The Distance of Death

Ageing populations ‘will create crippling debt’: at least this is how one of today’s Financial Times headlines reporting on the latest Standard & Poor’s assesment of OECD sovereign debt dynamics has it.

In fact the article says S&P argue that:

industrialised countries face crushing debt burdens – greater even than those during the second world war – unless governments make politically painful cuts in social spending in the next few years

At the same time this weeks Economist has a special supplement on ageing prepared by ‘death of distance’ guru Frances Cairncross which argues that :

a larger generation of old folk than ever before will need support for longer than ever before from a population of working age that is shrinking continuously in absolute size for the first time since the Black Death. And the level of that support is unprecedented.

Seems bleak, doesn’t it? Crippling debt, black death: are things really that bad?

Well of course the answer here, according to both sources, is not really. Frances Cairncross puts it like this:

This survey will argue that the promises governments have made to people retiring today are too large to be met in full. As a result, people will have to work longer, and retire later, than they do now. And the old will have to insure themselves for more of the cost of health care.

Fortunately there is a time window, of about a decade, during which the population of working age will be at a historic high. Projections by the OECD in Paris show that the impact of retiring baby-boomers will not begin to be felt until the next decade, and will culminate in 2025-35. So governments have a chance?but one that they must grab fast.

Indeed S&P’s also reach a similar conclusion: if the bullet of reform is bitten early enough the worst can be avoided:

This scenario is not a prediction by Standard & Poor’s. It is unlikely that governments will allow debt and deficit burdens to spiral out of control in the manner outlined.

Now a number of things could be said here. In the first place Frances Cairncross’s objectives may well be rather different to those of S&P’s. She is concerned, in part, to offer dignity to old age, and respect for societies as they age. In this I agree with her completely. We have converted ourselves into youth-centric societies, and our attitude and self-image need to change.

S&P’s is more interested in fomenting pension and social security reform and they undoubtedy take a much more restricted view of the problem.

However this being said they both share one common rather re-assuring conclusion: acting in time can make the transition painless. Hear I am afraid I cannot be so anodyne: I think this is all going to be incredibly traumatic, and disturbing. As to acting in time, not only am I unsure whether our political systems allow for this, I am not even sure we know what we should be doing.

S&P’s like many analysts produce reams of data – the government debt of country (a) will have reached (b) % of GDP by the year (c) – but I’m going to let you in on a little secret: none of us really know in any detail what the dynamics are going to be. In the end we are all guessing, and these guesses conceal large margins of error. Take the US deficit situation. S&P says the sharp deterioration in US public finances over the past two years has prompted it to revise US debt forecasts sharply higher. “The US debt ratio is now projected to reach 158 per cent of GDP, almost double the 83 per cent projected two years ago.”

Now think about this: it is pretty staggering isn’t it? In two years the numbers have changed drastically, and all with a teensy weensy little deficit like 4% of GDP per annum for a year and a half.

So don’t let them blind you with data: they are as much in the dark as you are, it’s just that pages and pages of figures sometimes make people feel better.

And think of another little statistic: last year the German federal government ran a deficit of 4% of GDP to promote growth (thus emphasising the *growth* side of the growth and stability pact) yet no growth was produced.

Three years from now even the German government promise to be aiming for a zero deficit: I leave each of you to do their own back-of-the-envelope calculations about what kind of growth level they might achieve if they adhere to this line.

And if you continue with the annual deficit but don’t get growth, then at some stage the absolute values (the % of GDP that the govt owes) start to get pretty scary – in Japan they’re already over 150%, and in Italy and Belgium over 100%) – and at some stage someone starts to ask the awkward question whether you can ever pay all this back, and from that moment we don’t quite know what happens, because, like they say, we’ve never been there before.

Now before leaving the topic of numbers completely I would just like to touch on one detail: the one aluded to in the title to this post. The point is what is the ‘distance of death’: we simply don’t know, and this is another of those weak spots where all these projections start to get into trouble. We simply don’t know whether the tendency towards increasing longevity which we have enjoyed over the last century or so will continue, or whether the rate of increase in life expectancy will accelerate or decline – and these details are pretty important if you want to get down to it and do the calculations. In fact what can be said is that most of the ‘reassuring’ scenarios tend to assume a ‘favourable’ evolution in life expectancy (in actuarial terms) and a recovery of fertility, neither of which may be justified: that is to say we are assuming the most favourable of scenarios.

