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November 17, 2020 - January 16, 2021
Next, some of the sluggish growth of productivity per worker in the last few decades may be due to a combination of technology, shifting jobs from semi-skilled to unskilled,
and, perhaps, the growing participation of older workers.
Finally, an ageing population tends to consume services, such as care and medicine, where productivity increases are harder to obtain than in manufacturing,
Thus, our reasonably confident expectation is that output growth, ex India and Africa, will slow markedly over coming decades, perhaps to about 1% p.a. In this respect, Japan is the trailblazer. Japan’s growth has averaged 0.87% since 1999.
Overall the report aims to clarify whether our call for increased research expenditure in dementia is still relevant and how much so. And indeed it is: compared with the number of people developing dementia – one every 3 seconds – the amounts devoted to research are tiny. For a start there isn’t enough original research. The global ratio of publications on neurodegenerative disorders versus cancer is an astonishing 1:12. At the same time, not enough people are getting into research on dementia. While there are many reasons for this, it is not surprising, given that it has been 40 years since
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The changes in the recognition and the treatment of dementia are happening far too slowly to make a dent in the challenge that is increasing every day.
The basic problem is that ageing is going to require increasing amounts of labour to be redirected towards elderly care at exactly the time that the labour force starts shrinking.
Our view is that there will remain a chronic shortage of suitable candidates in the UK and probably in most other HIC.
The most feasible solution would, we think, be targeted immigration.
Besides the increase in life expectancy, and hence in the incidence of dementia, there has been another demographic shift, whose macroeconomic implications have also been insufficiently considered; this is the rise in the age of marriage and of the age when a woman has her first baby
Nowadays people will be most free of dependency caring in their 20s, when earnings are lower and the prospect of living until 90+ almost unimaginable. Not a good time for saving. Then from 30 onwards, in some cases continuously, until your own retirement, looking after your own children12 would be followed in short order by the need to help look after your parents.
Inflation is the outcome of several interacting forces. These include underlying structural trends, demography and globalisation, and the macro-economic balance between savings and investment, as well as purely monetary phenomena. Intuitively, the balance between workers, who normally produce more than they consume, and dependents (old and young), who do the opposite, matters. A more complex argument depends on how different sectors of the economy (households, corporates and the government) change their savings and investment behaviour in response to ageing.
The ineluctable conclusion is that tax rates on workers will have to rise markedly in order to generate transfers from workers to the elderly.
Workers, however, would not be helpless bystanders. Labour scarcity in AEs (and some EMEs) will put them in a stronger bargaining position, reversing decades of stagnation in AEs.
Central banks will, soon enough, have to revert to their normal behaviour. The zero lower bound (ZLB) is largely the consequence of a combination of a China effect, an unprecedented demographic backdrop and the deepest cyclical shocks since the Great Depression, once during the financial crisis and more recently during the pandemic.
The re-birth of inflation is our highest conviction view among the effects of demographics, and it is one that both financial markets and policy-makers are dismissing at their own peril. But what is the logic behind this deeply counter-conventional inference?
The renewal of upwards pressures on inflation stems from three interacting and interlocking viewpoints: An intuitive balance based on the dependency ratio; An exercise based on labour market demand and supply, otherwise known as the Phillips curve; and A consideration of the relative balance of savings and investment in the (non-financial) private sector, and the effects of this on the public sector, and its policies.
Almost by definition, an improvement in the overall participation rate is deflationary, as workers outstrip those who do not work. As the dependency ratio falls, the disinflation from more workers overwhelms the inflationary impact of dependents.
Normally inflation is treated as a monetary phenomenon. Given the expansionary monetary policies in recent decades, trying to explain current disinflationary pressures in this way would be a struggle.
Of course, there is also the return to capital, profits. But again, relatively more workers will tend to raise profits. As consumption out of profits is less than consumption out of wages, see, e.g. Kalecki (1954), an improvement in participation rates is deflationary.
Dependents (the young and the old) are purely consumers and hence generate an inflationary impulse, whereas workers can offset this inflationary impulse through production.
The decline in the NRU resulted from the progressively weaker bargaining power of labour, combined with a shift of jobs towards the unskilled, who are both less productive and paid less.
The combined effect of a cutback in globalisation, opposition to immigration, and the decline of new young entrants into the workforce, will lead to a shrinking of the labour force in demographically challenged countries. As this happens, the bargaining power of labour in such countries will rise again. The continuing downwards shifts both in the NRU and in the size and power of private sector trade unions will first stabilise and then start to reverse.
If the non-financial private sector (households and the corporate sector) starts to move back into deficit, then macroeconomic balance requires that the government sector switches towards surpluses. However, switching from a deficit to a surplus when age-related expenditures are going to skyrocket will be extremely painful, and we think not politically feasible. Inflation then becomes a way that macroeconomic balance is restored.
Ben Bernanke (2005) famously attributed the declining real rate of interest from the 1990s onwards to a ‘savings glut’. This was down to two drivers: first, baby boomers saving for their future retirement and, second, by the ageing, but increasingly prosperous workers in Asia (especially in China) saving for their old age due to an inadequate social safety net.
as the dependency ratio worsens (i.e. rises), the household savings rate falls
Many of those who argue that personal sector savings will remain high enough to keep real interest rates and aggregate demand low (the secular stagnation camp) do so on the assumption that (i) the age of retirement will rise relative to the expected age of death, and/or (ii) that state benefits to the old will fall relative to the average income of workers.
The sectoral surplus depends on the balance between investment and savings. Most personal sector investment is housing related. The demographic forecasts for most countries show total population still rising, comprising a falling share of under 65s and a rising proportion of over 65s. How will this affect personal sector housing investment?
