"Naturally, and quite properly, the West supplied much of the management; the East supplied the labor," wrote Goodhart.
Outsourcing labor to less costly locales kept wages at home from rising too fast. This, in turn, entailed that inflationary pressures were benign, as best depicted by the concept of the Great Moderation, or the idea that central bankers were better able to stabilize the business cycle.
As companies were encouraged to boost capacity with workers rather than capital equipment, this put downward pressure on the cost of the latter.
"Access to a new reserve army of cheap global labor through globalization has encouraged companies to invest in this workforce rather than in capital at home. A garment company, for example, could choose to build a highly automated, capital-intensive factory in the U.S. or build a low-tech, high-labor factory in the Far East," said Toby Nangle, who published a column on the connection between labor power and interest rates in May. "For years, companies have been choosing the latter option, which reduces the requirement for capital in the West, thereby reducing the price of that capital."
The ensuing savings glut in China was recycled back into U.S. Treasuries, and put downward pressure on real interest rates. As such, the abundance of cheaper labor was only one avenue by which the world's second-largest economy contributed to these global trends.
So what now, as the conditions that fostered these long- decades-defining demographic trends dissipate?
"So, we believe that demographic trends were one of the main causes of rising (within country) inequality in recent decades; and it was nothing to do with some innate tendency for returns to capital to exceed growth," wrote Goodhart's team in a direct challenge to the French economist's tome, Capital in the Twenty-First Century.
The anatomy of income inequality over the past few decades has been increasing within countries, and decreasing between countries. Goodhart sees income inequality falling in both cases going forward.
A shrinking labor force relative to dependents in advanced economies will work to quell income inequality within countries, while a stretch of stronger growth from emerging economies versus the Western World will continue to help income equality increase between nations.
Perhaps most importantly, Goodhart and his predecessors' works offer a compelling rebuttal to the theory of secular stagnation -- essentially that we'll need negative real interest rates to achieve subpar growth and full employment.
"It puts that in contention, and it puts it in contention with reference to data rather than hyperbole, and puts it in a theoretical framework that people can engage with," said Threadneedle's Toby Nangle. "We can start to think about what data we should be looking for to test this, and luckily enough, we're looking to the fact that dependency ratios in developed markets and some emerging markets have already reached inflection points just about now."
So the Japanification of advanced economies is far from set in stone.
Unlike many other economists, Goodhart does not believe the demographic backdrop of an aging population is inherently deflationary. The pool of labor around the globe that kept wages suppressed domestically on the island nation has nearly run dry; Japan, in other words, was a victim of circumstance. More generally, in order to meet the obligations of the state, the shrinking pool of workers will be forced to pay higher taxes at the same time that they'll be in a position to haggle for better wages.
"This is a recipe for a recrudescence of inflationary pressures," wrote Goodhart. "The present concerns about deflation are fleeting and temporary; enjoy it while it lasts."