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Home Publications Blogs Beat the Press News for the Wall Street Journal, Countries Tend to Grow Faster When Coming Out of Recessions!

News for the Wall Street Journal, Countries Tend to Grow Faster When Coming Out of Recessions!

Monday, 23 June 2014 09:25

When economies have lots of excess capacity and idle workers, as is the case following a recession, they tend to grow very rapidly. When they are near their potential level of output growth tends to be slower.

This is why the United States economy was able to grow at a 5.6 percent rate in 1978 or a 7.3 percent rate in 1984. In both cases the economy was operating far below its potential so it had lots of room to grow simply to get back to potential. Once it reaches potential, an economy can only grow at the rate of labor force growth plus the rate of productivity growth.

If the Wall Street Journal understood this simple fact it might not have tried to imply that Japan faces some economic disaster because it is projected to have a lower rate of growth in 2015 than the other major western economies. Japan's economy is much closer to its potential than most of the other economies on the list.

Japan's unemployment rate is under 4.0 percent. And the percentage of prime age people (ages 25-54) who are employed is now 81.9 percent, 1.3 percentage points above the pre-recession level. By comparison in the United States employment among prime age workers is still down by 2.5 percentage points from pre-recession levels at 76.4 percent. Given this difference in where these economies are in relation to their potential output it would be very surprising if the U.S. economy were not growing more rapidly.

The piece also implies that a low growth rate is a major problem. Economists usually look at per capita GDP, that is why they generally think that Denmark is wealthier than Indonesia. Japan's population is shrinking at the rate of roughly 0.1 percent annually. By contrast, the U.S. population is growing at a rate of 0.8 percent annually. This means that, on a per capita basis, the 1.0 percent growth projected for Japan is equivalent to 1.9 percent growth in the United States. That is roughly the long-run potential growth rate that many analysts now project for the United States.

Comments (4)Add Comment
written by jm, June 23, 2014 11:09
A few weeks ago the Asahi Shimbun ran an article about how much trouble Toyota was having finding contract production line workers, and the difficulties a fast-food chain was having finding workers to staff the late-night and weekend shifts. Toyota is having to go to Okinawa to find workers. Fast-food chains are, IIRC, offering about $15 an hour for the undesirable shifts.
The Harder They Fall, The Easier to Get Up
written by Last Mover, June 23, 2014 12:23

How is the sock puppet media supposed to handle this explanation of growth rates by Dean Baker?

What? Fall harder in order to grow faster? More recovery means less growth?

Not only that, the rest of the story is to reduce population to have more?

Wait till Fox News runs this through the conspiracy mill:

Dean Baker, Another Commie Who Wants More with Less
written by dax, June 24, 2014 6:42
Sorry, I'm having difficulty squaring:

1/ Japan is already near full employment and at its potential,
2/ Japan is at the zero bound

Any illumination appreciated.

written by bananaguard, June 24, 2014 9:45

Keep an eye on direction, as well as level. Japanese retail trade was down 4.3% y/y in April. Housing starts down 3.3% y/y in May. Labor cash earnings up just 0.7% y/y, and that's an improvement over the average since 2010, while inflation is running around 3.4%, for a pretty sharp real-yen drop in labor earnings. That sizable inflation gain, by the way, reflects a tax hike, and will fall away in a year. As of April, the gain was 1.6%, a more realistic indication of inflation.

Japan is not in a terrible situation, but in part that's because the government has been aggressive in propping up the economy. One ought always ask, when thinking about policy, "where would we be without this policy?". If the answer is "in the soup", then the policy may be a good idea despite apparent recovery.

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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.