The week of July 7, 2025: Adapting to a falling population, tariffs, fiscal policy, Mamdani’s grocery stores, and much more.
Eight billion of us now live on this rock, and, for the most part, live better than any previous generation. This would have shocked Thomas Malthus, but he had the excuse that he lived two centuries ago. The disco-era doomsters behind The Limits to Growth did not. Their underestimation of humanity’s by then proven ability to adapt and to innovate owed more to ideology — and the rewards that ideology could bring — than to observation.
Overpopulation panic is being replaced by panic over ageing and even declining populations. In a recent article for the Washington Post, American Enterprise Institute’s James Pethokoukis (a father of seven, incidentally) noted the apocalyptic tone of much of the discussion over falling birth rates. This has led governments to scramble “often at great fiscal cost, to slow or even reverse their baby busts,” but without much effect. “There’s little sign of a promising untried fix waiting in reserve.”
But Japan, as the poster non-child of birth dearth panic (unlike most of the world it has moved from slowing population growth to population decline) is, explains Pethokoukis, doing better than often assumed. To be sure, Japanese governments have regarded the country’s falling birth rate as a crisis for years, although not so much of a crisis that they have resorted to European-style mass immigration to “resolve” it. They may have opened Japan’s doors of late to an unprecedented extent, but they have not exactly flung them wide open. The proportion of Japan’s population that is foreign-born has doubled since the turn of the century, but it is still only 3 percent. In 2024, the government announced that it envisaged up to 800,000 foreigners taking advantage of its skilled worker visa program in the following five years, far more than in the past, but check out the small print.
Oliver Jia, writing in the Spectator last year:
Under this program, there are two types of visas. The first imposes a maximum residency stay of five years, while the second allows workers to extend their stay, invite their families and renew their visas. Acquiring a Type 2 visa requires an additional skills test. The number who’ve actually arrived is around 208,000. Of those, only thirty-seven people have Type 2 visas.
And unlike many European countries:
Japan has multiple cultural and societal bulwarks in place which prevent immigrants from overriding the local populace. You typically need to learn the Japanese language to a high level to have a successful career, which causes most to leave the country after only a few years if they cannot crack it. And language is only the first step. Japanese society remains highly dependent on in-group and out-group social dynamics, and a foreigner hoping to find their place in this system must adapt to the local customs or be excluded entirely.
Some of these “bulwarks” are, I suspect, a matter of numbers (being part of a very small minority increases the pressure to adapt) and also, maybe, the absence of Western self-abasement.
Jia:
Despite the government’s push to attract more skilled workers, actual immigration laws are getting stricter, with Japan ignoring criticism from the UN’s Human Rights Council over its decision to push for deportation of candidates who fail to achieve refugee status three times or more. A Cabinet-approved bill from 2023 accelerated the deportations of illegal immigrants and additionally stipulated that those convicted of crimes and sentenced to three years or more cannot remain in the country. The past decade has shown a consistent pattern of the Japanese government’s caring little for the opinions of foreign organizations on how it handles immigration; its priority is the integrity of its own laws.
This is the way.
The government is now looking to tighten its monitoring of migrant arrivals, the use migrants make of social services, and so on. This may partly be a response to an increase in support of Sanseito, a populist-right, “Japanese first” party, with a platform which includes a call for tighter immigration controls, as does another party on the populist right, the somewhat more (classically) liberal Japan Innovation Party (Nippon Ishin). At the end of June the latter’s leader remarked that “the population of Japanese children is declining. On the other hand, the number of foreigners is steadily increasing.” His meaning was clear enough. The decline in Japan’s native-born population is not a reason to encourage immigration, but a reason to be cautious about it.
Overall, immigration does not rate highly in voters’ concerns, but that it is already beginning to register is an indication that a good number of Japanese take a different view of their birth dearth than Europeans. Perhaps they have noticed what has happened over there.
There is no “right” population size for a country. There is no reason, in theory, that Japan cannot flourish with 63 million people (the current projection for 2100), but managing a fall in the population to that level from today’s 124 million (which is about four million below its peak some 15 years ago) is not only less straightforward, but will not by itself be enough. That lower population also needs to represent some kind of demographic equilibrium, which 63 million in 2100, to the extent that this can be said with reference to such a distant date, would not.
For now, a more pressing question is whether Japan will have the workers it needs. Less obvious, at least from the headlines, is that the number of people employed in Japan has never been higher. Pethokoukis explains that labor shortages have encouraged Japan to bring more women into the workforce. In 2000, roughly two-thirds of all women between the ages of 25-54 were employed, a share that has now increased to some 85 percent. The comparable figure in the U.S. was 77 percent in 2000, a percentage that is more or less unchanged today.
