Monday, April 23, 2012

Europe Going Gray: Why Stimulus will Likely Fail

When Paul Krugman and other progressives talk about the risks of austerity in Europe, they are forgetting a basic fact: Europe and Japan are getting grayer and grayer. There are more retirees than young people, and that means lower and lower rates of productivity.

I often cite two authors willing to confront this truth: Megan McArdle and Robert Samuelson. In the April 2012 issue of The Atlantic, McArdle bluntly assesses the issue of a graying population in the Western nations. It is a problem the United States will soon experience, too.

First, a few paragraphs from the lengthy McArdle piece. You absolutely should read the entire article. (If you don't read The Atlantic, you should.)


Europe's Real Crisis
The Continent's problems are as much demographic as financial. They won't go away soon.
By MEGAN MACROCELL 
http://www.theatlantic.com/magazine/archive/2012/04/europe-8217-s-real-crisis/8915/ 
Italy's fertility rate has actually been inching up from its 1995 low of 1.19 children for every woman, but it is still only about 1.4—well below the number needed to replenish its population (2.1). As a result, even with some immigration, Italy's population growth has been very slow. It will soon stall, and eventually go into reverse. And then, one by one, the rest of Europe's nations will follow. Not one country on the Continent has a fertility rate high enough to replace its current population. Heavy debt and a shrinking population are a very bad combination. 
SINCE THE INVENTION of birth control and antibiotics, country after country has gone through a fairly standard shift. First, the mortality rate drops, especially among the young and the aging, and that quickly translates into a bigger workforce. Then, birthrates drop, as families realize that they no longer need to birth a basketball team to ensure that a couple members will survive to adulthood. A falling birthrate means that parents can invest more in each child; with fewer mouths to feed, more and better food can nourish each of them, and children can spend more years in school, causing worker productivity to rise from one generation to the next. As the burden of bearing and rearing children lightens, mothers can do more work outside the home, boosting both household resources and the national economy. 
In 1984, when Ronald Reagan spoke of "morning in America," he was at least demographically accurate. The youngest members of America's vast Baby Boom were in college; the oldest were on the brink of their peak earning power. America was about to reap what the economists David Bloom and David Canning have dubbed the "demographic dividend" of rising labor supply and productivity. Bloom and Canning's analysis of East Asia and Ireland attributes a substantial fraction of the recent economic booms in those places to this dividend. 
But the dividend does not last forever. Eventually, the baby bulge reaches retirement age, the labor force stops growing, and older workers start spending their savings, depleting the nation's supply of capital. The virtuous cycle turns vicious. This is what is happening right now in much of southern Europe.

Krugman and company look back to the 1940s and 50s and attribute all sorts of explanations to American prosperity. They credit employee unions, the G.I. bill, expanding social programs, and dozens of other factors, but there are some simple truths:

  • Two World Wars left Europe and other U.S. competitors hobbled for several decades. "Winning" economically doesn't mean much if you're the only real competitor in the ring. 
  • America was "young" and energetic, while Europe was already "aging" after the two wars. Baby Boomers propelled our growth as much as any other factor: youth defeats age, at least in economics.
  • "Conservative" economic policies, namely creating and saving a surplus, might have helped prepare for the aging future… but it could be too late.

I've argued that our national debt, contrary to Krugman's assertions, does matter. Why? Because we are a graying nation that must save now for an impending tidal wave of retirees and the associated expenses of an elderly population. Once we have more citizens over 60 than under 21, the fiscal tipping point is near.

Why won't stimulus work? Because that money is already promised to our aging citizens. Debt is only manageable if you believe growth is inevitable, but growth is less and less likely. Productivity gains are slowing: technology can only replace so many people and older workers are, somewhat naturally, less likely to contribute to productivity gains.

In theory, some debt and investment is reasonable. But, that assumes future growth of 3 to 6 percent. The United States, like Europe, would need dramatic growth that seems unlikely as our citizens age. Some economists even suggest we need 7 percent growth. I cannot imagine sustained economic expansion over 4 percent in the next decade.

Growth requires more workers, more youth. Other than immigration, nothing is going to spur the dramatic growth that would support deficit spending.

Allow me to offer the following metaphor:

When you are twenty, going into debt for a college degree is an investment. A 30-something entrepreneur is comfortable risking money on a new business idea. Even at 40, some debt for a new house or car might be reasonable. But what about at the age of 60 or 70? Debt doesn't make sense. You worry about living expenses and basic needs. Risk? That's not logical.

Well, the United States is approaching middle-age. The above metaphor is how nations evolve, much like individuals. When you have a young, energetic population, investing in the future makes sense, even if there are risks involved. In sunset years? Risk is to be avoided.

America's relative youth was a benefit in the 40s and 50s. Today, our graying is a liability. No matter how much we raise the retirement age or adjust benefits, there is a point at which most humans are not productive workers.

Our older citizens aren't going to let us cut the social safety net that was promised to them. Yet, with fewer young workers, who will pay these expenses? That's a serious question and one that will directly affect national growth. It is time to be honest and admit there is a structural problem in our economy that no amount of stimulus will solve.

A baby boom might help, though.

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