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Home Publications Blogs Beat the Press Krugman Wrong on Japan's Demographics and Stagnation

Krugman Wrong on Japan's Demographics and Stagnation

Thursday, 09 September 2010 05:02

BTP doesn't ordinarily focus on blogs, but Paul Krugman's blog is widely read, and most of us expect him to be right, so it is a big deal when he gets an important point wrong. This morning he told readers that part of the explanation for Japan's decline in per capita income relative to the U.S. is due to its aging population. He argues that his has led to a drop in the percentage of working age people in the population, which has led to a drop in per capita output.

A quick trip over to the OECD's data base tells a somewhat different story. While the ratio of working age people to population did fall in Japan over this period, we also see a rather dramatic decline in average hours worked per worker. Average annual hours per worker dropped by 7.0 percent from 1992 to 2008.

This indicates that there was no shortage of potential labor in Japan over this period. If Japan had pursued policies that generated demand, there is no reason to believe that its workforce would not have supplied the necessary labor, inspite of the decline in the percentage of working age people in the population. In other words, Japan's economy was demand constrained, not supply constrained.

This doesn't mean that there are not circumstance under which Japan's population could become supply constrained, it's just that these circumstances did not exist in the stagnation of the last 18 years. This is sort of like a baseball team that is reduced by injuries to 23 players on its roster (rather than the usual 25), which gets beat 24-2 as a result of an awful performance by its starting pitcher and the early relievers. It may matter at some point that the team only has 23 players to draw upon, but that would not have been the issue in this particular loss.

This point is important because there is a whole industry devoted to scaring the public about the demographic changes that the United States is now experiencing. While these changes will certainly affect the economy, they will not be the main determinants of living standards. The success or failure of economic policy will dwarf the impact that projected decline in the ratio of workers to retirees will have on well-being.  

Comments (13)Add Comment
written by Ron Alley, September 09, 2010 6:53
Krugman's comments are not quite adequately portrayed by Dean's comments. Krugman states:

Demography is not the whole story; Japan has stayed depressed, deflation is a problem, labor markets are poor (although the trouble tends to show in rising numbers of freeters rather than high measured unemployment.) Still, when you look at Japan’s declining share of world GDP, and even its relative decline in per capita GDP, the biggest single cause is the declining number of working-age Japanese.

Krugman cites this article for the definition of "freeters" which I found interesting:


This observation was particularly interesting:

More than one-third of the workforce is part-time as companies have shed the famed Japanese lifetime employment system, nudged along by government legislation that abolished restrictions on flexible hiring a few years ago. Temp agencies have expanded to fill the need for contract jobs as permanent job opportunities have dwindled.

Japanese youth are suffering many of the obstacles faced by American youth. Their government is dedicated to corporate interests over the interests of the workers.

written by skeptonomist, September 09, 2010 8:01
Somehow the case of China is never mentioned in discussions of the dire implications of declining population growth. It was certainly recognized that excessive population growth placed limits on economic growth and the Chinese government took drastic steps to limit the birth rate. How much of China's current relative prosperity is attributable to the reduction of population growth?

And again, there is no reason to think that population growth rates will not ultimately be limited by resources. What typically happens in all the natural world (not just humans) is that populations grow until resources are greatly overused, then there is a crash. Economists are not doing their job if they ignore the realities of resource limitations.
written by diesel, September 09, 2010 11:53
There is something incredibly myopic about economist's narrative of what is happening in Japan. The article Krugman drew the term "freeters" from, by Charles Smith illustrates this well. It's as though economists have mastered a vocabulary, a set of mathematic equalities that relate terms of that vocabulary to one another and meta concepts that order those equalities and then when some real phenomenon comes along such as that occurring in Japan that does not fit neatly into their training, they cannot break their ingrained habits of thought.

For example, if a nation's economy were to develop state of the art products and infrastructure that lasted well and required little or no maintenance or repair, they would experience little growth and be regarded as a failure by such blunt measurements as GDP.

I'm a guy who can build or fix almost anything found in a home today. For conscientious persons, quality matters more than quantity. I (we) want stuff that "leaves us alone". We don't want stuff that constantly breaks down or that is so poorly designed (many products formerly built in American factories) that they never worked correctly right out of the box. Therefore, beyond a certain critical break point, a large GDP is a signal of the FAILURE of an economy, not its success. This contradicts the reigning gospel, but there is no other word than FAILURE to describe wasted labor, time and resources. If this notion befuddles you, it's probably because you never built or fixed anything in your life. Had you actually been forced to deal with the products of American industry, you would realize that constantly correcting mistakes does not yield a higher Quality of Life. It's a tragic Waste of Life. In this, as in so many other things (e.g. fuel economy), the USA sets the standard for wastefulness and inefficiency.

