Japan's Demographic Crisis Will Only Get Worse. Here's Why That's Bad News for America

July 19, 2017 Topic: Security Region: Asia Tags: JapanEconomyAbenomicsDeficitBudgetGDP

Japan's Demographic Crisis Will Only Get Worse. Here's Why That's Bad News for America

The Japan of the future will have fewer resources, both in men and money, to devote to its defense and economy.

Nor is the United States immune. Like Japan, the United States now runs structural fiscal deficits, even at the top of the business cycle. These deficits are coming in higher than forecast, just as America’s sixty-five-plus age cohort is set to increase by half to 2025. The Obamacare repeal and replace dilemma reflects just this tension. On the one hand, “compassionate conservatives”—and voters—want universal healthcare coverage. On the other hand, the funding for such coverage is not readily available from tax revenues. Thus, the U.S. social safety net appears to be at a turning point, with enormous pressures to solve the problem by resorting to ever-increasing debt. If inflation and interest rates are low, why not borrow more? That’s what they did in Japan. Like Japan, the United States may find itself in a trap of unrealistic expectations meeting the reality of a thinning workforce and a slow-growing economy. This is already visible in states like Illinois, New Jersey and Connecticut, which are finding that they are unable to meet the pension promises made in the last thirty years. Within a decade, these pressures may be manifest on a national level, too.

Since 1980, the elderly have benefited at the expense of the unborn. Lives have become longer, healthier and more prosperous, even as education has become unaffordable and families are raising too few children to maintain society’s numbers. At some point, either the trend line turns, or it doesn’t. If fertility rates are to be raised to replacement level, the price may well be greater support of families without increasing taxes (which are paid principally by the working parents of families). Thus, social spending will be redirected from the elderly to the young and unborn at a time of slow economic growth. Today’s young elderly, those in their fifties, may find a vastly more hostile world when they reach their eighties.

Conversely, society may continue to exist for the living and birth rates may continue to fall back. The United States posted record low fertility this past year, for example. In such an event, society will continue to consume itself, with each passing generation smaller than the previous—exactly the path demographers have forecast for Japan, and not only until 2050, but until 2100.

In the last twenty years, it has been customary to refer to Japan’s weak economic performance as a lost decade. Demographics tell us that we are moving well beyond that. Japan is looking at a lost century.

It may not be the only advanced economy to suffer such a fate.

Steven R. Kopits is the President of Princeton Energy Advisors. He writes about oil markets and related geopolitics.

Image: Japanese prime minister Shinzo Abe meets with Russian president Vladimir Putin at the G20 Summit in Hamburg, Germany, July 2017.