The Faded Mirror

As the few long-term readers of this blog know, I continue to be fascinated by the effect of demographics on a nations economy.  I find this topic especially interesting, because, unlike other factors, demographics are a long-term and long-lasting factor in a nation’s development.  It takes nine months just to create a new citizen, plus a decade or two to develop him or her into a truly productive member.  One cannot turn that ship around overnight.  So, a trend in birth rates now must shape the nation decades hence.

One of the biggest effects that are commonly brought to attention is  the “dependency ratio”, or how many citizens the average working-age member must support by his or her labor.  As the population ages, the dependency ratio goes up and becomes more burdensome on the economy, especially for more socialist states with a high level of guaranteed welfare.  But as a recent article points out, the effect of an aging population can be felt even earlier in terms of a nation’s savings rate and trade deficit. 

To summarize, a middle-age population tends to save more than they consume, as they enter their high-wage years and the expense of raising their children comes to an end.   This leads to greater exports (see Germany, China, and Russia).  However, as their wage-earning years tail off, they begin to consume more and save less.  To avoid a crippling trade imbalance, they must find a way to increase their exports.  But without a sizeable younger population to employ, how can they increase production?  Watch invesment capital start to flee China and Russia in the near future as it becomes apparent that they no longer have the workforce to exploit any increase in production capacity….

Read “A Country for Old Men and a Bit of Samba” here.

 There’s been a lot of talk about the growing suspicion that our economic recovery will not be accompanied by an increase in jobs, and our employment picture will begin to resemble that of France.  Click here for an interesting piece in Time magazine, which I will discuss briefly below.

First, the sardonic quote:

We’re a long way from Hoovervilles, of course. But it’s not hard to imagine, if we’re not careful, a country sprouting listless Obamavilles: idled workers minivanning aimlessly through overleveraged cul-de-sacs with no way to pay their mortgages, no health care, little hope of meaningful work and only the hot comfort of angry politics.

Next, the “get a dictionary” quote:

Hysteresis is a word that you (and the rest of us) should hope we don’t hear too much of in the coming months. It comes from the Greek husteros, which means late. It refers to what happens when something snaps in such a way that it can never be put back together. Bend a plastic ruler too far, drop that lightbulb — that cracking sound you hear is the marker of hysteresis. There’s no way to restore what has just been smashed.

And now, the scary quote:

The funding for job creation in the American Recovery and Reinvestment Act was based on an assumed 8.9% unemployment rate. Now 15% is a realistic possibility. And yet we’re hearing few interesting ideas about how to enhance America’s already groaning unemployment support system as millions of Americans sit idle. Tangled in the debate over health care — and bleeding political capital — the White House may find itself too weak and distracted to deal with the danger of joblessness.

Finally, the insightful quote:

The painful fact is that the 1930s option, to have the government directly employ millions of people in labor fronts, is not an option today. “There’s no way to create real jobs using this approach,” says Harvard professor Roberto Mangabeira Unger. In the 1930s, you could throw 10,000 people with shovels at dam or road projects. Today the work of 10,000 shovels is done by a few machines — and it was a lot easier to persuade farmers to switch to ditchdigging than it would be to get laid-off hedge-fund traders to switch to sewer repair, appealing as such an idea might be.

In essence, the much vaunted productivity gains that have boosted the American worker over his foreign rivals are now coming back to bite him.  It’s not enough that the productivity multipliers (computers, robots, machines, and processes) can now be exported around the world, but that in a recession, it’s cheaper to squeeze more productivity out of the remaining workforce than to hire new workers.  Adding additional labor increases capacity by so much now that employers can meet increased demand by only marginal increases in headcount.  So, the virtuous cycle of increased demand -> more hiring -> more consumer spending -> increased demand is short-circuited — increased demand leads to minimal hiring which leads to little incremental demand, and the cycle fizzles.

I suppose that, taking things to rediculous extremes, given infinite productivity one guy could meet all the needs of everyone in the entire country.  Would this one guy get to pocket all the GNP, leaving everyone else to starve?  Or would he be forced to do all the work for everybody … and then why would he bother?  Yes, it’s an extreme example, but it does send conventional labor theory for a loop.  How do we adjust our economy for these huge productivity gains?  Who gets to reap the benefits, without removing incentive from the system?  Interesting questions….