Edward: Put simply: I take it as intuitively obvious that there is a problem in Germany and Japan (and Switzerland) which doesn’t exist in the same way in the US.

Well, you don’t make it simple for me On one hand, I wouldn’t dispute that said countries have specific chronic economic problems, but likely those are different from those you see, and other problems I see as ones shared with the USA. I’m not sure what your following sentences were about, but if the impression is right and you thought this is some Euro-patriotism issue for me and my interest ends where I see Europe ahead of the USA, not so - my whole point was not about a lack of problem, but about the problem lying elsewhere than commonly seen.

The problem I see is a saturated economy. Now this seems is rather the opposite of what you wrote about accelerating technological development. But my point is that when measured by the size of the economies created (minus the economies replaced!), none of the recent technological developments are on par with previous ‘big things’ like the railroads, the automobile, electricity, or plastics. Most of the economy can only compete by more efficient or better quality production, not by increasing volumes, and even most of the growth sectors replace older applications without much growth in volume. Or, worse, growth is in the non-essential, increased quantities sold not for its increased value but by advertisement: see SUVs.

(I must insert here something tangentially on-topic: while one debates the merits of HPI or of certain elements of balance sheets, I have recently wondered about how it would be to insert ‘depreciation’ into national GDP. I.e., if increased road noise lowers house prices, smog increases, fish are killed in the rivers etc., that could be substracted.)

I think the state (or local government, or the EU, or the UN etc.) can and should play a central role in pursuing certain “next big things”, to the extent of ignoring protests by established industries and to the extent of openly breaking with the non-intervention dogma, but that is another longer issue.

Again, it might be nice to view it as such, but that view doesn’t change the budgetary situation an iota. You raised the argument elsewhere that older people are less willing to spend - while I’m not sure, with the trend of the last decades of senior world-trippers, and with so much spending in healthcare, I also think that those who inherit from old people should also be factored in as spenders (and let’s not forget inheritance tax).

I should also note that I am deeper into economics also only for a few years now - it is not even something I am genuinely interested in, but something I got concerned about because of the way it (or policies using arguments from it) affects my life and the stuff I am really interested in (say public transport, say international politics, say alternative energies).

“I might differ from you about the extent to which people are being ‘forced’ into early retirement rather than actively seeking it.”

Well, OK, there is a third way, people accepting early retirement proposed by the company.

Maybe not in England, but it is pretty much standard practice, especially with state companies, if they want to awoid friction with unions. Also called ‘natural workforce reduction’. It is so standard sometimes adverse effects are marked and chronic, say at the German state railways: older people also take experience and knowledge with them, causing maintenance problems affecting the whole company.

“GDP per capita is going to be a function of the proportion of your population who are working and of the ‘net worth’ of the work done by those who are actually working.”

I think it is a function of the entire population and the ‘net worth’ produced. [...] I checked some numbers from Wikipedia, indeed it is.

“One strong argument I am advancing is that the age of our most productive activity (economically speaking) is declining as part of this acceleration process.”

Hm - does it? Or is it more of a general feeling among employers; a Jugendwahn? I would not contest that teenagers are more able to learn new things, but people, especially in high-tech jobs, begin ‘production’ after that age. One could also argue that being a parent reduces productivity, but that won’t make a society with less chidren less productive. Anyway, I would be interested in the actual statistics your opinion is based upon.

However, even if there is something to it, I dispute its significance in the US/EU comparison (and, consequently, as a significant economic factor): for, at least in Europe, there is also a pattern of youth joblessness, markedly so in some highly-qualified sectors - that is, I can’t see a looming shortage of most productive people.

I also have an inverse argument. If there would be a shortage of young very productive people, that production could have be done by a larger number of older people, if those accept (or, Harz IV and all, have to accept) lower pay than what the Yuppies would get. (I note this is not the same argument as about a trend to low-wage, low-profile jobs, i.e. growing service class.) Same GDP, higher employment. Am I missing something?

Finally a third example for comparison: the new EU members have the same or ‘worse’ demographic structure, but higher growth. The question is not the reason for this, but how in light of the above this could happen with so few young people - the best of whom are leaving to the West anyway?

“If you like, the elderly dependents are those ‘who are yet to receive’ and the young ones are those ‘who are yet to pay’. Assymmetries here are crucial IMHO.”

But not IMHO That line looks less impressive if one adds that the young ones are also those ‘who are yet to receive again’.

