This blog is intended to go along with Population: An Introduction to Concepts and Issues, by John R. Weeks, published by Cengage Learning. The latest edition is the 13th (it will be out in January 2020), but this blog is meant to complement any edition of the book by showing the way in which demographic issues are regularly in the news.

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Thursday, August 8, 2013

Demographic Headwinds and Tailwinds

My thanks to Peyton Dobbins for pointing me to an article about the relationship between age structure change and the economy written not by demographers but by people who are professional investment advisors. It is a well-researched and well-written article and it is fun when people "see the light" and want to share that with others who might benefit, in this case financially, from demographic insight. The paper is "Demographic Changes, Financial Markets, and the Economy" by Robert D. Arnott and Denis B. Chaves, both of whom work for Research Affiliates in Newport Beach, CA. The paper was published in the Financial Analysts Journal in 2012. Their point is one that is familiar to readers of my book--age structures with a disproportionate share of people of working age are good for economic growth (economies with a demographic tailwind), and age structures with lots of kids or lots of older people are not so good (economies with a headwind). They summarize the situation nicely:
Children are not immediately helpful to GDP. They do not contribute to it, nor do they help stock and bond market returns in any meaningful way; their parents are likely disinvesting to pay their support. Young adults are the driving force in GDP growth; they are the sources of innovation and entrepreneurial spirit. But they are not yet investing; they are overspending against their future human capital. Middle-aged adults are the engine for capital market returns; they are in their prime for income, savings, and investments. And senior citizens contribute to neither GDP growth nor stock and bond market returns; they disinvest to buy goods and services that they no longer produce.
To their credit, they don't offer investment advice on this simple age structure formula. The world is obviously more complex than this, but a country's age structure frames the kinds of policy and investment decisions that governments, private institutions, and private individuals are going to be making. 

1 comment:

  1. Very interesting, and thanks for posting this.

    I think one of the biggest temporal issues is that an aging nation (e.g. Japan, Germany) may accumulate a huge amount of foreign obligations (e.g. US treasuries) as its population saves for retirement all at once. These nations are implicitly tryiung to chain themselves to the future production of a nation that is younger (i.e. the United States).

    When the future arrives, as futures tend to do, these aging nations will likely flip from creditors to debtors as their elderly draw down 'their' savings (which as Arnot points out) is not reserved real assets but a claim on goods and services not yet produced.

    A nation such as the United States will be under enormous pressure to break those obligations by devaluing, sticking a nation such as Japan or Germany with a huge loss at a time when it is relatively elderly.

    Highly productive nations such as Japan and Germany delude themselves by accumulating financial assets rather than real assets.

    Accumulating real 'assets' for Japan or Germany would include raising a larger replacement generation of productive citizens.