Latest Andy Xie: The Japanese Disease

Why are healthcare costs rising? Society is aging and needs more healthcare. The difference between this industry and others in the past is that the government is responsible for much of the healthcare for the retired. In the past, limited resources would limit the growth of the industry. With government backing, however, there has been no limit on healthcare spending...

When a society ages, its resource allocation increasingly favors the old. Healthcare costs, for example, rise exponentially. Broadly, an old population is unwilling to take risks, which makes social or economic change difficult. Underlying forces in an aging society favor unproductive expenditures and less competition.
Rising social burdens in an aging society obviously fall on the working population, i.e. the tax burden on the working rises over time. The diminishing reward for work decreases labor supply, as workers choose more leisure. A vicious cycle in labor incentives is quite possible.

The changes in an aging society are far greater than what the arithmetic of the so-called dependency ratio – the ratio of non-working to working citizens – suggests. A society changes in many ways to become more conservative, less hard-working, and less innovative. The society ages.

But Japan's problems will spread to other major economies. Major European economies, for example, are not far behind Japan. Unemployment and retirement benefits are more generous there, so the loss of economic vitality comes more quickly.

Rising national debts in developed economies are driven by aging. The benefits they promised during the high growth period cannot be supported by government revenues anymore. They resort to borrowing to keep promises. Japan's national debt at about 200 percent of GDP is the highest in the world. Other developed economies seem to be on the way there. The average fiscal deficit in Europe is 6 percent of GDP. Britain's is 12 percent, and America's is 10 percent. While most analysts blame oversized deficits on the recession, they could last for many years to come. Japan's deficit in the 1990s was viewed similarly. With such high deficits, it won't take long for them to catch up with Japan.