? the ratio of household debt to disposable income reached a record of 108.3 percent at the end of 2003. This rise was driven primarily by surging mortgage debt, but the ratio of consumer debt (mostly credit card debt and car loans) to disposable income was also at near record levels;

? if the household debt continues to grow at the same rate in the next presidential administration as it has since 2000, it will reach 152.0 percent of disposable income by the end of 2009;

? the cost of servicing this debt - which is already at near record levels relative to income - will increase substantially in the near future, both because of continuing increases in the debt, and higher interest rates, which are a virtual certainty. This will almost certainly push bankruptcy rates, which are already at historically high levels, to new records;

? the country’s net foreign indebtedness is rising to unprecedented levels as the dollar remains seriously over-valued in international financial markets. This over-valuation effectively places a tax on U.S. exports and subsidizes imports into the United States, leading to record trade deficits;

? at the end of 2003, the net foreign indebtedness of the United States stood at $2.4 trillion dollars. If the trade deficit remains constant as a share of GDP, net foreign indebtedness will rise to over $7 trillion by the end of 2009, an amount equal to $24,000 for every person in the United States;

? Measured relative to GDP, foreign indebtedness stood at 22.1 percent at the end of 2003. If the current path continues, it will hit 48.0 percent by the end of 2009, a level of indebtedness far greater than any industrialized country has ever experienced.

? While the dollar originally became over-valued largely because foreign investors bought into the stock bubble, its value is currently being sustained by foreign central banks. The dollar will only stay at its current levels as long as these banks consider it to be in their interest to keep the dollar at a high value relative to their own currencies.

I don’t want to saturate Afoe with an ongoing stream of my ‘crackpot’ ideas. It is however my aim to try and foment debate and awareness on all this, and so I will try and post something serious on a weekly basis.

Meantime, the conference papers at the recent Jackson Hole shindig sponsored by Greenspan and co may form a useful starting point:

http://www.kc.frb.org/PUBLICAT/SYMPOS/2004/sym04prg.htm

Of course, I don’t suppose it will come as any surprise if I indicate that I have plenty of methodological reservations about most of the papers you will find there. Still, they have the advantage of at least recognising that there may be a problem, and they do try to get to grips with it. There is now much more material on this than there was 4 years ago.

I’m really not going to get into all this, since I consider it a minefield which is only going to lose the non-specialist. I am trying to argue more from some basic ‘first principles’. I do consider hedonics as a valid procedure, especially in deriving a relevant Consumer Price Index (the whole thing comes basically from a debate about index number theory. Without some such procedure it is hard to see how we can get anywhere with deciding what is happening to ‘real’ prices (ie compare one years prices with another in a continuously evolving basket), but of course you do then get into all the issues about comparative GDP’s.

Put simply: I take it as intuitively obvious that there is a problem in Germany and Japan (and Switzerland) which doesn’t exist in the same way in the US. Of course if you don’t see that, then we really are talking about ‘chalk’ and ‘cheese’ and it is hard to advance any further. This is not the football world cup, or the Olympics, and we don’t need to approach these phenomena from a purely ‘culturally specific’ baseline. I just ask you to consider that you may be doing the German and other European populations - who I am sure you deeply care about - a great dis-service if you do not at least consider the other possibility.

“To some extent, all of the US deficits are financed by a massive net capital influx into the USA. This capital (both foreign private and foreign state [bank] investors) directly offsets the trade deficit, parts of it finance the interests for the deficit of the public sector (credits taken to pay credits), and some parts directly, other parts through private banks’ loans from the Fed finance the private debt, and thus the credit-based (rather than wage-based) private consumption that is said to be the motor of US economy.”

Just to make one point clear: I am saying that demographic dynamics are an important part of the picture, I am not saying they are the whole picture.

Clearly there are massive global imbalances (and I entirely agree with Morgan Stanley’s Stephen Roach on this). Part of the problem here is the ’set-up’ of the whole global financial system, having one currency (the US dollar) acting as ‘numeraire’ for all the rest. This means that US dollar holdings are not necessarily a reflection of the ‘net worth’ of the US economy. This is one of the problems we face, but not the one I was posting about.

There is no ‘inbuilt’ correction mechanism which can allow for the steady rise of the new global economies in a smooth fashion. This is not simply a question of floating the renminbi and the rupee. What this means is that we increase the likelihood that any correction which comes may be violent rather than ’seamless’.

Unfortunately part of the thinking which conceptually underlies the euro - having two numeraires where once there was only one - only tends to make a bad situation worse. My guess is that if the US job recovery continues to be ’soft’ we will see this ’softness’ once more reflected in an upward pressure on the euro, but this is the subject for future posts (if, and when).

