There is not really much secret as to why Japan’s economy has stagnated over these last two decades, with aggregate demand in all sorts of goods and services steadily creeping downward: Demography. Japan’s population growth collapsed and went negative in roughly the second generation after World War Two. Its population is now declining and rapidly aging, with a median age of over 43 years. (Italy and Germany have had much the same demographic experience after the War, and more severely than that of any of its war-time foes. It’s not clear what, if any, causal link might exist between the correlative population growth implosion amongst the three former Axis combatants.)
Japan’s demand simply can’t sustainably expand in the face of its demographic decline, no matter what fiscal or monetary measures are undertaken to stimulate it.
The US, however, has not suffered a demographic implosion. Its population is still growing, albeit slowly, and all due to immigration. And it is yet much younger than Japan, with a median age of only about 37. Yet its aggregate demand is declining, not unlike Japan’s. Just a few tidbits of evidence:
~Consumer spending this month showed no increase in growth from its paltry 0.1% the month before
~Housing transactions further declined (2.4%) last month after posting a thirty percent decline in May
~Sales at Ford, General Motors and Chrysler declined or were flat (-0.7%, +1.5%, +1.1%, respectively)
~Consumer sentiment continued its decline, with the Consumer Confidence Index decreasing to just above 50 from its recent high in May of 62.5
Why, with demography in favor of the US, do things look so dour so far as aggregate demand is concerned? The short answer is that demography is not driving the US’s demand into contraction. Employment is. Employment is stubbornly stuck above 9%, as it has been for all of this year and last.
Why is unemployment so high? Another short answer–the price of labor is the US is too high compared to that of its trading partners, most notably, China. When a major trading partner has per capita income of about $5,500 (China), against per capita income of about $46,000 at home, something has to give. Wages/incomes in the US are too high and those in China are too low. Yet there are structural impediments to labor finding its market-clearing price in the US, including, unemployment insurance; rules and regulations making employing a US worker relatively more costly, and not least, minimum wage laws that set a floor under which prices for labor can’t fall. If the market-clearing price for labor is below the minimum wage, the result will be less labor demand than is supplied, i.e., unemployment.
The recent step-wise increases in the minimum wage mandated by legislation in 2007 was unfortunate in its timing. It turned out that the increases would take place at exactly the time that demand for labor was declining, and therefore the market-clearing price for labor was declining as well. The worst thing to do during a demand contraction is mandate increased wage rates. Of course, that didn’t stop Roosevelt from doing so with the passage of the 1938 Fair Labor Standards Act, which put the minimum wage at roughly $3.77 in 2009 dollars. The recent increase was baked into the economic pie at about the time (in 2007) that the post 9/11 illusory economic expansion hit its peak.
Minimum wages do not matter if the wage floor is below the market-clearing price of labor. If labor prices are naturally above the minimum wage, then the law stands as a nullity, nothing more than a pretty exercise where governments appear to be doing something when in fact they aren’t. It is not clear with the latest round of increases whether or not the wage rate stands below or above market-clearing rates. I suspect it is below market-clearing rates in most urban areas, yet above it in a few rural areas. In any event, any mandated wage rate is unwise in a time of declining demand for labor.
The unemployment conundrum is what is fueling the demand contraction in the US. The American economy depends on the consumer, and the consumer depends on employment. With high unemployment, demand declines, and prices should fall, including not least, for labor. Maniacal money-printing by the Federal Reserve can only delay by illusion the inevitable outcome that all prices should decline.
Forecast: It seems that what is shaping up here, with outright quantity declines in some cases (housing) and a leveling of growth in others (autos, manufacturing, etc.), the aggregate economy has worked through the excesses of its recent contraction, where demand briefly plummeted to levels below that necessary to sustain the basic needs of the population. It is now entering a phase of consolidation at decreased levels of activity from its peak, but at levels high enough to sustain economic life. It may plateau at this slow, or no-growth level, or it may, due to incipient monetary expansionism by the Federal Reserve, ultimately enter another phase of heavily contracting demand. In short, if the Fed decides to juice economic performance through more quantitative easing, the end result will be another crash, even more severe than before. If the Fed leaves things alone, growth will likely be slow to non-existent for quite some time, not unlike Japan’s two lost decades–about the best outcome that can be hoped for.