In 2013, former Treasury Secretary Larry Summers popularized the term “secular stagnation” — a reference to a nation’s decline into permanently sluggish economic growth. Economists use the phrase interchangeably with “Japanification” — the process of a nation adopting the traits of Japan’s economy.
As former Cato Institute senior fellow Daniel Mitchell summarized, Japan merges “misguided entitlement programs that are found in most developed nations” and “a quadrupling of the debt burden” with “far-worse-than-usual demographics.” In other words, Japan’s economy is simultaneously limping along due to decades of Keynesian economic activism and a diminishing populace. Both phenomena inhibit the nation’s long-term economic expansion.
For any civilization, economic and demographic stagnation leads to a death spiral.
Most immediately, an aging population decreases the tax base from which governments can fund healthcare and retirement handouts. More broadly, however, a shrinking labor force diminishes an economy’s ability to innovate and produce. With fewer people comes less output and less entrepreneurship — an effect intensified when government debt exerts a downward force on productivity.
Western nations are increasingly wary of their own slides into Japanification. European countries especially are observing negative replacement rates, older populations, and ballooning public debt in the wake of the 2008 recession.
The United States is not far behind its cohorts across the pond.
For one, American replacement rates have dropped tremendously. Although American women bore an average of 3.65 children in 1960, the fertility rate dropped to 1.93 births per woman by 2010. Birth rates again reached record lows in 2020.
For another, labor force participation is steadily diminishing. After a half-century of growth, labor force participation reached its apex in the late 1990s, when nearly 70% of Americans between 25 and 54 years old were actively employed or seeking employment. For the last two decades, however, labor force participation has continuously declined, reaching 61% in May 2021.
Both a decline in birth rate and a decline in labor force participation reflect worrying inefficiencies; indeed, American human capital is not being applied to physical capital to create goods and services. The Bureau of Labor Statistics affirms that the effects of a weaker labor force are “slower economic growth” because fewer people are working, “a rising dependency ratio” because there are fewer workers to support those who are not working, and “higher tax rates” because the tax base from which the government draws revenue is smaller.
Excessive federal spending further contributes to national economic decline.
For the past four decades, government debt in the United States has continuously increased as a percentage of output. In the early 1980s, the debt-to-GDP ratio was slightly above 30%; today — especially following multiple COVID-19 omnibus stimulus bills — it is nearly 130%.
Meanwhile, output growth is progressively slowing. Over the past four decades, the real GDP growth rate has seen a noticeable shift downward — a reality that reflects lower year-over-year increases in American productivity.
Indeed, according to the Heritage Foundation’s Index of Economic Freedom, the major obstacles to economic freedom in the United States are “excessive government spending” and “unsustainable levels of debt.” The Japanese economy is likewise restricted by “government spending.”
Government debt tends to “crowd out” investment; as investors finance public debt instead of private ventures, their dollars are prevented from facilitating economic growth.
Indeed, the “crowding out” effect is a contributing factor to economists’ pessimism about the American Rescue Plan, the American Jobs Plan, and the American Families Plan. Though they spend trillions on stimulus programs, the proposals spend so far beyond the federal government’s means that future GDP growth is sacrificed on the altar of short-term expediency.
Unless policymakers begin thinking about the future, the United States may indeed follow Japan into economic atrophy.
To rip Keynes’ famous one-liner drastically out of context: “In the long-run, we are all dead.”
The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.