Put simply, part of my argument would be that the money spent on child care, education etc is an investment in the future, whilst the payment of retirement benefits, old peoples homes, health care etc is a debt to the past which we still need to honour. It is an incurred liability.

I am not at all convinced that increasing child support (which may be morally entirely justified) will have much in the way of impact on fertility rates which evolve as part of a much larger process, and in a different evolutionary ‘time frame’. Our tragedy is that we are reacting to all this so late in the day that we have fiscal dynamics which mean that spending more on these highly desireable things will only make the deficit problem even worse on the mid term horizon, and that, unfortunately, is the one which I think is critical: ie 2008 - 2015.

First of all Dodo I’d like to say thanks for all the constructive and informed comments you are posting, this certainly fuels debate, and constructive debate is always interesting to clarify things :).

You are certainly absolutely right to draw attention to the distinction bewteen total GDP and GDP per capita: this last number is, of course, the interesting one.

Now productivity calculations (as you also indicate) are a complex (and highly charged) issue. So I would agree readily that one useful, and rough and ready, metric for assessing the relative productivity performances of two societies are their comparative GDP per capita numbers and the evolution of these.

This calculation depends on a number of factors, but most important among these is the proportion of the population considered to be of ‘working age’ and then the proportion of this latter population who are actually working (the so called participation rate).

When I say “considered to be of ‘working age’” I really mean this, since, as you also point out this is a convention not a hard fact, and numbers immediately become difficult to compare. The old convention of 15-64 seems less than useless since most people no longer enter the labour market at the lower end, and - again as you point out - customary retirement ages vary across countries (although I might differ from you about the extent to which people are being ‘forced’ into early retirement rather than actively seeking it. My impression is that proposals to extend the working life are hardly being enthusiastically welcomed by voters). Japan - as I have pointed out in another post - has lifted the top limit (many Japanese now work up to 75) which again makes unemployment numbers hard to compare.

But back to the main point.

GDP per capita is going to be a function of the proportion of your population who are working and of the ‘net worth’ of the work done by those who are actually working. And this is where I have a separate argument in my back pocket waiting to come out.

The pace of technological change is accererating, as is the extent of globalisation of the labour market. One strong argument I am advancing is that the age of our most productive activity (economically speaking) is declining as part of this acceleration process. At the same time in many European economies (and of course the Japanese one) the average age of the workforce is rising. So - other things being equal (which of course they normally aren’t) - this will tend to act as a drag on the productive activity of an economy.

Now in this sense there is an important difference between the US and the EU. Taking the numbers on US and German workers to total population ratios you give at face value, it is important to note that these numbers hide an important difference: that between the proportion of young ‘dependents’ and old ‘dependents’. This, IMHO, is vitally important. The US has a much higher proportion of young dependents.

The ‘demographic transition’ as we currently have it has two components: a secular decline in fertility (which is virtually universal) and a component which comes from increased life expectancy. This latter is pretty important as it has major implications for the responsibility of the future working population for the elderly dependents.

This issue is further complicated by the question of intergenerational transfers, and in particular for the assumtion of liabilities already incurred. If you like, the elderly dependents are those ‘who are yet to receive’ and the young ones are those ‘who are yet to pay’. Assymmetries here are crucial IMHO.

Now on the issue of the over 50’s, participation rates, and extending the working life. Clearly this is the great challenge that faces us here in Europe: to increase the participation rate, and to extend the years of work. But this means massive job creation, and this, I take it, is what the whole debate about labour market reform is all about.

And this is where the ‘global labour arbitrage’ and accelerating technical change arguments lock in. If the over 50’s are to find employment in activities which are generally less productive economically (either because the skill component is lower, or because the global value of the work is reducing as a much younger population in places like China and India comes on-line), then this will impact on the net productivity of the societies in question, and hence on the relative value of GDP per capita.

Now all of these questions are topics I have been giving a lot of thought to over the last three or four years (you can find a lot more detailed info on my recently greatly neglected website: http://www.edwardhugh.net). I do not expect you to accept them at face value. I am not advancing any ‘hidden agenda’ about comparing an EU model with a US one. I have been forced to get to grips with all this by a genuine concern about the future of our societies, and by a sense of responsibility to all those who may find that the only impact of the ‘reform process’ may be continuing impoversishment in old age if we don’t understand what the problem really is, and why we are doing what we are doing.