I’ve just read a fascinating article over at Bloomberg by Clive Crook about the macro-economic effects that the world’s ageing population will have in the next 40-50 years. His argument is that most commentators and politicians and economists have failed to properly appreciate and think through the “unprecedented” (his words) fall in the ratio of working people to retirees. As he notes:
“A remarkable boom in the world’s working-age population is ending, and a new boom in the population of retired people has begun. People are living longer; more importantly, when it comes to reshaping the global age structure, they’re having fewer children. Today, there are roughly four people of working age for every person aged 60 or over. By 2050, it’s estimated there’ll be just two.”
Leaving to one side the new financial strains that will come upon most societies as they struggle to pay pensions and healthcare as an obvious implication, Crook argues that the world’s current patterns of saving and investment will change in the years to come. This is because generally countries with an older population save less than countries with a younger, working population because people tend to save while they are working and then spend their savings once they’ve retired. As certain countries age more quickly than others, this will have an impact on debtor vs creditor nations:
“For years China and Germany have had persistent current-account surpluses (reflecting an excess of saving over investment), while the U.S. has been persistently in deficit. But China and Germany are now aging faster than the U.S. Their so-called support ratios — the number of workers per consumer — are falling faster. So their external surpluses are likely to decline.
Japan, at the leading edge of the aging curve, shows the way. By the same token, the U.S. deficit is likely to narrow. In the future, Africa, Latin America and South Asia will have relatively high support ratios — which implies high saving, which implies external surpluses.”
Crook also argues, drawing on the work of Goodhart and Erfurth, that real interest rates, which have been declining over the last couple of decades, will start to rise again. This will occur if investment demand increases in relation to saving (or at least doesn’t fall as fast as saving). Goodhart and Erfurth argue that investment demand is unlikely to fall as much as saving: residential investment is unlikely to fall far since rising incomes will lead people to want bigger houses (or a house of their own); business investment will likely rise now that the “demographic premium” of cheap global labour will slow down quickly in the years ahead. A slowdown in the worldwide supply of labour “should support the demand for investment”. The upshot is that real interest rates will return to the historical equilibrium value of around 2.5-3% by around 2025.
Although Crook argues that low interest rates are a “big problem for economic policy” since they make it harder to provide monetary stimulus, he argues that the rise in real interest rates is not all good news:
“Slowing growth in the number of workers and abrupt declines in support ratios mean less saving and less economic growth.
Labor will be more scarce, so pre-tax wages may rise, and the recent decline in the labor share of national income may reverse. Inequality, measured that way, may moderate. Taxes, though, will have to go up to support incomes in retirement. And in any event, output per person — living standards measured across the whole population — will grow more slowly. That’s just arithmetic.”
His conclusion is hardly rosy either:
“It’s hard to believe that the past couple of decades have been as good as it gets. Yet, in one crucial sense, that’s the case…But there’s no denying that, demographically speaking, a golden age is coming to a close. We’ve barely even begun to think this prospect through.”
It is rather depressing to think that the last 20 years may have been as good as it gets economically. Surely not? And to think, he has not even touched on the unpredictable: Russia and the Ukraine; ISIS; Chinese assertiveness; Ebola; rise of superbugs etc etc! At least we can thank God that Pandora clamped down on that box when she did…