Japan’s sprightly sexagenarians and septuagenarians are another resource. There are a lot of them (about 30 percent are over 65, a number that will probably increase to 35 percent by mid-century), they are healthier than in the past, many jobs are less physically demanding and for some employment is not only a source of income, but a way to alleviate the loneliness that can come in older age, especially when there are no grandchildren around.
In 2000 5 percent of Japanese workers were over 65, a share that has now increased to 13.5 percent, comfortably more than double that in the EU and U.S. As of 2022, over half of Japanese people aged 65 to 69 were, including part-timers, at work of some kind, a figure that falls to 33 percent of those between 70 and 74 and to 11 percent of those idlers over 75. Employers are now obliged to increase their mandatory retirement age to 65 and being encouraged to increase the ability of employees to continue working until they reach 70.
Interestingly, compared with most OECD countries, Japan’s productivity is unimpressive. If the country’s employers still have room to make better use of their existing employees, a labor shortage may be even less of an immediate threat than is usually suggested.
And, economically, Japan’s prospects may be turning up.
Pethokoukis:
A Goldman Sachs analysis this year found that annual wage growth has risen from 0.3 percent in the 2010s to 1.2 percent in the 2020s, while annual core inflation has climbed from 0.5 percent to a healthier 1.5 percent, an encouraging development in a country that was long stuck in a deflationary trap.
As Goldman sees things, the demographic decline that once drained vitality is now creating a “virtuous cycle” of tightening labor markets, increased worker bargaining power and more investment in productivity-enhancing tech. These trends are helping prop up the economy even as it weathers a shock from the U.S.-led trade war.
Humans adapted to a rising population, and, in Japan, they are adapting to a falling population. “Rather than just grumbling about the lack of workers,” writes Pethokoukis, “businesses are finding ways to use fewer of them. From software to machines — here’s where AI and robotics can really lend a hand — productivity has gone up in Japan’s most labor-starved sectors, with corporate profits hitting record highs in fiscal 2024.”
Mass automation may hit the overall demand for human workers even in Japan, but Japan may be better equipped than many countries to face this challenge. That will matter. The potential for serious trouble arising out of job losses caused by automation will be increased by the likelihood that those losses, particularly if AI delivers on its double-edged promise, will extend up the professional ladder. As I discussed in 2016 and, again, with AI specifically in mind, last month, many of the newly unemployed will have the talents and the clout to form what social scientist Peter Turchin has described as a “counter-elite” set on reorganizing society in a way that gives them the leading roles to which they believe they are entitled. Expect more Zohran Mamdanis.
History teaches that new technologies will create more jobs than they destroy, but that lesson doesn’t come with a timetable. There may well be an interlude between the destruction of old jobs and the creation of their equivalent — or better (such as the admittedly debated but I think convincingly proven) — “Engels Pause” in England in the early decades of the industrial revolution). It’s in that interlude that danger lies.
Japan’s unusual social cohesion ought to ease its transition into the age of mass, “intelligent” automation, as should its shrinking, ageing workforce. Japan will start with less surplus labor, and that surplus will itself be further reduced as time scythes though the old folk. Any “pause” ought to be reduced by the way that Japan’s demographic change has given impetus to the development of an automation sector that is a source of jobs. And to the extent that technology is compensating for too few workers (and thus helping Japan adapt to its smaller population), it will be better received than in countries where it is replacing a labor force that does exist.
Japan’s falling, ageing population brings some benefits (less crime, for one) on top of boosting its ability to handle radical technological advance. But another potential advantage — more elbow room in a still densely if unevenly populated archipelago (only about a third of its territory is habitable) — is more theoretical than real. People have moved out of ever emptier rural areas to cities that are often not well-suited for larger families. As of 2023, crowded, expensive Tokyo had the lowest fertility rate of all Japan’s 47 prefectures.
Meanwhile about 10 percent of Japan’s population is over 80 (more than twice the rate in the U.S.), a figure set to rise to 15 percent by mid-century. Longer lifespans come, to green eyeshade types, with a catch, an increase in the numbers of the very elderly, not in good enough shape to work, but in good enough health to last a long time especially with the help of modern medical care. In Japan, life expectancy has increased (to 85 or so) by more than healthy life expectancy.
