Greg Mankiw Wakes Up: Demography Does Matter

I recently berated Greg Mankiw (and the top ten world economists he pretends top cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.

Now since dependency ratios are really a function of three factors – fertility, life expectancy and net migration – it is hard to deny the obvious: that fertility is important.

Mankiw also cites approvingly the opinion of US economist Jeremy Siegel to the effect that the “way to finance the baby boomers’ retirement is persistent capital inflows and trade deficits with developing countries”. Now Siegel doesn’t quite have this right here. The way to finance a high old-age dependency ratio, is through a high level of saving, and running persistent capital *outflows* and trade *surpluses*. This, of course, is precisely what Germany and Japan are now doing, (and also, incidentally, steering the currency down to reduce deflationary pressure, which is again what has been happening in Japan) and this is one of the reasons I give so much importance to this phenomenon. It is also one of the reasons why I discount the likelihood of domestic-demand-driven growth in these countries.

So all I can say is, well, well, well, welcome onboard Greg. As is well known both time consistency and cognitive dissonance are phenomena which constitute important problems for economic theory, but normally not in the sense that we can see them at work here.

A topic whose time has finally come? We will see. To quote the evolutionary biologist Linda Partridge (in another context) “there is much to do”. Would that economists were as aware of this as theoretical biologists seem to be.

Update: the problem is more perplexing than I initially imagined, since I now discover that on July 20th Greg approvingly cites a paper by Nir Jaimovich and Henry Siu. The title of the paper is The Young, the Old, and the Restless: Demographics and Business Cycle Volatility , and the extract he cites is this one:

changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies“.

Greg says that this was the most intriguing hypothesis he had heard all day (he was at the NBER Summer Institute), which is fair enough, and I don’t expect him to agree with the hypothesis simply because he finds it intriguing, but I *am* stumped to understand how he can then go on on August 26 to describe the idea that low fertility posed a serious economic problem as one of the most wrong headed ideas he had heard recently, since, obviously, it is fertility levels which in part determine age structures which in part influence volatility in business cycles (according to the intriguing hypothesis). So come on Greg, which is it, wrong-headed or intriguing?

Seriously though, my point here is not to have a go at Greg Mankiw (although I have rather done that haven’t I?). My point is to draw attention to all the confusion which is knocking about on this topic. Material not unrelated to all of this is to be found in a recent article in the FT by John Kay. Kay asks hijmself why it is that Eureka moments seldom happen to economists. Basically he suggests that the reason is down to the difference between the natural and the social sciences. I don’t buy that, and I think that we social scientists sell ourselves too cheap if we succumb to it. But by the by Kay touches on another point, and it is one which brings us back to the struggle Greg Mankiw is having with the recalcitrant phenomena, since:

“It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat.”

Well sorry John, but we have just found one that is: the neo classical account of steady state growth, there is no real factual basis for this theory, and theoretically it isn’t hard to see that it must be flawed, if, that is, the ‘intriguing hypothesis’ which Greg was scratching his head about is a valid one, and thus, since age structures constantly change, so must rates of economic growth. In which case both steady state growth and convergence theory go quietly west, off into the sunset. The intriguing question is then of course what exactly it is which modulates the changes in age structure. This is, of course, just the kind of problem that Archimedes was toiling away with in the relatively unturbulent waters of his bathtub. Aha, now I know why it is economists seldom have Eureka moments: they all take showers.

Now just let me step outside a moment, what is going on out there, is that the sun going round the earth, or could it just be that somehow or another the earth – unbeknownst to me – is actually turning round the sun.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “Greg Mankiw Wakes Up: Demography Does Matter

  1. One further point I could add. Dependency ratios. These are not carved in stone. They can be flexibilised by changing retirment ages. But the extent to which we can do this is related to our biology and to the dominant level of technology, this is what I am trying to get at in the ‘Pyramids’ post (and there will be more to come on this, the problem is finding time to write). This is why I think the US demographer Ronald Lee has it wrong (see links in pryamid thread), we have to look at the social, economic and physiological factors which influence the conventions which influence dependancy rations and inter-generational transfers: no-one, for example, really now becomes self supporting at 16.

    The problem is that the theoretical work which is needed in order to understand how all this works has really not yet been done.

  2. Isn’t looking at the ratio only too narrow a view?

    It seems to me you need to figure in the degree of dependency. A healthy senior citizen with a modest pension living at home is cheap. Somebody with advanced Alzheimer’s disease in a nursing home will be an order magnitude more expensive.

    Considering that, investment into medical research now could have extraordinary importance later on.

  3. “Considering that, investment into medical research now could have extraordinary importance later on.”

    This is all very much to the point. As I say where the dependency ages are is not a fixed issue. I have two more posts in mind, one on life expectancy and how and why it has been rising and one on the biology of ageing. Just bear with me a little, and maybe some of this will be clearer.

    There are two important questions:

    1) How long can we work, and how productive can we be while we are working.
    2) How much can medical advance lengthen our active lives, and how much can it simply help us resist the impact of age related disease a little longer.

    A lot depends on the answers to these two questions.

  4. Edward, your writing style is deucedly hard to follow. I honestly sometimes can’t parse your arguments. Have you thought about sticking to a more rigid social science style?

  5. Hi Noel,

    Nice to see you over here.

    “Have you thought about sticking to a more rigid social science style?”

    Well I will take this as a compliment. Didn’t they use to say about Derrida “now why can’t this guy write normally”.

    But probably this would be far too presumptious of me. Maybe I it would be nearer to the point to own up and admit that I am just severely challenged when it comes to the syntax of sentence construction.

    Or I could simply answer “Yes, I have, but I decided against it” :).

  6. There’s a lot of interesting stuff over here, Edward! Thanks for the hat tip.

    But regarding sentence structure: I think you’ve got some interesting ideas. They may even be correct. If they’re not communicated well, however, then they’re impossible to judge. Isn’t it worth investing in simplifying the writing style in order to communicate the ideas?

  7. “Isn’t it worth investing in simplifying the writing style in order to communicate the ideas?”

    Ok Noel, you win, I will try harder next time :).