Is the Downturn a Bad Thing?

According to an article on the front page of The New York Times for February 22, 2009, Japan is entering another “lost decade.” Its economy contracted at an annual rate of 12.8% in the last quarter of 2008. But in many ways the lost decade, which was caused by banking instability after a real estate bubble burst, never ended. Sales of whisky, the chic tipple, are 20% those of the late 1980s. Domestic car sales have fallen by half since 1990. Only 25% of Japanese men in their 20s want a car.

What pulled Japan out of its period of no growth was an export boom. When that collapsed, its economy collapsed. Now however the situation in Japan has changed. Instead of being employed for life, with guaranteed pension and benefits, more than a third of Japanese workers are temps, with no job security, lower wages and fewer benefits and than full time workers. People are poorer. This turns up in the falling savings rate, which has dropped from about 15% in 1985 to less than 5% now, even as consumption has fallen. People are spending more on necessities. Japanese companies pay less because they are in competition with foreign companies with lower- wage workers.

While this situation is undesirable, no growth may not be such a bad thing for Japan. Japan has an aging population. The population of the country is set to fall. The Japanese do not welcome foreigners, whose labor they need for a growing economy (or even, for a time, for elder care, in a time of falling population), as their Korean and Chinese minorities can attest. If not for competition for pride of place among the countries of the world, a contraction in the Japanese economy would not be a bad thing. Their tremendous savings, properly managed and redistributed, would let them get through the demographic transition to a lower population and a steady-state (not growing) economy. Japan has wasted trillions of dollars on unnecessary or damaging infrastructure (bridges to nowhere, concreted rivers) in the last decades. It could direct some of that money (less and less of which will be available) into projects that will enhance the natural productivity and wealth of the country and thus, over the long term, improve the wealth and happiness of its people.

The countries of Western Europe are at the beginning of a similar demographic transition. The population of the United States would be falling now except for immigration.

In other words, perhaps we should treat the worldwide downturn as an opportunity….