It’s Deficit Time Again

There’s a fair amount of talk again this week about the various government deficits and what to do with them. Earlier in the week the FT had a piece about the current state of play with the US deficit whilst the Economist is busy musing one more time over the ongoing saga of the EU growth and stability pact.

These two situations appear, on the surface, to be somewhat similar, but in reality it may be more interesting to consider how they differ.

The problems of the US Federal deficit and its potential implications are by now relatively well known:

Congressional forecasts published on Tuesday suggest that President George W. Bush is on track to miss his pledge to halve the ballooning US budget deficit within five years.

According to the non-partisan Congressional Budget Office, the deficit will fall from this year’s 3.6 per cent of national income – a record $422bn – to 2.1 per cent of GDP in five years’ time. The CBO’s estimate of the cumulative deficit in the decade to 2014 will be $2,294bn.

This five-year outlook assumes no real rises in discretionary spending over the next decade and could be far worse if the president’s tax cuts of 2001 and 2003 are extended, as Mr Bush has pledged to do.

Failure to reduce the deficit could lead to higher interest rates in the long term and a decline in the dollar, some economists warn.
Source: Financial Times

The EU ‘dilemna’ is also hardly ‘breaking news’:

THE European Union?s stability pact …………died an early, political death, when in November of last year the euro area?s finance ministers refused to punish their French and German colleagues for repeatedly running budget deficits in excess of 3% of GDP. On Friday September 3rd Romano Prodi, outgoing president of the commission, and Joaqu?n Almunia, the EU?s commissioner for monetary affairs, announced their proposals for a reformed pact that will be economically literate and politically feasible, albeit legally feeble.

The commission used to argue, with some justification, that the 3% deficit ceiling gave governments plenty of room to spend their way out of recessions, provided they also saved their way through upswings. Unfortunately, that was not the way the pact worked in practice. Germany, for example, was asked to do too little during its last economic boom (four long years ago), and it is now being asked to do too much in the midst of economic stagnation.
Source: The Economist

Really I don’t want to enter too much today into the politics of the US deficit situation. I imagine that is going to get plenty of ‘airing’ over the next couple of months as the presidential election looms. What I want to draw attention to are the underlying differences between these two situations in terms of the demographic and growth backdrop.

The Washington based Population Reference Bureau hit the headlines in mid August with a report on the global population outlook (PDF) (which despite the coverage really added nothing new to information and data already readily available at the UN population division). Apart from the obvious fact of a projected dramatic global population increase over the next 50 years from 6,000 to 9,000 million (which will clearly have an important influence on the relative pricing of raw material resources like oil), the report drew our attention to the changing distribution of this population, in particular, for our present concerns, to the differences between the US and the other OECD countries.

To illustrate their point the PRB drew attention to two countries with starkly different population projections: Nigeria and Japan. They point out that, today, the two countries have similar populations: 137 million for Nigeria and 128 million for Japan. But by 2050, Nigeria’s population is expected to reach 307 million, while Japan’s population is projected to decline by 22 percent to 100 million, ie Nigeria will be three times the size of Japan.

The really significant difference, however, are to be found elsewhere. For when it comes to population trends, the United States is in an enviable position relative to its industrialized peers. While Japan and most EU countries have a fertility rate that is well below replacement, the United States still enjoys a steady and sustainable fertility rate of around two births per female. In addition, they note the United States benefits from a regular infusion of working-age people thanks to the 1.3 million immigrants who arrive in the country each year. Against this backdrop U.S. population is expected to swell to more than 400 million by 2050.

So this is the first point: the US, like Europe, is an ageing society, but the population momentum is still much higher. This means that the economic problems faced differ significantly in each case. I have posted at lengh recently about the soft labour market in the US and its attendant problems, but one point needs to be made clearly: the labour market is in part ‘soft’ since the US demographics are such that it needs to create around 175,000 new jobs every month just to tread water. This is not the European case.

I have been arguing that in fact the US case is far nearer to the UK situation which Keynes struggled to address in the 1920’s: growing working age population and declining global importance economically (in this case due to the rise of new powers like China and India, in the earlier UK case due to the arrival of the US itself). Given this it is pretty reasonable to argue that more traditional Keynesian remedies are more relevant to the US, and amongst these policy remedies is of course the fiscal deficit. The EU situation is quite different: we simply don’t have this luxury, we are in a more ‘backs to the wall’ battle.

(Interlude: news in today about the Japanese economy which reveals a significant slowdown in second quater growth indicates what may happen when government expenditure needs to be cut ‘at a forced march’. Equally revealing in a European context is the Swiss case (another of the significantly ageing European societies) where again the typical symptom of a domestic demand which stubbornly refuses to revive has seen interest rates near to a Japanese style zero rate policy (ZIRP) for some time now: I don’t think it will be going up too far any time soon)).

Now I am not saying that the US deficit, and the manner of inflating it (the Bush tax cut) are not important issues, I am simply saying that this pales virtually into insignificance when compared with the European case. The US has much more room for manoeuvre, that’s all.

