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The Japanese Economic Lesson – 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 fell 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 that 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 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.

Posted in: Credit Crisis, Demographics, Economic Statistics, economy, Finance, Japan, Politics, Public Policy

5 Comments

  1. John

    Immi­gra­tion is also a ter­rific boon to the prison industry.

    I like the idea of fill­ing up fore­closed homes with new immi­grants given the stag­ger­ing num­ber of RECENT immi­grants who defaulted. Sounds like a great approach.

  2. Depression, Economy, Japan - 103 Year Old Trader Remembers and Talks, Steve Roach, Japanese Demographics

    […] The Japan­ese Eco­nomic Les­son – 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.  — Mark Sun­shine Blog […]

  3. Gary Seifrit

    Direct and to the point writ­ing: in real­ity, absent uncon­tro­lable vari­ables such as polit­i­cal pol­icy, nat­ural dis­as­ters, etc., eco­nomic devel­op­ments can most def­i­nitely be tracked by study­ing and quan­ti­fy­ing demo­graphic trends. It is, in essence, rather sim­i­lar to the method­ol­ogy of actu­ar­ial analy­sis, used by life insurers.

    Mr. Sun­shine has obvi­ously read the 20-years of research and eco­nomic mod­el­ing pro­duced by Harry S. Dent. I highly rec­om­mend his many books — all best sell­ers –and review­ing his web­site at http://www.hsdent.com.

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