Sunday, December 03, 2023
Rich world demographics and macroeconomics
My generation, the boomers, is named after our numbers. The "baby boom" after World War II until the mid-60s, when the contraceptive pill was invented, created an unusually large generation in most rich countries. And most of my generation, me included, have now retired, with relatively few of us being left in the workforce. Now, if you read articles or watch videos about macroeconomics, you will have heard that this is causing a lot of concern among economists. They talk about "old age dependency ratios", with fewer and fewer working people supporting more and more retirees. And thus they project an economic decline of the first world countries, among gloom and doom. To me that proves two things: Classical economic indicators like GDP are horribly bad at describing the economic situation, and textbook economics are frequently very much detached from the real world. My prediction would be that actually things are looking up.
Just compare the anecdotal evidence you have yourself: Among the people you know or have heard of, are there are lot of cases of elderly people moving in with their kids, because they can't afford housing anymore? I don't know a lot of those cases, but I see and hear many cases of the opposite: People in their 30s still living with their parents, or people in their 30s only able to buy a house with finance from "the bank of mum and dad". The economic error is to consider only production, which is going down when fewer workers are available, instead of wealth. Yes, of course, there will be some flow of wealth from the younger generation paying pensions to the elderly. But a much larger flow of wealth with be in the other direction, with the younger generation receiving huge amounts of money either as gifts from their parents or inheriting it. We know that, because we know who is currently holding most of the wealth, very often in the form of houses, and it is the boomer generation. Of course wealth is even less well distributed than income, and if you are a member of the younger generation and your parents don't own a house you are out of luck; but in aggregate we are looking at the upcoming biggest wealth transfer in history from old to young.
But inheritances aren't the only good news for younger people. It is macroeconomically obvious that our economies will pivot: Up to recently, economic growth was mostly demand-limited. There was plenty of supply of everything, and it was people's spending that limited GDP. In the future, more and more, economic growth will be supply-limited: Fewer people working will produce fewer goods and services than there is demand for. The good news part of that is that in an economy which is supply-limited, the value of an hour of work is going up relatively to the value of capital. We are already seeing the first examples of companies having to pay employees more money, because of a shortage of talent. Note that even in an economy with falling GDP, if a larger part of the money is going to the working classes, the economy will feel better for the average person.
The macroeconomic situation after World War II also was supply-limited, with many countries still having food rationing for years after the war ended. A limited supply of goods and a shortage of labor led to one of the biggest economic booms in history, which was especially exceptional in that the newly created wealth was much better distributed. Life was good for the average person, which then led to people having all those babies. While of course the process won't be painless, I do think that it is very possible that another such boom is ahead. Economies do operate in large cycles. A shortage of labor might just be what is necessary to right things.