The Demographic Crunch

I still don’t really have a great feeling for WHY it is that a demographic transition is toxic to economic growth. I very vaguely feel like it has something to do with younger people being more productive in society, something that I’ve heard referred to as the demographic dividend.

But what on earth does that mean?

Here’s Frances Woolley. Woolley’s point is that a generation’s quality of life once they reach ‘retirement’ age is determined by the age distribution of society behind them. I’ll paraphrase: panic if you’re anything like China when two generations of one-child policy leave a nation of grandparents with 1/4 a grandkid each and nobody to take care of them.

She also discusses the problem of where one puts one’s savings. When you save, you’re saving with everyone else and raising asset prices. When you dissave, you’re liquidating with everyone else and lowering asset prices.

In other words, if you’re a boomer that saved during your 30s-50s, you were destined to buy high and sell low. I’d love to read a paper that discusses the recent stock and housing bubbles in that light. I’m sure it’s out there.

Anyway, all this presupposes that older people retire. What if they don’t?

My grandfather retired in the late 70s as a college administrator/teacher and his life divides neatly into three: a third before his career (includes WW2), a third as a worker and a third retired. As a retiree with an indexed pension, he claims to enjoy the highest standard of living of his life. All guaranteed by the state and funded by the demographic dividend.

As those kinds of deal evaporate, workers will extend their working lives, particularly given the buy high sell low saving environment.

Are 60-year-olds as good as 25-year-olds at output and innovation?

Let’s think about possible historical analogues. Hey, what about Japan? Hm…

Here’s Michael Pettis:

On the other hand if the definition of poor demographics is extended to mean a wide variety of demographic conditions that hurt economic growth, there is nothing especially Japanese about Milligan’s list of Japanese symptoms.  They are pretty standard for countries undergoing financial crises.

Great quote here, too:

Japanese households on the other hand continued to do better, year after year, after the crisis, the difference being that their wealth increased more slowly than reported GDP before 1990 and increased more quickly than reported GDP after 1990.

So, at best, the causes of Japan’s malaise will be difficult to disentangle from its debt hangover.

And here’s another blog post by Tino that I think I’ve referred to before:

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

So a demographic transition only cause a mismeasurement of GDP growth and not an actual decline in living standards, which IS the result of a debt crisis. But this mismeasurement only occurs to the extent that the Frances Woolley effect dominates (i.e. people just stop working). If they keep at it, nobody loses.

These conclusions contradict the wikipedia article’s phrasing of the demographic dividend, which it suggests is driven by the share of “working age people” in a population, as opposed to the share of workers in a population.

There has to be some empirical work out there on this.

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