We are a dumb nation that applies a dumb standard to our lives, and only by that standard are we number One.
again population affecting demand?
written by GQ, September 09, 2010 12:26
can it not be the case that demand is constrained because the population is aging? basically that as the population ages, this results in that aging population having less disposable income, which results in lower demand overall?

written by diesel, September 09, 2010 2:17
or maybe an aging population just knows better than to keep buying a bunch of crap. Psychologists and religions have long pointed out that people in the second half of life tend to lighten their material load, so less demand is entirely predictable.
written by diesel, September 09, 2010 3:12
In the past, four wheel disc brakes, rack and pinion steering, fuel injection, breaker-less ignition, airbags, crash absorbing frames and bodies, side reinforcement were all features adopted as STANDARD on Japanese and European sedans while available as only add on extras (if at all) on certain American autos.

House siding made of pressed wood flakes that disintegrated within 10 years (resulting in a large class action lawsuit) the responsibility for which the manufacturer tried to weasel out of by blaming installers, 2 x 4's or 6's that are so twisted because they were carelessly milled or dried are the rule, not the exception, plywood that cups like a potato chip even as you pull it off the rack, full of voids, shabby, shoddy veneers are what your home is built of. "Manufactured wood products" dominate the industry today, because a whole generation of miracle trees that were treated with growth hormone looked great from the outside, but inside, the growth rings were so large and porous that the wood was appallingly weak--balsa like--good for sucking up poison preservative though, which as some chemist will testify, will make the wood used in your foundation last twenty years. Imagine that, twenty whole years. Examine a chunk of old growth wood and you may see 25 growth rings to the inch. Dense strong, long lasting wood that keeps many old homes solid and will, if properly looked after, last 500 years. You won't find it in our lumber yards (Bill Gates's home was built with recycled warehouse and pier wood) because we shipped it all to Japan in exchange for Sony stereos and Toyotas. Shipped it as rough sawn logs, not finished dimensional lumber, because American mills could not process timber to Japanese standards. Disgusting. The spotted owl was just an excuse. Here in the Northwest, we tried to preserve the last of our old growth forests from rapacious exporters and the threatened-species owl was the best means available. Exporting logs that have been just trimmed on four sides doesn't create jobs in U.S. mills. It takes hundreds of years to grow those trees. Meanwhile, content yourself with a house built of chips or dust mixed with a plastic goo that off gases formaldehyde fumes that give your baby cancer. And, as Scott said in an earlier post, just sue the timber companies and the building trades twenty years hence to collect for damages to your long-term health. Good Luck. Houses that need repainting every seven years--there are only brick houses in the Netherlands. Not mandating passive solar windows in homes, not utilizing super efficient walls, on demand hot-water heaters, low power and water consumption clothes washers, in all these areas, we lag Europe and Japan. Freedom to be careless. Inefficiency is slavery.

I recently read that the average American will spend more money on cars than homes, over the course of his/her life. These are not just eddies, tangential to the stream of life. These ARE life. We work harder for shoddier goods than our European and Japanese neighbors. That's what's missing from the calculations.
What a hoot.
written by Bill Jones, September 09, 2010 8:28
Paul Krugman's blog is widely read, and most of us expect him to be right,

What sort of krazed Fantasy Keynesian world of what jobs do you hang out in?

The next the clown is right will be the first.
written by Rae, September 09, 2010 10:17
Most of us expect Paul Krugman to be right?
Not really. I mainly read his blog to see the the graphs. But I only expect him to reflect what his friends and colleagues believe. I suppose he's one of the "grass-men," meaning, generally recognized as safe, but with hard proof often lacking.
written by Jason Ruspini, September 10, 2010 7:13
You are the one telling the story, the data are neutral in this respect. The data only tell a different story if you assume at the outset that age structure and population have, or must have, less long-term impact on demand and production than fiscal policy. On the other hand, if a demographic savings glut overwhelming the capacity of productive assets originally caused the balance sheet recession that policy now struggles with, then policy is the dwarf here. No one can prove such causal stories, but economists should have a lot more respect for them. I would bet that Paul Krugman and others secretly do, but if both your balance sheet and prospective cash flow are impaired, it is hard to argue for stimulus.

Can we at least agree that the GDP assumptions of SS Trustees should look a bit less like 90's US and bit more like '90s Japan?
timberland shoes store
written by timberland for you , September 11, 2010 3:39
Tucked away in our timberland for you subconscious is an idyllic vision. We see ourselves on a long trip that timberland 6 inch spans the continent. YQ
"...most of us expect him to be right" -- hahahahaha
written by Tom Faranda, September 13, 2010 12:32
As a matter of fact Krugman was pretty much right this AM - 9/13 - in talking about trade and currencies. So that raised his batting average from .071 to .075.
written by wow gold, September 20, 2010 1:52
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Krugman's Post
written by 4Sight Consultants, October 26, 2010 9:50
You know there a lot of reasons that Japan's economy is suffering from stagnation. Like a lot of countries, Japan's population is aging quickly and the workforce has declined. They could counter the problem with many internal innovations toward newer, more efficient systems. A company like TMS consultants offers products and services that would make an impact in the Japanese economy.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.