Greater prosperity, if Japan can achieve it, will ease this burden that this creates, and it helps — these things are relative — that Japan’s balance sheet (a government debt/GDP ratio of 240 percent, buttressed by a primary fiscal deficit of around 5 percent) is not quite as bad as it seems. In a recent paper for the St. Louis Fed, YiLi Chien and Ashley H. Stewart estimated that while gross government debt stood at (an even higher) 270 percent, the net number was only 78 percent, thanks, among other factors, to a large surplus in the social security fund, the result of some canny if not entirely risk-free financial engineering. While a crisis of confidence cannot be ruled out, it helps that nearly 90 percent of the government’s debt is held by the Japanese themselves, and nearly half of that is owned by Japan’s central bank.
Last year, one expert panel recommended that the government should target a population of 80 million in 2100, almost 20 million more than is currently expected. According to the panel, this would be achieved if the fertility rate increased from 1.15 in 2024 to 2.07 in 2060, close to its level in 1960. The chances of such a target being met are minimal. As Pethokoukis explains:
Hungary’s lavish baby bonuses and generous parental benefits in Scandinavia have barely budged birth rates…Cash-for-kids advocates Musk and JD Vance would protest, but no financially feasible subsidy can compete with 21st-century attitudes about families, career priorities and life goals.
Japan’s government is planning to spend billions on various measures to increase the birth rate, ranging from increased child allowances to more support for childcare, and assistance with education costs, ideas that build on some local successes such as those seen in Akashi, a city of some 300,000 in western Japan or Nagareyama, which is within commuting distance of Tokyo. Such measures, all designed, one way or another, to make it easier to raise children, may help if only at the margin, as would making workplaces more friendly to women with children, a change that may, if labor shortages become chronic, be resolved by the laws of supply and demand.
But the most important step that the government can take to increase birth rates is to do what it can to help create conditions in which prospective parents have confidence in their economic future. Given that any material reversal of direction in Japan’s demographic course will take years, they will need to believe that Japan can prosper despite a shrinking population. The fact that it has a better chance of doing so than most now expect is the best reason to think that the birth rate may turn up.
The Capital Record: Sound & Vision
We released the latest of our series of podcasts/playlists, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which is hosted by financier David L. Bahnsen makes use of another two formats to deliver Capital Matters’ defense of free markets. The original podcast continues, but if you want to watch David talk, please click on the YouTube link.
The 240th episode: (Podcast/YouTube)
The Biden administration spent $42 billion of taxpayer funds to bring broadband access to rural America, and people are shocked, shocked, that nothing has been done. As people on both sides of the aisle scream for government to “do more,” perhaps there is a lesson in this failure to create connectivity, and perhaps that lesson ought to be that incentives and knowledge matter.
The Capital Matters week that was . . .
Tariffs
So, let’s see if we have this right. The architects of the New Economic Plan seek to disrupt the global competition we Americans designed and are in the process of winning by bringing back (and no doubt being obliged to subsidize) jobs that our grandparents despised, with the intention of recapturing some distant and ill-defined glory that was abandoned thoughtlessly by our parents but is reflected, alluringly to some, in putatively emerging markets now lodged in underdeveloped foreign countries…
Fiscal Policy
Dan’s righteous indignation at a district court’s ruling that Congress must fund Planned Parenthood is worth a read. He nails all the points about how deciding what gets funded and at what levels is a fundamental legislative power that courts should not second-guess. “If Congress lacks the power to decide when not to spend taxpayer money, it may as well disband,” he writes…
So even with the tax cuts extended, federal revenue is forecast to be stable as a share of the economy for the foreseeable future. The level at which it is stable is within the historically normal range of 17 to 18 percent of GDP. (One of the remarkable things about federal tax policy is how stable that percentage is despite major changes in the tax code.) It’s spending that is rising out of control, far beyond the historical norm outside of recessions or wars.
It is true, as a simple matter of arithmetic, that raising taxes is just as much a solution to this problem as cutting spending. But it’s up to conservatives to say that the federal government shouldn’t continue to grow as a share of the economy…
I am arguing, however, that when there’s a debt that’s been incurred, it has to be paid, and that it’s prudent and necessary to pay it down rather than adding to that debt through further uncontrolled borrowing while at the same time reducing revenue intake…
As the headlines of these posts suggest, neither of us is seeing good things in the U.S. fiscal future. It would be free-lunch thinking if I had said tax cuts completely pay for themselves, deficit spending is basically free because we’re lending to ourselves, or we don’t have to worry about the debt because the government can always print money to make up the difference. These are arguments that people have made in the past to justify fiscal recklessness, they are wrong, and I do not make any of them…
Speaker Boehner was far from the only Republican of that period to say that the national debt was not only imprudent but immoral. Passing down a massive financial burden for future generations to pay, though they had no hand in making it. Forcing your children and grandchildren to pay for your retirement and health care, because you didn’t want to. That was immoral, wasn’t it?
