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 12th (it came out in 2015), 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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Tuesday, February 17, 2015

Aging Societies Aren't Necessarily Going to Hell in a Hand Basket

Thanks to Dr. Dobbins for pointing me to a George Friedman article in Stratfor today (and referenced, I see, fairly widely in demographic circles) about the idea that the aging of Europe is not necessarily a recipe for disaster. This is, of course, the theme of my note yesterday. While Friedman gets some of his smaller facts wrong (I'm guessing that he hasn't read my text!!), I agree with his overall assessment. 
But the real question is whether a declining population matters. Assume that there is a smooth downward curve of population, with it decreasing by 20 percent. If the downward curve in gross domestic product matched the downward curve in population, per capita GDP would be unchanged. By this simplest measure, the only way there would be a problem is if GDP fell more than population, or fell completely out of sync with the population, creating negative and positive bubbles. That would be destabilizing.
But there is no reason to think that GDP would fall along with population. The capital base of society, its productive plant as broadly understood, will not dissolve as population declines. Moreover, assume that population fell but GDP fell less — or even grew. Per capita GDP would rise and, by that measure, the population would be more prosperous than before.
This is an important set of distinctions. If you are concerned about human welfare, the idea that GDP per person may not drop even in the face of population decline is a very optimistic picture. If you are just an investor looking for return on your money, then anything except a growth in GDP may seem dangerous to your wealth. This was the point made yesterday in a Mauldin Economics blog, in which the point was made that increasing life expectancy at the older ages is very hard on pension funds that hadn't planned on people living that long, whereas it is good for life insurance companies who can continue to rake in premiums at a higher rate than they are paying out benefits. I mention this in Chapter 1 of the 12th edition and Mauldin notes that some pension funds are buying insurance companies as a hedge against their own liabilities. The economy is a complicated business.

1 comment:

  1. I think the challenge for the US population is that a declining GDP could very well happen ... as a result of global economic changes. This would be accompanied by an abrupt change in global currency alignments, if the US dollar stops being the "currency of choice" around the world. It is not a disaster if the change is allowed to happen naturally. But it is a potentially chaotic transition if the powers-that-be attempt to fight the change. Unfortunately, markets and governments are often dominated by short-term greed and not long-term wisdom. The USA is not going to fall off a cliff, by the wealth of the country might diminish if measured in real terms. This matches a "decline" in the apparent wealth of the average American. Which, practically speaking, mean that we will NOT be able to buy cheap goods at WalMart indefinitely. This should be obvious :-)

    The bigger problem for Americans is MUCH more fundamental. WHY - Ohhhh WHY - should a new generation of Americans foot the bill for Social Security? Stop and tell me why? The current generation of Baby Boomers - and I am one of them - has left this country with an ENORMOUS DEBT. It is a debt that the Baby Boomers have no intention of paying. Therefore, the debt will be passed to the next generation. But how on Earth can they pay off such a debt, and have good lives (economically), and also go through a transition where the USA is not the pre-eminent superpower? It simply does not add up. Therefore, the social situation is ripe for some sort of grass roots revolution - where the next generation refuses to pay for the costs of ailing Americans. And frankly, I cannpt blame them. The Baby Boomers have been the most selfish generation in US history - no other generation left the country with such a huge debt. It represents an abdication of responsibility.

    This would be a very interesting discussion for your students - maybe challenge them to write a research paper about this.

    Just my $0.02 :-)

    Pete, Redondo Beach