Internationale
Politik und Gesellschaft Online International Politics and Society 1/2002 |
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Our economic and social organization depends on continued economic expansion. The imminent demographic transition is likely to cause economic contraction, rendering the welfare state as we know it unsustainable. A radical overhaul, focusing on lifelong productivity as opposed to subsidized old-age leisure, is as urgent as it is unlikely to come forth. |
This
historic shift means that the problems of unemployment that dominated
social thinking in the twentieth century will soon give way to the
social crisis of labor shortages.
Policies devised after World War II to allocate too few jobs
among too many workers—generous unemployment, disability and retirement
benefits together with labor regulations that sacrifice efficiency
for stable employment—will be radically counterproductive in the new
era of tight labor markets. Reforming
these policies may become a task no less urgent than the upheaval
that led to their rise in the first place.
Between 2000 and 2010, several industrial nations, including Germany, Japan, Austria, Spain, Italy, Sweden, and Greece, will for the first time in modern memory experience a contraction of their working populations. The century’s second decade will see the EU and Japan enter a period of population decline lasting into the indefinite future. According to the U.S. Census Bureau, by 2030 the EU can expect to have 14 percent fewer workers and 7 percent fewer consumers than it does today. In Japan, over the same period, the number of workers and consumers are poised to decline by 18 percent and 8 percent respectively.
Ageing Recessions
(Problems of unemployment
that dominated social thinking in the twentieth century will soon
give way to the social crisis of labor shortages)
The casual
observer can be forgiven for regarding such trends with something
less than alarm. After all,
the general thrust of labor and social policy over the past two centuries
has been to artificially tighten labor markets.
In the future, naturally tightening labor markets may mean
that unemployment will no longer be a problem; young people will find
it easier to establish themselves in homes and jobs; and there will
be fewer strains on the environment. Even the roots of poverty will be more easily
eradicated in a world where every worker is needed and valued. Why should this be a cause for worry?
The answer
lies in the interaction between population change and the economy,
on the one hand, and the economy and the tax base, on the other. Like it or not, our current economic and social organization depends
on continued economic expansion.
Without it, both government and private sector finances will
become significantly more precarious.
The most rapidly depopulating nations face the prospect of
lengthy „ageing recessions” characterized by a vicious cycle of falling
demand, collapsing asset values, shrinking corporate profits, deteriorating
household and financial institution balance sheets, weakening currencies,
and soaring budget pressures.
These
stresses are sure to be transmitted to other countries through the
global markets. Indeed, the fact that so many of the rich countries
will experience them simultaneously suggests that the whole could
be larger than the sum of the parts.
Much as unconnected financial problems in Thailand, Korea,
Indonesia, Russia, Brazil and other developing countries combined
overnight to create the global financial crisis of the late-1990s,
so too could the disparate pension and economic crises of the major
industrial nations converge to create a global depression from which
none of our welfare states will emerge intact.
For policy
makers seeking to avoid such an outcome, understanding the linkages
between the economy and population growth is an essential first step:
Labor markets and growth
One likely effect of the decline
in working populations will be a slower economic growth rate. A nation’s gross domestic product (GDP) is merely a multiple of
its working population times its average income. All things being equal, a decline in the number of workers translates
into a decline in output. Over
the past three decades, population growth in the industrial economies
has accounted for between one-half and two thirds of the rise in GDP.
The remainder has come from increases in “total factor productivity,”
reflecting gains in labor and capital efficiency.
The Organization for Economic Cooperation and Development (OECD)
has estimated that labor force declines will subtract 0.4 percent
a year from potential economic growth in the EU between 2000 and 2025,
and 0.9 percent a year thereafter. In Japan, worker shortages will subtract 0.7
percent a year between 2000 and 2025, and 0.9 percent a year thereafter. The U.S., Canada, and Australia will see their
labor supplies expand during this period. However, slowing labor force growth will cause their economies to
grow more slowly as well.
