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Home Publications Blogs Beat the Press It's Stupid to Talk About Demography When Countries Suffer from Inadequate Demand

It's Stupid to Talk About Demography When Countries Suffer from Inadequate Demand

Friday, 29 July 2011 05:17

The NYT told us "it's the demography stupid" as the explanation for the economic crisis afflicting the United States and the world. This piece is truly remarkable for its ability to confuse just about every basic economic fact relevant to the crisis.

The fundamental problem facing the U.S. and European economies is the lack of sufficient demand to fully employ their workers and their productive capacity. There are few economists who dispute that if there were more demand, there would be more employment and output.

The key feature of the "demography stupid" story is that the ratio of the elderly to the working population is too high. This means that workers do not have much left in wages for themselves after the taxes or capital earnings of the elderly are pulled out of the economy.

Of course this is 180 degrees at odd with the problem the U.S. and European economies face. If the elderly suddenly went on a huge buying binge it would create millions of jobs for younger workers. In the current economic situation the young would be better off if the elderly either had more money or there were more elderly spending money.

The article also seems oblivious to productivity growth which is by far the most important factor determining living standards. Increases in productivity, which have averaged more than 2.0 percent annually in the United States over the last 15 years, swamp the impact of changing demographics. This is the reason why the United States has been able to have substantial increases in living standards even as it has experienced a continual rise in the ratio of retirees to workers (although this has been partially offset by declines in the ratio of children to workers).

The failure to understand productivity growth also leads to the bizarre claim that China faces a problem because of its slow growing population. China has been experiencing productivity growth in excess of 7 percent annually. At this rate output per worker will nearly quadruple after 20 years.

With this pace of productivity growth, if workers were taxed to the extent necessary to provide retirees with incomes equal to 70 percent of the before-tax wage of the average worker, after-tax wages could still quintuple over 30 years even if the ratio of workers to retirees dropped from 5 to 2 over this period. This is a much faster drop in the ratio than any country has ever experienced. People writing on economic issues for the NYT should know about productivity growth.

This piece also seems to have little understanding of the impact of population growth on living standards. People who have heard of global warming recognize that larger populations will make it more difficult to limit greenhouse gas emissions. Countries that have lower population growth, or even negative population growth, will find it easier to hit emission targets than countries with rapidly growing populations.

Lower population growth also contributes to well-being in ways that are often not accurately measured in national income data. For example, public transportation and recreational facilities are likely to be less crowded. We know that people are willing to pay more for less crowded planes, trains, buses, or beaches, however this quality improvement is not picked up in most price indexes.

Finally, it is striking that the piece relies on former Treasury Secretary and top Citigroup executive Robert Rubin as an authority on this issue. Mr. Rubin is best known for putting the U.S. on a high dollar path that led to the enormous trade deficit and the huge economic imbalances that eventually crashed the economy. He also pushed for the deregulation of the financial industry, which helped to facilitate the financial crisis. As a top executive of Citigroup he personally pocketed over $100 million dollars as the bank plunged into insolvency, eventually requiring multiple bailouts from taxpayers. This is not the sort of person who would usually be presented as an authority.

Comments (4)Add Comment
Elderly Euthanize Themselves to Make Room for More Elderly
written by izzatzo, July 29, 2011 7:42
...workers do not have much left in wages for themselves after the taxes or capital earnings of the elderly are pulled out of the economy.

It's the only answer to preserve what one reaps when young one shall sow when old. Since the elderly are crowding out the young one must go and it can't be the young else productivity gains itself will vanish and do both in.

Even though one may produce enough for two now, two may consume more later than two consume now. We must have our productivity cake and eat it too lest there be no cake at all.

Stupid liberals.
written by Jay, July 29, 2011 8:58
Great. This writer wants to lower the wages of workers even more by increasing the number of people. Also, they want to raise the price of homes and rentals by increasing demand. It wants to burn up more of gasoline by putting more people on the road to cause congestion. It would be swell to have a situation like in Germany where young families cannot afford a house.

Not to mention, we allowed a large number of illegal immigrants to come over and have a baby boom of their own in addition to getting some entitlement benefits. Perhaps, while living in citizenship limbo for years, the immigrants that circumvented the immigration process due to its bias against the uneducated (or poor) can do something about the demography problem.

If our politicians made a decision about the state of these illegal immigrants then they could figure out whether they will become citizens or spend the rest of their life dodging ICE. Personally, I have mixed feelings about this. This is more competition for jobs we do not have, housing, transportation, education, and benefits we do not want to give in the first place. But then you have people that have raised children here that know no other home.

It's interesting that the Times ignored that whole globalization will solve all our problems theory that was in vogue not too long ago. In effect, this writer is providing what appears to be a supply side argument when it is clear as day that "it's all about demand, stupid."
Can we please be done with this competing narrative reporting?
written by Scott ffolliott, July 29, 2011 2:23
Re: New York Times evidence is The New York Times Narrative

Where is the scientific evidence to back up this claim?

Again we have narrative reporting that spreads the beliefs we would like to believe without the use of critical thinking.

Shall we then apply this logic to peaceful nuclear power, and yes again we can come to rash conclusions with no scientific substance.

Can we please be done with this competing narrative reporting?
What the press cares about
written by Floccina, July 29, 2011 2:53
It doesn't matter to the press how wrong an idea is, it only matters how interesting to readers/viewers.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.