Aging to the rescue
It seems aging may help. Not with deeper wisdom, longer perspective and greater imperturbability to offset creaking joints, failing hearing and ebbing stamina. Rather, aging may help on the world economic scene, according to a paper released recently by the Bank f or International Settlements.
Written by Charles Goodhart, professor emeritus at the London School of Economics, and Manoj Pradhan of Talking Heads Macro ( yes, that’s right), it argues that three big trends of the last three decades — declining real interest rates, stagnant real wages in rich countries, and both rising inequality within countries and falling inequality between them ( OK, that’s four trends) — are all mainly due to a demographic change that is already reversing itself.
That change was the advent of the biggest generation ever, and by far, of working-age people. It wasn’t just the baby boom. That was big in many parts of the rich world. But the real shock was the coming on- line of China and Eastern Europe.
“Everything about China is enormous,” Goodhart and Pradhan write. In 1990, the working- age population of China and Eastern Europe together was 820 million. In the industrialized countries it was just 685 million. The effect of integrating historically communist countries into the western world was therefore “a one- time increase of 120 per cent in the workforce available for global production.”
The effect on labour markets and inequality should not have been surprising: such a massive increase in the supply of labour, even if not yet always as skilled as western labour, was bound to slow and maybe even halt the growth of wages. That contributed to the apparent paradox of not only rising inequality within most countries — including the former communist countries, as capitalists and kleptocrats alike rocketed up the income scale — but also declining inequality between countries, as economies Marxism had hobbled for decades finally experienced rapid income growth.
The final effect of this great unleashing of labour power was the big increase in world savings that has brought two decades now of declining real interest rates. China’s social safety net is minimal, so workers have had to save aggressively for retirement, while its private safety net — family support — was removed by its onechild policy. On top of that, Chinese firms built up big re- serves that China’s primitive capital markets had trouble reallocating internally.
Rates depend on demand as well as supply, of course, and the demand for savings for the purpose of making profitable real investments in ideas and things didn’t dry up in the 1990s and 2000s — although it took a hit in 2008 — but all that Goodhart and Pradhan need for their story to work is for new savings to have outpaced investment, and that seems at least plausible.
But it’s all about to change if it hasn’t started changing already. The China Shock is over. China is now a permanent fixture in the world economy. It will not again be introducing several- hundred- million worker/savers to that economy again. And the demographic trend in China, as in many places, is that old folks, who typically save less, are a rapidly rising share of the population. ( Where the demographics do still make workers dominant, as in Africa, lousy institutions reduce the prospects for a rapid, large- scale integration with the world economy as happened in China after 1979.)
Will world i nvestment now outpace world saving, so that real interest rates really do start rising? No one knows, obviously. But Goodhart and Pradhan work through the possibilities and build a case that, with the 2008 episode now truly behind them, firms facing both new technological opportunities and, because of the growing world shortage of labour, rising real wage costs, probably will keep up the investment pace. With slower growth of saving that’s all that’s needed for interest rates to rise.
Rising real rates will be good for people who own capital, so many rich people ( Justin Trudeau will be disappointed to learn) will still do fine. But a relative shortage of labour in the world will be good for workers and should result in declining inequality (and certainly declining poverty). And just as we get our policies all to focus on what our governments seem to be assuming will be permanently rising inequality.
Will t hose of us with creaking joints, failing hearing and ebbing stamina survive to see all this happen? Perhaps not. Will things work out the way Goodhart and Pradhan predict? Same answer. But they realize that. Their concluding line is: “We don’t know what the future will look like precisely. It will not, however, be anything like the past, of that we are sure.” Although, with the rise of throwback socialists like Jeremy Corbyn and Bernie Sanders, perhaps it’s best not to be sure even of that.
LOW INTEREST RATES, STAGNANT WAGES AND RISING INEQUALITY MAY HAVE BEEN DUE TO AN EFFECT ALREADY REVERSING ITSELF.