Significantly,
within the EU, the effects are likely to be highly uneven, with some
countries much more vulnerable to ageing recessions than others. Italy and Germany could see their working age
populations plunge by 47 percent and 43 percent respectively by 2050. In contrast, France and the United Kingdom
can expect less drastic declines of 26 percent and 15 percent.
Population and aggregate demand
The decline in national populations
after 2010 will add to these problems by adversely affecting consumer
demand, asset values, corporate profits, and balance sheets.
In mature markets such as autos and home appliances, sales
are likely to shrink year after year for as far as the eye can see. Meanwhile, start-up companies will face greater risks in markets
where population trends no longer enable new and existing enterprises
to flourish in tandem. The
prospect of overcapacity and stiff competition means that economy-wide
profits and returns on investment will suffer.
In an open global economy, the result will be capital outflows
and weak currencies. One reason for the euro’s steady decline against
the dollar in 2001, despite the EU’s stronger growth rate, may be
that European firms are repositioning their assets in the U.S. in
anticipation of better long-range growth.
America’s population is projected to be 46 percent larger by
mid-century.
Home-buyers and housing wealth
Trillions of euros in property valuations
could disappear over the next two decades.
Because depopulation is characterized in its early stages by
the shrinking of the youngest age groups, demand for products and
services consumed by the young is the first to decline.
In Germany, for instance, the cohort born during 1995-1999
is only 47 percent as large as the cohort born during 1970-1974. To date, shrinking numbers of children mainly have been a boon to
household and governmental finances by reducing dependency costs. But soon, these declines will work their way
into the household forming populations.
Over the next 20 years, the EU will experience a 20 percent
falloff in its 25-44 age group; Japan, an 18 percent decline. Spain and Italy, with declines of 36 percent and 30 percent respectively,
are sure to see a steep contraction of housing demand—which, in turn,
can be expected to undermine real estate values and create both reverse
wealth effects at the household level and balance sheet weakness among
financial institutions that hold mortgage-backed assets.
Collapsing
real estate prices were instrumental in triggering Japan’s ongoing
financial crisis, as well as the savings and loan meltdown that rocked
U.S. financial markets in the late-1980s.
Significantly, in fast-aging countries like Germany and Japan,
construction sector bankruptcies already are on the rise. Like the proverbial canary in the mineshaft,
builders are hypersensitive to population decline.
Tax increases and recession
While countries facing depopulation
will need to dramatically boost their tax take in the coming years,
they will face grave risks in the process.
As growth rates slow, tax increases may prove counterproductive. In Japan, an abortive 1996 consumption tax
hike is widely blamed for pushing the economy back into its current
slump. As the economy has swooned, tax revenues have
disappointed, leaving the government with a fiscal 2001 budget deficit
approaching 10 percent of GDP—and a national debt headed for 140 percent
of GDP. Yet by 2010 Japan
must boost its tax revenues by an estimated 15 of GDP to cover rising
old-age benefit costs. If
it fails to do so, the markets will come to regard Japan as a default
risk, and impose risk-premiums that could boost its debt service costs
by several percent of GDP. This, in turn, would necessitate large spending
cuts. If Japan cannot find
a way out of this debt trap, its living standards may fall well below
current levels, and stay there for generations.
The EU’s more
rapidly depopulating welfare states could face a similar problem. Several must raise significant revenues in
the near term. With median
retirement ages in the late-fifties, European baby boomers will begin
drawing pensions in large numbers by 2005.
However, as in Japan, tax hikes may not be a viable option.
Italy, Germany, and France have reduced taxes in recent years
as part of a program to stimulate growth.
Reversing course could have precisely the wrong effect at the
worst possible time. European
nations must soon confront the paradox that efforts to boost tax rates
could yield less, not more, revenues.
Productivity and economic
growth
(Our current economic and social
organization depends on continued economic expansion.)
Countries with shrinking labor supplies
will need to achieve sustained productivity growth if they are to
avoid long, potentially destabilizing ageing recessions.