Anyway instead of trying to speculate about numbers, which as I say are bound to be pretty suspect, let’s try arguing from first principles, let’s just look at what advantages and disadvantages an ageing society might have, and I’d like to examine these in the context of two variables which I often mention: technology and globalisation.

In the first place maybe it helps to think of a society as a single person, then what is happening is that with every passing day that person is older. Now in economic terms there must be an optimum age for a society to have. As a crude approximation you might think that the earnings curve is a reflection of this fact (or what we economists like to call a proxy). Broadly speaking, especially for qualified workers, wages and salaries tend to rise, peak and then taper off. This trajectory probably represents a trade-off between two factors: speed and experience. Within certain limits the younger you are the quicker you are (and the more ‘risk open’ you are), and the older the more ‘wise’ (and more resistant to change). The resistance to change factor isn’t particularly surprising: as you get older the more you probably have invested in ‘the way things were’.

So in theory you could make a calculation: for a given level of technology, and a given rate of technological change (x) is the optimum age for a society to have (in strictly economic terms). OK?

But the rate of technological change isn’t constant: it is accelerating. So what does this do to the calculation? Well esentially it gives more emphasis to reaction speed, and less to experience (putting this in Schumpeterian terms the rate of destruction of human capital increases) – ie essentially it brings down the optimum age, and the faster the technological change, the faster the age drops. This essentially is the first important argument I fear Frances doesn’t consider, and I think it is a pretty important one.

Of course socially speaking the image of all those elderly people working more and more years to keep their societies functioning may be extraordinarily laudible, but let us never forget one thing: social worth and economic worth are not at all the same thing. So the extra work that we all get to do may in most cases have a diminishing economic worth.

And this brings me to the second topic: globalisation. In fact I found it rather surprising that Frances doesn’t really get into this, since it is the very ‘death of distance’ which she was so prophetic in forecasting which may be the final kick which makes her somewhat ‘rosy’ view a rather questionable one.

As she says:

When the baby-boomers start to retire in large numbers, they will empty out workplaces?such as public services?that now have lots of staff in their 50s. To replace them, employers will have to come up with the sort of flexible deals they once used to attract women back to work. That may make it more appealing to continue to work.

Indeed, the workplace revolution that lies ahead may be very like the one that, in the course of the 1970s and 1980s, brought millions of mothers into the job market. Since then, the workplace has been feminised; in future it will be grizzled. A quarter of a century from now, retirement will look different from the way it does now: a mix of work and gardening, rather than gardening alone. For older people, work may then offer some of the charms that have lured so many women into the job market: stimulus, companionship and the freedom from worry that a bit of extra money can bring.

Now what is surprising is that she doesn’t consider another form of flexibilisation here: the one which can be brought about across the telephone line. In fact American consultants McKinsey have been thinking about this. In forecasting that by 2008 IT services and back-office work in India would swell fivefold, to a $57 billion annual export industry employing 4 million people and accounting for 7% of India’s gross domestic product they specifically cited the impending retirement of the baby boom generation in the US.

And of course – what a coincidence – just as the average age of our EU societies edges gently up and away from the decining optimum, many newly developing societies will have average ages which are steadily approaching it from below. So the balance must inevitably shift. In fact as the more mobile information type work moves steadily away we may become a highly polarised zone with a few extremely highly talented and rewarded young people, and an ever growing pole of ‘the rest’ accumulating in pretty low-end economic activities (the ones it is impossible to move) with a proportionately lower relative standard of living.

Which brings us back to the government debt, it’s ever growing real value, and our ever diminishing ability to repay it. I’m sorry Frances, I’m sorry S&P’s: somewhere out there lies a tipping point just waiting for us to come and find it, or to use an expression from game theory I’ve borrowed, there is a backward induction point from which todays ‘market participants’ may deduce the reality which I am trying to describe, begin the rush for the door and kick the whole machine into motion.

Full Disclosure: while writing this I have been listening nostalgically to a CD from the French folk singer Renaud S?chan (not to be missed as an actor in the film version of Zola’s Germinal). I have just got to a track from 1980: Dans Mon HLM. Certainly prophetic, just how I imagine my old age. My apologies to those who don’t speak French – I daren’t translate!