Reinforcing this is the relative growth situation. UK chancellor of the exchequer Gordon Brown in an interview in the FT today (subscription only unfortunately, although a summary can be found here) gets right to the heart of the matter.

?It is the weakness of European Union growth that lies at the root of imbalances?

What does he have in mind here, well the fact that the Europe economies collectively have grown at a rate of 3 per cent in only one year in the past 10, while the US grew at more than 3 per cent on average over the decade, might do for starters. Clearly the EU economies, and the eurozone in particular, have a ‘growth deficiency problem’. And it is this which again makes all the difference with the deficits. For if Europe doesn’t get growth, then meeting even the minimum deficit reduction criteria is going to be near impossible.

So what are the proposals?

Basically the new Commission proposals to ‘flexibilize’ the pact are twofold. In the first place they would oblige countries to tighten fiscal policy in good times, but allow them more leeway to loosen it in bad times. And in the second place the commission wants to shift its focus from the size of a country?s deficit to the sustainability of its debts. In other words towards the proportion of a country’s GDP the accumulated (not the annual) deficit represents. Put simply, this would move the key ‘sinners’ from being France, Germany and the Netherlands – who have the highest deficit forecasts for this year – to Italy, Greece and Belgium all of whom have accumulated debts on or around the 100% of GDP mark.

This second point has a certain logic, since it is difficult to see how these states can sustain their finances if there is not a drastic reduction in the accumulated deficit (which means annual budget surpluses, not deficits!). Regular readers will already know that I have long seen the Italian economy as the real ‘sick man of Europe’, and as such I can only welcome this emphasis. In fact I see the Italian case as the litmus test for the whole problem. (Indeed I am happy to let my demographic ‘thesis’ stand or fall on the Italian ‘bridge’. Remember Italy is far from being Japan in economic terms. I am not a betting man, but I have no doubt that I would be backing a ‘winner’ here). But this being said, I am far from being convinced that the new proposal will be sufficient to alter dramatically even the Italian situation.

Going back to the first point – the good times bad times distinction – the problem is that this really begs the question: how do you decide where in the cycle you are, and, indeed, what kind of cycle you are on? In theory, and according to the ‘luminaries’ aren’t we now in full recovery mode? This being the case, oughtn’t countries like Germany and France now to be running not deficits but surpluses to get ready for the downswing to come? It is hard in this context to see what all these fine words mean.

So as I said, we are ‘backs to the wall’. In this context, and in order not to be simply called a ‘defeatist’, I will cite the words of the paraplegic Catalan poet Miquel Marti i Pol:

Treure l’espada
Treure el pit
Tot es possible
Tot esta per fer

which liberally translated reads:

Out with the sword
Out with your chest
Everything is possible
Everything is still to do

If this doesn’t seem much like a policy then I will leave you with the thoughts of one European politician of an earlier generation, in his blood, toil, tears and sweat speech:

You ask, what is our policy? I say it is to wage war by land, sea, and air. War with all our might and with all the strength God has given us, and to wage war against a monstrous tyranny never surpassed in the dark and lamentable catalogue of human crime. That is our policy.”

Of course I am not thinking here of the kind of war one GWB would have in mind. I am thinking of a war on poverty, injustice, desperation, fatalism. A war which could avoid seeing the majority of the EU elderly population sinking into poverty and depression in the face of problems which seem insurmountable. A war to instill optimism and drive into a generation of young people who – faced with the mounting costs of intergenerational transfers – may sometimes see little alternative to leaving what may seem increasingly like a sinking ship. A war to save the ideals which we all as Europeans can be justifiably proud of. As a child I coudn’t stand Churchill for the class bias and priviledge which he seemed to represent. Now I find politicians of his calibre, and economists of the stature and commitment of Keynes, sorely wanting. How one’s perspective on things changes with age!

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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".

13 thoughts on “It’s Deficit Time Again

  1. Wonderfully argued! I wish I did not agree, but your demographic take becomes increasingly persuasive.

  2. I am less convinced about the demographic argument. Not that I don’t see a problem, rather, I don’t see it connected to the size of population – and I learnt that comparisons with US statistics have their problems.

    Edward, why do you think that population growth matters? GDP growth is just a number, per capita GDP growth is another, and it might say more. I would assume the costs as well as the income in taxes would decrease with a decreasing population, all other factors left unchanged.

    In particular, the reasoning about an influx of ‘working-age’ people seems fishy to me. It assumes that working age is something set in stone, and can’t be altered when the age distribution changes in a population. However, that is not only not true, but f.e. the German economy offers examples that economic pressures work in the opposite direction: many companies and the State ‘rationalised’ in the last decade by sending older workers into early retirement, in effect lowering the numbers (and economic costs) of the jobless by increasing the numbers (and economic costs) of pensioneers. This indicates to me that the problem lies deeper, and demographics doesn’t play a serious role in it: the total ‘demographic’ costs, i.e. the sum of money spent on childcare, jobless benefits and retirement funds per worker – basically, the ratio of non-workers to workers – is what counts, and the present problem is that it doesn’t get less.

