seems ine!itable after %&'=.

By contrast, the US, the United in"dom, and rance are liely to "row faster for the

sim#le reason that their worin"-a"e #o#ulations are continuin" to "row, e!en if at a

relati!ely slow #ace.

Two lessons emer"e from this consideration of the influence of demo"ra#hic factors on

economic "rowth. irst, the idea of a $a#anese-style lost decade is misleadin" – e!en

when a##lied to $a#an. Slow "rowth in $a#an o!er the last decade was due not to

insufficiently a""ressi!e macroeconomic #olicies, but to an unfa!orable demo"ra#hic

trend.

Second, a further slowdown in rich countries0 "rowth rates a##ears ine!itable, "i!en

that e!en in the more dynamic countries the "rowth rates of the worin"-a"e #o#ulation

is declinin". 7n the less dynamic ones, lie $a#an, 2ermany, and 7taly, near-sta"nation

seems ine!itable.