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.