What I am suggesting to my friends Dominic Pino and Charlie Cooke is that, in addition to raising needed revenue for the federal coffers, a reintroduction of the pain point of higher taxes would be politically salutary for the overall effort of getting back to small government under our current political conditions…
Mark Antonio Wright makes the essential point that the reason people keep voting for an expansive federal government is that they don’t have to bear its cost. “The American people are not feeling (at the moment, that is) the effects — the very real pain — of Big Government because they’re not paying Big Taxes..”
The fiscal literature is clear: Durable debt reduction comes from spending cuts, not from higher taxes. In fact, when countries adopt fiscal adjustment packages primarily based on tax increases, they fail to reduce the debt-to-GDP ratio precisely because special interests continue to get their way with the revenue…
During the past few days, Dominic, Mark, Veronique, Charles, and John have all had a very informative discussion about budgeting and fiscal policy. The question of whether higher marginal tax rates can generate more tax revenues is an important one. Similarly, there are important empirical questions about the extent to which additional tax revenues will actually lead to deficit reduction.
Another fact to consider is whether tax revenue reductions will result in spending cuts…
When it comes to the One Big Beautiful Bill Act (OBBBA), two things can be true at once:
The legislation contains some truly important policies, including permanent 100 percent bonus depreciation and other TCJA tax reforms, as well as changes to Medicaid and SNAP, steps toward energy independence, a permanent cap on the mortgage-interest deduction, and some welcome reductions to the Inflation Reduction Act subsidies, among others. That’s great.
But…
Mark writes, “The American people are not feeling (at the moment, that is) the effects — the very real pain — of Big Government because they’re not paying Big Taxes.”
Just because taxes don’t match government spending does not mean Americans are not bearing the cost of big government. First, it’s not as though there are no taxes. Americans still do pay, on average, about one-third of their income to the government. That’s lower than in other rich countries, but it’s not free, or close to free…
Economics
In a recent article in American Affairs, Philip Pilkington describes a seeming paradox: Despite rising living standards measured by increasing real GDP, many, especially young people, feel that “their quality of life [is declining] as time goes on.” To support this claim, Pilkington points to noneconomic measures, “such as the suicide rate and the rates of drug addiction and overdose,” and concludes, “It is time for economists to admit that their metrics are broken.” While some of his critiques are well-founded, they are not new. They indict practitioners rather than the tools themselves…
Energy
Glyndebourne, like much of the British cultural establishment, is proud to brandish its green credentials. These include such feats as “increased use of recycled paper” and a “cycle-to-work scheme for Glyndebourne staff,” as well as “adjusting toilet flushes to save water.”
Otis B. Driftwood (Groucho Marx): “And now, on with the opera. Let joy be unconfined.”
Deregulation
Since 2022, Virginia has reduced the number of requirements in its regulatory code by 26.8 percent, exceeding Youngkin’s goal of 25 percent. He says his administration is on pace to reach a 33 percent reduction by the end of his term early next year. The reduction in regulatory word count is even greater: 11.5 million words were struck, nearly half of the total found in state guidance documents…
Regulation
About one-third of American workers now earn income from a source other than a traditional nine-to-five job, whether this is their primary occupation or a side hustle. Many work as freelance writers, Uber drivers, consultants, or tradespeople. Nearly all are effectively blocked from accessing common workplace benefits, such as a retirement contribution or a health stipend.
The reason isn’t economic — it’s a regulatory relic…
Education
The purpose of public spending on K–12 schools is to educate children. This is a surprisingly controversial stance among educators, who will point to all sorts of metrics other than student performance to justify ever greater spending. Part of the reason for that is probably that the student performance metrics look so poor…
Rare Earths
The dangers of relying on China as the dominant supplier and processor of rare earths have long been obvious, but with luck the recent panic triggered by Beijing’s squeeze on rare earth exports sounded an alarm too loud to be ignored…
Zohran Mamdani’s Grocery Stores
By the time Scott Lincicome has finished with them, there’s less left of some key arguments for New York mayoral candidate Zohran Mamdani’s city-run food stores than there was edible food on the shelves of a Soviet “supermarket.”
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