Au rez-d’-chauss?e, dans mon HLM
Y a une esp?ce de barbouze
Qui surveille les entr?es,
Qui tire sur tout c’ qui bouge,
Surtout si c’est bronz?,
Passe ses nuits dans les caves
Avec son Beretta,
Traque les m?mes qui chouravent
Le pinard aux bourgeois.
Y s’ recr?e l’Indochine
Dans sa p’tite vie d’ peigne cul.
Sa femme sort pas d’ la cuisine,
Sinon y cogne dessus.
Il est tellement givr?
Que m?me dans la L?gion
Z’ont fini par le j’ter,
C’est vous dire s’il est con!

Putain c’ qu’il est bl?me, mon HLM!
Et la m?me du huiti?me, le hasch, elle aime!

This entry was posted in A Fistful Of Euros, Political issues by Edward Hugh. Bookmark the permalink.

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".

12 thoughts on “The Distance of Death

  1. If there is to be a ‘death of distance’ Guru, shouldn’t it be her former editor Norman Macrae, rather than Frances Cairncross?

    Just a thought. V. interesting. What does happen next?

  2. Usually babelfish will do a halfway decent job, but on this it just threw up. Oh well.
    Anyway, as I recall Fernand Braudel figured at three times GDP debt got to be too much. Here in the US some pundits are saying we’ve reached that level, but I think you have to take out redundant financial sector debt to get to a more realistic level, which from what I recall comes to 200% of GDP at this point.
    So we’ve got another 100% to go here in the US, anyway.
    Either way, as a colleague of mine observed about himself, debt, as in Deb Tee, is our perpetual mistress, one which we will not be parting from any time soon.

  3. I suspect that the solution, at least in the US, is going to have to include transforming the system from a pension-style retirement into a true safety-net system which will protect poor retirees, but does very little for the middle class and nothing for the upper class.

    While this seems entirely equitable to me, it will still be a wrenching change.

  4. What an incredibly excellent post! A caveat:

    In the first place maybe it helps to think of a society as a single person, then what is happening is that with every passing day that person is older. Now in economic terms there must be an optimum age for a society to have…

    I don’t think this goes along with the spirit of what you are trying to say here. If we were to use the simplifying assumption that our object-society had only one average individual, that individual would have some unconventional attributes: she could very likely age backwards, as would happen if there were a baby boom or a particularly large, elderly cohort began to die off.

    More likely, she will age at a far slower rate than the average individual.

  5. Good stuff Edward.

    I also think it’s important to remember that most debt under discussion here is internal debt, in other words certain sections of the population owe it to other sections. This doesn’t make it a non-issue, but it does mean that there is, with reasonably coherent societies, a political solution.

    External debt on the other hand is harder to deal with because you have less political control over foreigners. So it’s worth noting that Japan has a huge external assets — indeed it bought 80% of the US government’s debt issuance in teh first quarter.

  6. “she could very likely age backwards, as would happen if there were a baby boom or a particularly large, elderly cohort began to die off.”

    You are right: this is a tremendous simplification. It is just a sugestion to try and help people think about the problem. The backward-ageing hypothesis is a very nice one, but it would be useful to have some evidence for some of it, somewhere (other than, of course, purely localised non-typical phenomena) before we started setting our hopes on it. I mean I don’t think we should consider it rational to select a phenomenon for which there is absolutely no justificatory evidence and say: let’s imagine that this is what is going to happen.

    This it seems to me is what we do all too often here. It is also called going for the ‘best case scenario’. Of course if you regularly select the best case scenario you must be skewing something somewhere.

    A better argument against my simple model might be: but since we are living longer we are ageing more slowly: we could all be ascribed a nominal and a ‘real’ age (to use the economic jargon). In principle I would have no objection to this, it only complicates the model a little: you would still need the ‘real’ (quality adjusted) average age to be actually dropping and for it to be dropping quickly enough to offset the technological change (creative destruction) component for this to work.

    I can’t tell you that this isn’t the case, but I can tell you that I haven’t come across anybody in research even thinking about it yet. So we are back where we started: take everything you are told with a very strong pinch of salt.

