Every January, more
than 10,000 economists fly somewhere in America for
the conference of the American Economics Association. This year it was in San
Diego, which was fun, because it was very easy to
tell who was a San Diegan and who was an economist. The conference is also
a way to figure out what economists are worried about. This year they looked west
across the Pacific Ocean, and they worried about something
they call Japanification. It's a funny term,
and some people don't even like to
use it because it has more than one meaning. It can be a shorthand
for what happened to Japan over the
last two decades - slow economic
growth, low inflation, and extremely low interest
rates for a long time. Those three facts don't give
you a complete picture of what's actually happening
in actual Japan, but they do terrify
macroeconomists. And so Japanification is
more often used as a way to point out that these
things could or will happen to everyone else. I think "Japanification"
is a useful term, and I think what it really says
is that Japan is the preview movie for the whole
rest of the world, especially in terms
of demographics. So if you think about
the percent of population that's over age 65, what
that does to consumption, what that does to inflation,
what that does to labour force participation. In Japan, the
population is ageing. And in other
developed economies, populations are ageing, too. Here's what that means. When you have a larger percent
of the population over age 65, you necessarily have a lower
percentage of people working. And what that means
is you have a lower level of demand in the economy,
and that impacts inflation. Inflation impacts
interest rates. And when we have a low, what
the Fed would call r-star, or that neutral interest
rate, when that is lower, you have less
policy space to act, and you need to enact other
policy frameworks in order to effectively deploy monetary
policy when growth slows or when there's a recession. The reason economists in San
Diego were worried about Japan is not because Japan is
a terrible place to live. Life expectancy, for
example, is higher in Japan than in the US, the UK,
Canada, and Germany. It's well higher
than the average across all
high-income countries. But when populations get
older, interest rates decline, inflation declines,
and that makes it harder to do
monetary policy the way we always used to - by raising
and lowering interest rates. So economists worried
about Japanification don't think that Japan, the
place, is a catastrophe. They're worried that their
own central banks won't have any room left to
cut interest rates, as happened in Japan. This is Ben Bernanke, the former
chair of the Federal Reserve. He gave a keynote in San Diego. He basically said that
if interest rates get too low in the US, as
they are in Japan, when the next recession
hits, the Fed might have to get more creative. I think the Fed and
other central banks are caught in a very difficult
position here, because on the one hand, they
can't announce too loudly they have no tools
left, because part of the magic of
central banking is to pretend that you have
a bazooka behind your back that you can bring out and
to prevent expectations from disintegrating and falling. So it's magic. Maybe "Japanification"
is the wrong word, because actual Japan is
actually a nice place to live. And in one important
way, it's a better place to live than the United States. We'd prefer not to call our
problem "Japanification." Because? Because Japan does
not have the problem that widening
inequality is leading to the stagnation
of people's incomes in the middle of the
income distribution, while people in the top
are growing or improving their situation very rapidly,
whereas that's the situation in the United States. Ben Bernanke's
worried about what low growth will do
to monetary policy, particularly when
a recession hits. That makes sense, because he
was in charge of monetary policy the last time there was
a devastating recession. But low growth and
low interest rates don't just have
monetary consequences. They have political
consequences. And the irony of using the word
"Japanification" is that what's happening to Japan,
low growth, may be a harder problem
for Washington to solve than it
has been for Tokyo. Now what's the main difference
between us and Japan? I would say the difference
is that in the United States, as in many other
industrialised countries, inequality is
widening very rapidly. This means that if
our rate of growth overall is very slow, as it is,
and if inequality rising means that most of the fruits
of that slow growth accrue to people who are
already at the top of the scale, then the broad bulk
of the population is not doing very well. California is a nice
place to visit, certainly in January when you're
coming from Boston or Chicago or Frankfurt or the kinds of
places economists tend to live, nicer in January than,
perhaps, Tokyo even. But what's happening
in Japan, low growth, may be even scarier
right here in San Diego on this side of the ocean.
It's cuz they're secretly into Hentai.