Getting old – the Reason for Our Economic Malaise? Part II

In my last post I discussed an
article published in the New York Times written by Chrystia Freeland.  

That article argued that demographic
decline is the cause of much of the West’s economic problems. There are not
enough young people to support the country’s economic burden as more and more
people reach the age of retirement.

Freeland’s article did not
impress Dean Baker, the co-director of the Center for Economic and Policy
Research.  He wrote a response to her
argument in the Business Insider. 

According to Baker, the “fundamental
problem” that is facing both the US and the European countries is not anything
to do with age, but instead:

“…is the lack of sufficient
demand to fully employ their workers and their productive capacity. There are
few economists who dispute that if there were more demand, there would be more
employment and output.”

the fact that the elderly are sucking too much money out of the economy through
their retirement demands, pensions etc is:

“…180 degrees at odd with the
problem the US and European economies face. If the elderly suddenly went
on a huge buying binge it would create millions of jobs for younger workers. In
the current economic situation the young would be better off if the elderly
either had more money or there were more elderly spending money.”

It is not the fact that the
proportions in the population are wrong; but that the population as a whole
(including the elderly) are not spending enough to create demand and to create
jobs.  There seems to be no discussion
here of that dreaded word: debt. I thought that one of the major factors behind
the recession was governments and private individuals spending beyond their
means. And one of the spending areas for governments is a
growing pension scheme (and healthcare for elderly) that is falling on a
smaller percentage of the population.  But
apparently, the solution is now that we all (including the elderly) need to
spend more. I don’t understand economics at times…

The next point raised by Baker is that Freeland’s
article ignores productivity growth. 
This is because:

“Increases in productivity, which have averaged more than 2.0
percent annually in the United States over the last 15 years, swamp the impact
of changing demographics. This is the reason why the United States has been
able to have substantial increases in living standards even as it has
experienced a continual rise in the ratio of retirees to workers.”

Thus, the amount of workers declining relative to the rest of the
population does not matter as long as each worker is producing more to offset
the working population’s decrease.

has been experiencing productivity growth in excess of 7 percent annually. At
this rate output per worker will nearly quadruple after 20 years. With this
pace of productivity growth, if workers were taxed to the extent necessary to
provide retirees with incomes equal to 70 percent of the before tax wage of the
average worker, after-tax wages could still quintuple over 30 years even if the
ratio of workers to retirees dropped from 5 to 2 over this period.”

as long as each worker continues to produce more, fewer workers should be able
to support a larger retired, dependent population. We have talked about China’s
increasing elderly population before on this blog. But according to Baker as long as each Chinese worker produces more and more,
he or she will be able to support more and more elderly dependents. How
does productivity increase? By people designing better, cheaper and faster ways
of doing things. In the end, it still comes down to human capital, doesn’t it? And if you have less of it, will more and more productivity increases come? 

Baker makes the point that a declining population has a positive impact on
living standards. 

who have heard of global warming recognize that larger populations will make it
more difficult to limit greenhouse gas emissions. Countries that have lower
population growth, or even negative population growth, will find it easier to hit
emission targets than countries with rapidly growing population.

population growth also contributes to well-being in ways that are often not
accurately measured in national income data. For example, public transportation
and recreational facilities are likely to be less crowded.”

those that are left will enjoy less crowded facilities. Of course, those fewer
people will have to pay proportionately more for those same facilities.

what do you think? Is Baker right? Are we worrying about the wrong thing by
thinking that more children is the (at least partial) answer to the West’s
economic problems? Will we better served with fewer people as the population
will enjoy a greater standard of living as long as those working continue to
produce more and more? Should we be going out to spend to get over the recession?
If countries start doing that, will credit agencies be very happy about that?




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