Comparing Japan’s Lost Decade with the U.S. Great Recession

Guillaume Vandenbroucke of St Louis Fed has a nice piece.

He says that in Japan growth rate of GDP per capita slacked whereas in US the levels of GDP per capita declined:

Japan’s economy began its “Lost Decade” in the 1990s, with persistent slow growth and low inflation. One could argue, however, that the Lost Decade has persisted for nearly three decades.

In 2008, the United States entered into what is now called the “Great Recession.” The Great Recession was also characterized by slow growth and low inflation. These similarities between the Lost Decade and the Great Reces­sion have led many analysts to wonder whether the United States is in for the same persistent economic slump as Japan. 

In this analysis it is critical to draw a distinction between a change in the growth rate of gross domestic product (GDP) per capita and a change in its level. For instance, a country can experience a sudden decline in the level of its GDP per capita after a major recession, but its growth rate can remain constant. Conversely, a country’s rate of growth can decline without any sudden drop in the level of its GDP per capita. The Japanese data reveal that the Lost Decade is clearly a case of slow growth rather than of a sudden negative shock to GDP per capita. The U.S. data, slightly varied, reveal that the Great Recession is the opposite case.

The difference is that Japan will take much longer to double its income compared to US:

To gauge the importance of the distinction between level and growth-rate effects, consider the following question: How long does it take for GDP per capita to double? In the United States prior to 2007, the average growth rate was such that GDP per capita doubled about every 32 years. After the sudden drop in GDP per capita in 2007, the new growth rate is slightly less than before, implying that GDP per capita will double every 50 years if it does not accelerate or slow down significantly. Thus, it now takes 56 percent more time for GDP per capita to double in the United States than it took before the Great Recession. What of Japan? Before 1990, the average growth rate was such that GDP per capita doubled every 14 years. The post-1990 growth rate implies, however, that it will take 80 years for GDP per capita to double in Japan: That’s 470 percent more time than before!

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