After 2025, annual productivity growth in the EU-15 and Japan
will need to average 1 percent or better in order to prevent recession. In countries like Italy, Spain, and Germany,
efficiency gains will need to be even more robust. At first glance, this hardly seems problematic: productivity growth
in recent decades has averaged 1.4 percent a year. Yet, there is a strong connection between productivity
and economic growth. Firms
typically refrain from making productivity enhancing investments in
recession-like conditions, where overcapacity, excess inventory, and
asset deflation combine to reduce returns on investment.
Instead, capital will tend to move abroad in search of higher
returns. Managers will especially seek out markets where
the tax climate and labor supply present the fewest uncertainties. This suggests that productivity growth could
be a major challenge in the EU and Japan.
Finally,
there is the question of whether ageing workforces will prove capable
of embracing new forms of organization and work.
Increasingly, boosting productivity requires the adoption of
new technology and a shift toward the “knowledge economy.” Yet older workers are thought to be less creative
and adaptable than their younger counterparts, and frequently lack
the skills needed in high-tech occupations.
Fiscal crises and investment
The social institutions most likely
to experience strain from the twin trends of ageing and depopulation
are the pension and health systems that comprise the crown jewels
of the postwar welfare state. These
are by far the largest source of public expenditure in the industrial
countries. And they are the programs most likely to be
affected by the coming explosion in old-age dependency. Even if growth in the industrial nations remains
at, or near its potential, most governments can look forward to constantly
rising fiscal pressures, as ever-smaller workforces are called upon
to support ever-larger dependent populations.
Popular resistance to tax increases and concerns about preserving
economic growth may lead governments to neglect future oriented investments
in the infrastructure, education and training—a course that could
weaken long-term growth. Or
they could lead to large budget deficits that could divert scarce
future savings to rising debt service costs.
Retirement and saving
As Japan has discovered, when a
large share of the population is in its retirement-planning years
(34 percent are aged 40-64 versus 27 percent in the U.S.) savings
rates can rise to levels that depress consumption and economic growth.
In a phenomenon known as “Ricardian equivalence,” budget deficits
have fueled a rising concern about Japan’s economic future, causing
its ageing workforce to respond through precautionary saving. Under these conditions, traditional monetary and fiscal responses—cutting
interest rates and running deficits—will merely trigger a stronger
savings response.
However,
in most countries, the retirement of the baby boomers is likely to
have the opposite effect. One
OECD analysis found that savings rates in the industrial world could
fall by as much as eight percent of GDP by the late-2020s.
How this occurs will depend on each nation’s fiscal and pension
policies. In countries like the United Kingdom, where
retirees depend heavily on personal savings to finance their old age,
ageing populations will be spending down their life savings faster
than smaller younger generations can replace them.
In countries like Germany, where intergenerational transfer
payments cover the bulk of retirement costs, a combination of large
deficits and tax hikes on youth could also depress national savings. While Germany could always cut benefits, that would just force retirees
to draw down their savings at a faster rate. Either way, except where Ricardian equivalence comes into play,
rising numbers of baby boomer retirees will tend to depress national
savings rates.
Global shocks and benefit
sustainability
Aging and depopulation will make the industrial world more vulnerable to global economic shocks in the future. The oil shocks of the 1970s produced a deep global recession in which public debt levels in the major industrial countries more than doubled. In the less severe global slump that followed the Persian Gulf crisis of 1990, combined public debt in the EU and Japan rose by more than half. Today debt levels in Japan and several major EU countries are so high that they could not double again without triggering severe reactions in the markets. With dependency costs set to rise rapidly, and growth already at risk, the industrial countries will be poorly positioned to weather the next global downturn—whether caused by wars, energy crises, or fallout from the kind of financial crisis that may very well be on Japan’s horizon. As the former communist countries discovered in the early 1990s, at some point, the ability of the state to bear risks collapses. And when that happens, it is the vulnerable populations who suffer the most.
Challenges to the Welfare State
(Involuntary unemployment
will no longer be a source of impoverishment and instability.)