    Like the idea that increasing participation rates are the ‘solution’. I haven’t got the European numbers handy, but in the US and Japan right now participation rates are actually falling. So what we need here are not more ‘bright ideas’, but some convincing facts.

  7. A few more issues with the society as an individual idea. It implies a commonality of interests the lack of which is one of the main problems of an aging society. Linked to that point is the problem of defining optimality for the age of a society. The society may have all the issues of delayed gratification and the like that apply to individuals and begs the question of what is to be optimised. FInally no society is an island.

  8. so many issues and arguments, so little time to comment. anyway: the overall problem is serious, and i like your figurative language. i can offer my own emotional spin on the matter at http://ostracised.blogspot.com/2004_03_01_ostracised_archive.html#107969437067280565

    – countries like Italy and Belgium or Greece have proven over the last decade that 120% debt of GDP IS manageable in the European context. It surely does not help economic growth though. Similarly, when the pressure reaches the necessary level, pensions systems will be bent to accommodate the inevitable (small steps are being made in Austria at this time)

    – I don’t see the rate of technological change increasing – rather, IT is now mature, biotech and nanotech seem to be making little progress in the market place – 70s-style stagnation looms

    – you don’t mention immigration. Europe needs and eventually will allow massive immigration of young people

    – I agree polarisation will increase in continental Europe. That is bad. It is good for the immigration issue though: Welfare-system barriers that arise when everybody who crosses the border automatically gains a huge economic advantage will diminish.

    – on the occasion, may I say that I’d love to see my new-ish but deserving blog (link above) included in your “national or regional politics” blogroll section? blunt but what the heck.

  9. “It implies a commonality of interests”

    This isn’t my intention, the only idea is to give a yardstick to think about social evolution and economic worth. This, I would emphasise is not a value I wish to impose, but a value determined in the global market place. It’s the value the rest of the world will put on the ageing OECD I am talking about.

    “I don’t see the rate of technological change increasing”

    Obviously this is another of my ‘issues’ with the economist: they agree with your mature technologies argument. I don’t buy it. Of course there can be fits and starts, but essentially the rate of increase of change has been broadly speaking accelerating since the stone age, and even more dramatically since the industrial revolution. Now that the quantity of resources explicitly dedicated to this just increased (the information society), and the ‘wiring-up’ of the planet’s brains just made our work more effective: so I see no reason not to expect this trend to continue.

    Of course if we did have a tech slow down this would change everything: your product-life would be longer, and the lifetime of your valuable tacit knowledge too: but I don’t see it. I suppose it depends on tech enthusiasm vs tech scepticism.

    However, if you don’t like arguments from first principles, or anecdotal evidence, you could try these curves from Kurzweil:

    http://www.kurzweilai.net/meme/frame.html?main=/articles/art0465.html

    “you don’t mention immigration. Europe needs and eventually will allow massive immigration of young people”

    Glad you raised this. I completely agree about the need. Whether they will come or not depends on whether we can offer them work. This depends on how our job markets are working. But even here the pattern of immigration may change, with the new services outsourcing model may mean that more educated people stay at home. Again individually, and compasionately this doesn’t matter to me at all, I welcome anything which we do to make the world more equal. I was simply trying to address our ‘net worth’ and living standards issues. Actually the US may well offer us some pointers here, and quite soon, since they are the most ‘open’ and thus affected by the new ‘outsourcing’ and ‘inward migration’ trends – so it may well be pretty revealing to watch how their job market and relative living standards evolve.

  10. Yes if we have to have a death of distance guru: my father Norman Macrae, whom Frances reported into, wrote up a whole future history on The Death of Distance in 1984 – The 2024 Report. Global networking as a system he opined would within 40 years either become the worst Orwellian Nightmare or the best time to be any of the world’s 6 billion human beings but not much in between. And one of the acid tests would be whether we evolved sufficient transparency so all the most suitable decisions were made by democrats as nations became less powerful and goodwill networks connected us all in whatever we most deeply wanted to work through our lives.

    Incidentally, I wouldnt want you to think my father was all virtual or desk bound. He loved outrageous confernce debates- Barcelona being one of his favourite innovation areas as it celebrated emergent democracy. He loves to see how well its doing as a leading conference and innovation city.

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