Arnold Kling

Japan, Demographics, and the U.S.

Arnold Kling, Great Questions of Economics
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'Jane Galt' suggests that Japan's stagnation may be caused by demographics, and that as the population ages in the U.S. we may face similar problems. About Japan, she writes

the population is aging fast. People alive today know that there are not enough people in the workforce to support a public pension; they're trying to sock it away for their retirement. Unfortunately, all this saving, much of which goes into government bonds for boondoggle construction projects with a negative net return, is killing their economy now, which doesn't improve the future outlook.

This is a very Keynesian point of view. It says that the problem in Japan is excessive saving. I would raise two quibbles.

  1. The saving might not be excessive if the rates of return were higher. If the saving were being channeled into more productive investments, the returns would be higher, which would reduce the need for saving.

  2. My favorite solution for demographics, which is a phased-in increase in the retirement age, might help here. If people know that they are going to spend more of their years working and fewer years where they are not earning a salary, then the need to save decreases.

Discussion Question. Some people, including economists, argue that to keep social security sound we have to save and invest more. Does Japan's experience raise questions about this?

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