Whatever its humanitarian intent,
the modern welfare state was, at heart, a pragmatic response to the
social upheaval caused by the large-scale unemployment of the early-twentieth
century. In order to create
prosperity, capitalism required stability. Significantly, the coming era of labor shortages means that involuntary
unemployment will no longer be a source of impoverishment and instability.
This development threatens to deprive the welfare state of
its pragmatism. In its current form, social policy will serve less and less the
interests of society, and more and more those of individual beneficiaries. To create prosperity in the future, capitalism
will need workers. A pragmatic
response—one that recognizes that state guarantees cannot be maintained
in absence of prosperity—will require a fundamental reordering of
the welfare state itself.
Following
World War II, all of the industrial democracies set out to buy social
peace through income transfer programs designed to ameliorate the
unemployment problem. The ideological turmoil of the 1930s underscored
the dangers that democracies courted by permitting unemployment to
impoverish large numbers of young men.
In the election of 1932, a majority of Germans voted for candidates
(fascist and communist) who promised to end democratic rule. By 1946, it was clear that resisting the Soviet
ideological and military threat would require solidarity not only
among the democracies, but within them as well.
Many analysts trace modern social welfare policies to Bismarck’s
National social reforms of the 1880s.
But the full flowering of the welfare state would have to await
the Cold War.
It was against this backdrop that
retirement came to be a mainstay of the welfare state.
Pensions would allow the old to gracefully make way for the
young, and at the same time to feel invested in the social order that
protected private property. As
the baby boomers swelled the ranks of the jobless in the 1970s, these
systems were expanded through generous unemployment and disability
provisions. Unemployed Germans
are eligible for a pension at age 60, while, “elderly” workers can
receive three years of unemployment benefits—making 56 a popular age
of workforce exit.
Today, throughout the industrial world, retirement has become a lengthy period of state-supported leisure for surging retired populations, a high percentage of whom, thanks to modern medicine and less-disabling forms of work, are able-bodied well into their seventies. Up until now, this has been a tolerable form of excess only because there were enough young willing to bear the increasing economic burden. Social security taxes now top 42 percent of payroll in Germany, followed closely by those of France, Italy, and the rest of continental Europe, versus 15 percent in the U.S. But in the future the supply of youth will dwindle. In the face of this demographic upheaval, the question is not whether reform will come, but whether it will be enough to prevent the problems now plaguing Japan—currently, the world’s oldest population—from spreading to Europe and the global economy.
(Surmounting the twin crises of ageing and depopulation will require the advanced industrial societies to be more tolerant to immigrants, more willing to “export” low-paying jobs and more committed to the ideals of lifelong productivity.)
One problem is that political time
horizons extend only until the next election.
To be sure, politicians in Germany, Italy, the U.S., Japan
and elsewhere have broached the issue of pension reform.
But their accomplishments to date have been modest and electorates
have not encouraged a healthy debate about revising benefit schemes.
Neither has leadership been forthcoming from the private sector. One need only review the casualty list of chief
executive officers (CEOs) who failed to meet their latest quarterly
earnings targets to see why. A
recent international survey found that half of major company CEOs
had held their job for less than three years.
Most business leaders are too busy coping with today’s problems
to contemplate tomorrow’s.
Finally, there is the sheer weight of intellectual inertia. Comfortable ways of viewing the world seldom change overnight. Thus, in the conventional wisdom, immigration and free trade steal jobs from the native born; those of pension age are “elderly” and therefore physiologically unfit; job-creation is the surest measure of economic progress; workweeks must be shortened, restrictions on corporate downsizing strengthened, and low-value-added work like farming and textile manufacturing subsidized in order to prevent unemployment. And so-on. Little wonder that the notoriously fickle journalistic community hasn’t picked up on the coming crisis.
Whether these policies can be put in place in time to reshape the life plans of baby boomers is another matter. They probably cannot, at least in the absence of crisis. And this means that the early twenty-first century could turn out to be every bit as tumultuous as the first half of the century just ended.