Could Ireland contract ‘Japan Disease’?
Ireland’s population will get older, as these cool graphs from Aidan Kane show. The bloggers from caing.com define ‘Japan disease’, where an economy is full of aging workers, and also highly indebted. How likely is it Ireland could contract a mild form of Japan Disease in the next 20-40 years?
From Any Xie’s post:
An economy ages in many ways. The most common are tied to the exhaustion of factors such as production-labor, capital and resources. When an economy begins to develop, labor is the abundant resource. Hence, it makes sense to develop labor-intensive industries. When labor surplus is exhausted, it makes sense to develop capital intensive industries. When capital stock is high enough, investment cannot drive growth anymore. Economists call it diminishing returns, or more of the same yields less output. This type of aging doesn’t worsen. Economists say a steady state equilibrium emerges when consumption and investment are balanced just right, sort of like permanent middle age.
Moreover, youthfulness is possible for a mature economy. Through innovation, an economy can produce more with the same inputs. This so-called total factor productivity (TFP) is an elixir for a mature economy. It determines how fast a rich economy gets richer. A 1 percent TFP is considered mediocre, 2 percent is good, and 3 percent is super.
Many economists argue for freer and cheaper economic structure to stimulate innovation. But, in the Internet era, innovations rapidly disseminate around the world. It’s not clear if innovation benefits can be contained in any country anymore. For example, even though the United States is more innovative than Europe, it hasn’t outperformed by much. Its celebrated prosperity during the Greenspan era turned out to be an old-fashioned bubble, not a reflection of superior innovation.
Two questions immediately present themselves. First, is Japan’s story the fate of all industrialised democracies? Second, is it possible, using the Debt/Demography criteria, to rank and rate different economies and their growth trajectories? MA/PhD students take note.
Update: Gerard O’Neill has also blogged about Xie’s Post, and no, I won’t rename this post ‘turning Japanese’!