    Considering the above, I now turn to comparisons with the USA. As even the Economist noted lately (if you have subscription: http://www.economist.com/finance/displayStory.cfm/none/?story_id=2765877), if you look at per capita rather than total GDP growth, and leave away Eastern Germany, the Eurozone’s growth exactly matches that of the USA (2.1%). Furthermore, the USA and EU countries measure GDP itself differently – if you factor in hedonic price indexing (HPI), various spending counted as investment in the USA and expenses in the EU, you’ll find the Eurozone ahead. (The article also notes that the EU and the USA uses different measures of productivity – the above article refers to a study that, using identical measures and adjusting for economic cycles, the Eurozone productivity growth was higher.) Needless to say jobless statistics also use rather different assumptions.

    But in my opinion even more significant are the US deficits you laid by side. Before I can make my argument, a basic point. 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. (The problem with this is that capital influx has to be increased constantly, i.e. it is always a net loss for the world-economy-minus-the-USA, but that’s a different issue.)

    Now, the first part of my argument is that this massive influx of capital, by itself, lends dynamism and contributed to the growth of the US economy. More directly through increased capital available for enterprises and by fueling credit-based consumption, more indirectly through capital gains on a stock market in almost permanently upward rally due to high demand. (Needless to say, since this massive net capital inflow is an imbalance of the global economy, you can’t reproduce it just by copying US economic policies.)

    The second, more weighty part is that the reason foreign investors were willing to sustain this influx is just those differing measures used in US and other (f.e. EU) statistics: when the rally started in the nineties, most investors had no eye for the details, and acted with herd instinct (also in the choice of the rationalisation adopted). Remember, not only was hedonic price indexing intoduced in that period, but it was the time of lax accounting rules and balance sheets reflecting stock price gains that led to Enron et al (and despite loud promises are still around), and made US stocks, not just the US economy as a whole, sexier.

    To summarise, it is my contention that the (quite serious) problem besetting our economy is not demographic in nature, and even structural problems may not lie where commonly identified, as evidenced by the fact that more meaningful statistical comparisons with the idealised US economy show the Eurozone is still better. However, your last paragraph is something I very much agree with.

  3. A little statistics, focusing on the workers to total population ratio I championed.

    Germany:
    Total population end-of-2003: 82,531,671
    (see http://www.destatis.de/download/d/bevoe/bev_bl_02_03.pdf)
    Seasonally adjusted number of workers living in Germany, end-of-2003: 38,221,000
    (see http://www.destatis.de/indicators/d/arb310ad.htm)

    Ratio: 46.3%

    USA:

    Total population end-of-2003: 292,200,200
    (my own projection based on http://factfinder.census.gov/servlet/DTTable?_bm=y&-geo_id=01000US&-ds_name=PEP_2003_EST&-_lang=en&-mt_name=PEP_2003_EST_G2003_T001&-format=&-CONTEXT=dt)
    Seasonally adjusted number of workers living in the USA, from household survey, end-of-2003: 138,479,000
    (see http://data.bls.gov/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS12000000&output_view=data|)

    Ratio: 47.4%

    The difference is on the scale of those due to differences in definitions.

  4. “Edward, why do you think that population growth matters? GDP growth is just a number, per capita GDP growth is another, and it might say more. I would assume the costs as well as the income in taxes would decrease with a decreasing population, all other factors left unchanged.”

    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.

  5. “This indicates to me that the problem lies deeper, and demographics doesn’t play a serious role in it: the total ‘demographic’ costs, i.e. the sum of money spent on childcare, jobless benefits and retirement funds per worker – basically, the ratio of non-workers to workers – is what counts, and the present problem is that it doesn’t get less.”

    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.

  6. “Furthermore, the USA and EU countries measure GDP itself differently – if you factor in hedonic price indexing (HPI), various spending counted as investment in the USA and expenses in the EU, you’ll find the Eurozone ahead.”

    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).

  7. Sorry about all the ‘dense’ comments, but I do think Dodo raises important issues, and I am sure I haven’t answered them all.

    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.

  8. http://www.cepr.net/publications/debt_trends.htm

    ? 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.

  9. Edward, first a sorry for much delay, second a sorry for further delays as today I won’t even finish responding to your first post (below), and third another sorry for a perhaps unfortunate formulation on my own blog – I didn’t meant you, not even most economists, but some policymakers.

    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’.

  10. Edward: “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.”

    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).

  11. Regarding hedonics: I raised it purely tin the context of illicit comparisons, but I do in fact have problems with it. It is a valid point that changes in dollar/euro value often conceal improved quality, but practical attempts to measure improved quality usually introduce vagueness of equal magnitude in the other direction. For example, is a computer that is twice as fast really twice as good (as a production tool)? If you think about it, a computer is not used at 100% or even 50% capacity most of the time.

    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.

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