What the United States Can Learn from the Decline of Japan and Europe

In some of my previous articles, I have outlined how the United States economy, and most other rich-world economies, have found themselves trapped in a long-term slowdown. In the US of the 1950s, 60s and 70s, economic growth rates averaged more than 4% per year. In the 1980s and 90s, they averaged 3%. So far in the 21st century, the US economy has grown by just 2% per year. Essentially, economic growth in the United States today is less than half of what it was just two generations ago.

While this trend is highly disconcerting, if we look beyond our borders, we can see that things could be much worse. In fact, the world’s two other main rich-world economies, Europe and Japan, serve as a warning sign that the economic situation here in the US could grow much worse. Europe was the center of the global economy for many centuries, while Japan was for a time the world’s wealthiest large-economy. Now, the economies of Europe and Japan appear to be in terminal decline.

Recent results highlight the poor performance of the European and Japanese economies. While the United States economy has grown by just 2.0% per year so far in the 21st century, Europe’s economy has grown by an even more anemic 1.1% per year, while Japan’s economy has managed to record growth of just 0.7% per year.

Furthermore, the economic growth forecasts for the coming years for Europe and Japan are well below those of the United States, with many forecasts calling for very low rates of economic growth in Europe and Japan.

One of the basic reasons for the US’ stronger performance vis-à-vis its rich-world partners is demographics. The United States not only has usually had a higher birth rate than Europe or Japan, but it also has attracted far more skilled immigrants than either of those places. For a long-time, Europe’s birth rates have been falling, while most European countries have struggled to integrate the migrants that have arrived in that region in recent decades. Japan’s demographic situation has been even more dire, as that country has one of the world’s lowest birth rates and, until recently, accepted very little immigration. As a result, Japan’s population is shrinking faster than that of any other large country.

The United States’ massive domestic market has also proven to be a major advantage for the US economy. Our single unified market allows small businesses to grow large without ever having to expand outside of our borders. In contrast, Europe, despite its efforts at economic unification, remains fragmented by a variety of factors, Japan’s situation is even worse, as its domestic market is shrinking rapidly. As a result, the economies of Europe and Japan are increasingly dependent upon exports for much of their growth, a dangerous situation given the rising level of protectionism and regionalization within the global economy.

Another advantage that the United States has enjoyed over Europe and Japan is its massive lead over these two economies in terms of its presence in key high-tech and high-growth sectors of the economy. One look at the rankings of the world’s largest tech firms, or the world’s fastest-growing firms, shows just how large the US lead over Europe and Japan is in these areas. Europe, while having become a leading regulator of tech firms, has struggled mightily to develop its own tech giants. Japan was, not that long ago, a leading player in many high-tech industries. However, it too has fallen far behind the US and China in the race to develop new high-tech industries and firms.

Finally, China’s growing assertiveness and Russia’s invasion of Ukraine have served as a reminder of the need for countries to be able to provide for their own security in an increasingly turbulent world. While the US has maintained much of its military prowess from the Cold War era, its European and Japanese allies have fallen far behind. The war in Ukraine has exposed Europe’s military weakness, leaving that region increasingly dependent upon the US for its security. Japan, hamstrung by its post-war constitution, also is finding its military capabilities dwarfed by those of China, leaving its security increasingly in the hands of the United States.

The United States needs to heed to lessons from the relative decline of Europe and Japan in recent decades. For example, the US has seen its birth rate decline markedly in recent years, while resistance to immigration remains strong in the US. To maintain our advantages in terms of our giant domestic market and our large workforce, we will have to either find a way to increase our birth rate, or to attract more immigration. The US also needs more private and public investment in technology and productivity-boosting processes. This can be done by a combination of more capital spending and greater investments in education. Finally, in order to avoid losing control over our own security, we need to maintain our defensive capabilities, while strengthening our alliances and convincing our alliance partners to play a greater role in maintaining their own security.

If it can heed the lessons of Europe’s and Japan’s relative decline, the United States has the capability to remain the world’s leading economic and geopolitical power for a long time to come. If not, the US could one day face a prolonged decline along the lines of those underway in Europe and Japan.

Michael Weidokal is a world-renown author, speaker and strategist. He advises many of the world’s leading businesses and governments in the fields of economic forecasting, global trends and business strategy. He is also the founder and president of the ISA Group of companies, including International Strategic Analysis, ISA Advisory and ISA Economic Development Consulting.