July 29, 2011
The NYT told us “it’s the demography stupid” as the explanation for the economic crisis afflicting the United States and the world. This piece is truly remarkable for its ability to confuse just about every basic economic fact relevant to the crisis.
The fundamental problem facing the U.S. and European economies is the lack of sufficient demand to fully employ their workers and their productive capacity. There are few economists who dispute that if there were more demand, there would be more employment and output.
The key feature of the “demography stupid” story is that the ratio of the elderly to the working population is too high. This means that workers do not have much left in wages for themselves after the taxes or capital earnings of the elderly are pulled out of the economy.
Of course this is 180 degrees at odd with the problem the U.S. and European economies face. If the elderly suddenly went on a huge buying binge it would create millions of jobs for younger workers. In the current economic situation the young would be better off if the elderly either had more money or there were more elderly spending money.
The article also seems oblivious to productivity growth which is by far the most important factor determining living standards. Increases in productivity, which have averaged more than 2.0 percent annually in the United States over the last 15 years, swamp the impact of changing demographics. This is the reason why the United States has been able to have substantial increases in living standards even as it has experienced a continual rise in the ratio of retirees to workers (although this has been partially offset by declines in the ratio of children to workers).
The failure to understand productivity growth also leads to the bizarre claim that China faces a problem because of its slow growing population. China has been experiencing productivity growth in excess of 7 percent annually. At this rate output per worker will nearly quadruple after 20 years.
With this pace of productivity growth, if workers were taxed to the extent necessary to provide retirees with incomes equal to 70 percent of the before-tax wage of the average worker, after-tax wages could still quintuple over 30 years even if the ratio of workers to retirees dropped from 5 to 2 over this period. This is a much faster drop in the ratio than any country has ever experienced. People writing on economic issues for the NYT should know about productivity growth.
This piece also seems to have little understanding of the impact of population growth on living standards. People who have heard of global warming recognize that larger populations will make it more difficult to limit greenhouse gas emissions. Countries that have lower population growth, or even negative population growth, will find it easier to hit emission targets than countries with rapidly growing populations.
Lower population growth also contributes to well-being in ways that are often not accurately measured in national income data. For example, public transportation and recreational facilities are likely to be less crowded. We know that people are willing to pay more for less crowded planes, trains, buses, or beaches, however this quality improvement is not picked up in most price indexes.
Finally, it is striking that the piece relies on former Treasury Secretary and top Citigroup executive Robert Rubin as an authority on this issue. Mr. Rubin is best known for putting the U.S. on a high dollar path that led to the enormous trade deficit and the huge economic imbalances that eventually crashed the economy. He also pushed for the deregulation of the financial industry, which helped to facilitate the financial crisis. As a top executive of Citigroup he personally pocketed over $100 million dollars as the bank plunged into insolvency, eventually requiring multiple bailouts from taxpayers. This is not the sort of person who would usually be presented as an authority.
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