It's the demographics, stupid

The Japan Story

Paul Krugman, NYT

Dean Baker is annoyed at Robert Samuelson, not for the first time, and with reason. The idea of invoking Japan, of all places, to justify fears that stimulus leads to inflation or asset bubbles is just bizarre. And while there is much shaking of heads about Japanese debt, the ill-effects if any of that debt are by no means obvious.

But what remains true is that Japan has run budget deficits for many years while delivering what appears on the surface to be very disappointing economic performance. What’s the story there?

My answer would run in two parts.

First, you should never make comments on Japanese growth or lack thereof without taking demography into account. Japan has low fertility and low immigration; this has translated into a dramatically aging population and a declining working-age population. So what does Japan’s performance look like if you calculate real GDP per working-age adult? (In the picture above I define working-age as 15-64; this is one case in which you DO NOT WANT to look at FRED, which defines working age as 16+ and therefore takes no account of aging).

(More here.)