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October 29, 2006
Looming Disasters? Sunday Morning Edition
In the last few days I have run into two articles worth noting: the first is about the oddest sort of tour while the second is about the peskiest sort of number to pin down.
I have a number of reactions to the points raised in either article. The part of me that is instinctive is just a tad skeptical: the track record of the doomsayers has, for at least as long as I've been following such matters, not been very good. They have nearly always failed to anticipate some compensatory mechanism that has significantly undermined their forecasts.
If there is a common theme to these articles, it is perhaps that demography is destiny: above all what is putting us in the hole in both cases (federal finances and potential growth rates) is the looming retirement of the Baby Boom generation.
This is a big deal. No question about that. Even if labor force participation rates among those age 60+ rise, and rise substantially, we are still on balance likely to see a historic source of output growth (eg growth in the labor force) largely, if not wholly, choked off. Without doubt, this will create incentives that may increase productivity growth, at least to a degree beyond what it might have been. But it is hard to believe that this will be achieved easily (if so, why aren't profit maximizing firms already doing it?); it seems unlikely that this can fully compensate. Moreover, the growth area of our population will for some time be a group of people who disproportionately burden entitlement programs (which seems to be Mr. Walker's main point). This will have all kinds of implications, including for real interest rates.
So in some sense these are sort of "demography is destiny" arguments, and in the short run there is no question that we face something of a crunch here in these United States. The graph below is pilfered from a presentation I prepared this summer. The red curve is the US, while the green one is Europe (the source for these figures is the World Population Prospects database with the "medium" fertility assumption). There is no question about it: the US is indeed facing something of a crunch, at least in the short run. Thereafter, the aging of the US population will level off, at least a bit. (The good news is that the total working age population in the US will continue to grow in the longer term. Europe, however, really is screwed.*)
What is curious to me is that, in parallel with the literature depicting the US in decline, there is a real industry out there predicting a new hyperpower: China. It seems to me that this "China crowd" is missing a gigantic long term cloud around China's silver lining. (Hint: guess which country is represented by the blue curve?). I have a strange sort of feeling that in a decade or two the hyperpowers-to-be du jour for this crowd (a broad if unconcious coalition of Beltway Bandits and Academic Hacks Wonkish types) will be India and Brazil.
Which brings me to a final cultural point. Ordinary Americans tend instinctively to follow a big myth: of an ultimate American invincibility coupled with a sense of the vulnerabilities or shortcomings of our foreign competitors (economic, military, etc.). The Beltway Bandits and Academic Hacks Wonkish types tend to rightly call their countrymen on this baseless Eternal Sunshine of the Spotless Mind (let's face it, our little rendition of Rome was not built by people who thought like Joe Sixpack, even if his ancestors did supply the cannon fodder).
Interestingly, however, these Beltway Bandits and Academic Hacks Wonkish types have a kind of persistent blindness of their own: while they are very good at predicting our vulnerabilities (again, with all of the accuracy of our local weatherman's five day forecast), they almost never see the vulnerabilities of our economic and geo-political competitors. Remember that this is the crowd that spent the entire 1980s predicting our imminent economic demise, all the while declaring the inevitability of Japan's economic ascent. They completely misinterpreted the structural changes overtaking the American economy of the age and never saw the growing cracks in Japan.
Of course, this post does not exactly represent rigorous thinking on my part either, but I have an excuse: it is very early on a Sunday morning, I have had only four cups of coffee and I am left dumbfounded by the superb rendition of Tosca I have just witnessed.
Perhaps now would be the appropriate time to give up this rant and feed my addiction.
*One potential exception to this is, believe it or not, is France, which has come some way in raising her total fertility rate. Don't count the French out just yet: cheese-eating surrender monkeys or not, they alone among the continentals just might hang around as an economic and geopolitical contender.
Posted by dag at October 29, 2006 8:42 AM