Under-occupancy is identified as one of the key issues. Average household size has fallen from 2.48 in 1980 to 2.36 in 2018, largely because of the ageing population. If household size today were the same as in 1980, there would be 1.3m more dwellings available. If people lived in homes more suited to their needs, 50,000 fewer homes would need to be built each year. One of the main findings is that the number of people set to live alone will increase by 30 per cent by 2040 - a result primarily of population ageing…
Some assume that forward-looking households will consume less with an eye on their pension plans. Papetti (2019) argues that: [with] perfect foresight, the representative household realizes that the growth rate of the number of effective workers in support of the number of total consumers (the population size) is shrinking over time. Therefore, with the goal of smoothing consumption per capita into the future and depending on the pension scheme in place, the representative household anticipates this change with a willingness of consuming less and saving more, i.e. becoming more patient thus
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most male retirees in the six economies included in the study [USA, Netherlands, UK, Australia, Canada, Japan] can expect to live around a decade longer than their retirement funds can pay for.
Japan’s combination of longer lifespans and lower average savings – because they invest in safer assets, with fewer gains over time – is leaving retirees there particularly exposed.
Nor does the World Economic Forum see the personal savings deficit declining in future. Instead, they argue that, in the eight countries that they cover, the six above plus China and India, it will grow significantly in all of them between 2015 and 2030, by an amount ranging from 2% per annum in Japan to 7% in China and 10% p.a. in India
the conclusion is starkly clear that, at least currently, people do not save enough to smooth their consumption over their longer expected lifetime.
we expect the personal sector surplus to erode sharply over coming decades.
The share of corporate profits in national income over the years 2010–2017 has increased quite strongly in most countries,
During these same recent years, interest rates, both real and nominal, have declined sharply, and equity valuations have increased in a continuing bull market, except in Japan. Under these circumstances, one might have expected that fixed investment would have increased strongly. Instead, however, investment ratios in western economies have remained stagnant, although the investment ratio in China has remained elevated
The result is that the non-financial corporate sectors in several advanced western economies have been in surplus in recent decades. The main exception is China, where investment has continued apace, largely financed by higher debt
So, a key question is what has caused such investment ratios to be so low, despite the otherwise favourable circumstances that have seemed to have held during recent years? There are several competing explanations, none of which are mutually exclusive, and all of which may have played some role in this. There are, perhaps, four main candidates as explanations. These are: 1. Growing corporate concentration and monopolisation; 2. Technology; 3. Managerial incentives; 4. Cheap labour.
the continuation of very low interest rates has itself led to greater market concentration, reduced dynamism and slower productivity growth.
Insofar as technology is shifting the balance towards human capital and away from fixed investment, the ratio of expenditures on fixed capital to total revenues and output is likely to decline, possibly quite sharply.
focus by managers on maximising short-term equity values. This can be done most easily by buy-backs, i.e. using profits to increase leverage by substituting debt for equity; but short-term profitability can also be enhanced by cutting back on longer-term fixed investment and R&D.
all these potential explanations have merit, perhaps particularly the final two, that managerial incentives have been, from the point of view of society as a whole, misaligned, and that investment in most western economies has been held down by the shift of production to China and Eastern Europe.
the demographic sweet spot, leading to a massive increase in the workforce and fall in dependency ratios, is on the verge of reversing sharply, as has already happened in Japan. This will have the effect of raising real wages in most western economies, and that is likely to lead businessmen to invest more per unit of labour in order to raise productivity and to hold down unit labour costs. But insofar as the low investment ratio has been due to the short-termism of managers, owing to the incentive structure under which they operate, this particular cause of low fixed investment will continue.
In Chapter 12, we shall argue that a key, perhaps necessary, way out of the accumulation of excessive debt, notably by non-financial corporates, will be to shift managerial incentives, and to encourage equity finance in place of debt. In any case, we claim that growing labour market tightness will raise wages and unit labour costs. For such reasons, we think it quite likely, though far from certain that, in future, investment per worker will rise.
Whether this will be enough to offset the declining growth rate of workers, tending to reduce investment, is uncertain. So corporate investment may rise, or f...
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On the other hand, rising unit labour costs, and the increasing relative bargaining power of labour, will curtail profitability, compared with the glory decades of 1980–2020, when globalisation, demography and easy money delivered a capitalist heaven. Those days are swiftly passing by, and...
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In recent decades, the household/personal sector and the (non-financial) corporate sector have both been tending to move into sizeable surplus, for the reasons just explained. It is thus just a matter of arithmetic to show that, in order to maintain macro-economic equilibrium, the public sector had to move into a balancing deficit. For individual countries, however, such a deficit would be more, or less, dependent on whether they were running a current account deficit (i.e. the Rest of the World was also in surplus), or surplus. Countries with large current account surpluses, such as Germany,
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You might think that the requirement that the public sector has to run a deficit to maintain macro-economic balance would be celebrated as a ‘good thing’, a chance for more public expenditures and less taxation. But this has not been so. Historically, continuing deficits on the scale of the last two decades (see Diagram 5.10) have only been observed in wartime and have often required a combination of both persistent austere fiscal surpluses and (unexpected) inflation to tame. For peacetime, the scale and level of public sector deficits and debt has now become unparalleled after the GFC. What
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overall growth and total hours worked will slow down as ageing advances (which we can see because β3—which represents the coefficient on the aged profile of the population—is negative for growth and even more so for total hours worked); both the proportion of young and old are inflationary for the economy—this can be seen clearly by the coefficients for inflation of β1 and β3; and both the investment and the personal savings ratios fall thanks to demographics—as seen by a negative value for β3 for both investment and the personal savings ratios. These conclusions fit with our own thinking
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