July 23, 2012
Given the failure of the economics profession to see the economic crisis coming or to devise an effective path forward, many people have come to question its competence and/or integrity. Somehow its assessments often seem to favor the rich.
For example, economists can be counted on to get really hot under the collar over a 20-30 percent tariff barrier that is designed to temporarily protect manufacturing workers, but don’t even notice that patent protection for prescription drugs raises their price by tens of thousands percent. Economists can’t even seem to remember that in a system of floating exchange rates, like the one we have, a decline in the value of the dollar is supposed to be the remedy for a trade deficit.
The NYT tells us that China’s economists are equally incompetent and/or corrupt. It tells us that they are worried that the Chinese are not having enough kids:
“Pressure to alter the policy [the one child policy] is building on other fronts as well, as economists say that China’s aging population and dwindling pool of young, cheap labor will be a significant factor in slowing the nation’s economic growth rate.”
Yes, that sounds like a real problem: “a dwindling pool of cheap labor.” Any economist who complains about this is working for the people who want to employ cheap labor, he/she does not give a damn about the economy.
Insofar as growth is a measure of anything, it is per capita growth that matters. Why would anyone be happier if the economy grew 20 percent, but population grew 50 percent? This is unambiguously bad for the country as a whole, even if there are some people who might benefit from being able to hire cheaper labor.
Economists who are not employed by rich people understand that “cheap labor” means that lots of people are working for little money. This should not be a goal of any honest economist.
The numbers presented later in the article show how utterly absurd the supposed demographic problem in China is. We are told:
“the number of Chinese older than 60 would be 411 million, up from 171 million today. The working population — people between the ages of 20 and 60 — would drop to 696 million from 817 million today. “
Okay, let’s turn to our friend Mr. Arithmetic. China’s productivity growth has been close to 10 percent a year, but let’s say it falls to 3 percent a year. This means that in 2040, an average worker will be producing 2.3 times as much as they do today. Let’s say that retirees consume 75 percent as much as the working age population.
With a current ratio of working age people (not workers) to people over age 60 (not retirees) of roughly 4 to 1, each worker is able to consume a bit more than 80 percent of their output, with the rest going to support retirees.
According to the numbers presented by the NYT, the ratio of the working age to the over 60 population will be just 1.7 to 1 in 2040. This would mean that the average worker would be able to consume a bit less than 60 percent of what they produce in 2040 in order to provide the huge number of retirees in China.
That sounds really dire, but Mr. Arithmetic reminds us that the average workers will be producing 2.3 times as much in 2040 as she does today. The portion of this output left over for our 2040 worker will be more than 60 percent higher than what workers today get by on. (They get 60 percent of their average output, which is 230 percent of average output today. That compares with current workers who get a bit more than 80 percent of average output.)
Of course this is a gross simplification; when we look at the issue more closely the demographic problem is likely to be considerably smaller than these numbers suggest. As wages rise, more working age people are likely to actually be working, this will increase the ratio of workers to working age people.
Similarly, as wages rise and the Chinese people become wealthier and healthier, more people are likely to choose to work into their sixties. This will both increase the number of workers in the population and decrease the number of retirees, meaning that the ratio of workers to retirees will not fall nearly as much as my calculation assumes.
Furthermore, the percentage of young people in the population is likely decline. This means that less income will have to be diverted to supporting young dependents. This will further increase the living standards of working age people.
Finally, I have assumed an unrealistic slowing of productivity growth. It is almost inconceivable that China would see the sort of plunge in productivity growth assumed in my calculation.
In short, in almost any conceivable scenario demographics will not prevent the Chinese from enjoying far higher living standards in 2040 than they do today. Economists who are worried about an insufficient supply of cheap labor are working for China’s rich, they are not expressing a real concern for the country as a whole.
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