Pol­icy needs to get on board with shift­ing global de­mo­graph­ics

The Globe and Mail Metro (Ontario Edition) - - Opinion -

LINDA NAZARETH Econ­o­mist, au­thor and se­nior fel­low for eco­nom­ics and pop­u­la­tion change at the Mac­don­ald-Lau­rier In­sti­tute. Her book, Work Is Not a Place: Reimag­in­ing Our Lives and Our Or­ga­ni­za­tions in the Post-Jobs Econ­omy, will be pub­lished in 2018.

Pol­icy is a pow­er­ful thing but its clout pales to that of de­mo­graph­ics. This month, the Bank of Eng­land raised rates for the first time in a decade, fol­low­ing moves from the U.S. Fed­eral Re­serve, the Bank of Canada and a clutch of other cen­tral banks. At the same time that cen­tral banks are send­ing in­ter­est rates higher, ag­ing pop­u­la­tions around the globe are cre­at­ing a glut of sav­ings that are in­flu­enc­ing rates to move lower. It is a tug of war with some in­ter­est­ing im­pli­ca­tions.

Cen­tral banks ar­guably con­trol short-term in­ter­est rates while hav­ing a lot less con­trol over longert­erm ones. It is a sup­ply-and-de­mand thing, as it al­ways is in eco­nom­ics: The higher the sup­ply of cap­i­tal (sav­ings) the lower the price of it (in­ter­est rates). You can com­pli­cate things and talk about how in­fla­tion comes into the mix, but it comes down to the fact that an ag­ing world is go­ing to have more sav­ings, which will drive rates lower.

You re­ally do not need fancy eco­nomic stud­ies to show you that younger pop­u­la­tions con­sume while older ones save. In­stead, just go to IKEA any week­end and you will see that those in their 20s and 30s load­ing up on Billy book­cases and cool throws for their Kivik so­fas. In con­trast, those a cou­ple of decades older are hold­ing garage sales to get rid of decades worth of junk ac­cu­mu­lated from IKEA and ev­ery­where else. They then squir­rel away their garage­sale money and any other they can get and put it into re­tire­ment sav­ings while wor­riedly us­ing on­line cal­cu­la­tors to fig­ure out whether it is go­ing to be enough.

We can put some num­bers to the whole thing. Ac­cord­ing to Statis­tics Canada, in 1987, the pro­por­tion of the pop­u­la­tion be­tween the ages of 25 and 44 was 33 per cent, com­pared with 19 per cent that were 45 to 64. As of 2017, those pro­por­tions were about equal at 27 per cent and 27.5 per cent, re­spec­tively. Look­ing at pro­jected pop­u­la­tion de­mo­graph­ics, 10 years from now the shares of pop­u­la­tion in the two groups will re­main roughly equal – a long way from what we had 30 years ago.

To be sure, even­tu­ally much of the pop­u­la­tion will get old enough to draw down on those sav­ings, but that seems to be a way off. Al­though we are see­ing huge growth in the num­ber of peo­ple older than 65, we are also see­ing in­creas­ing num­bers of them choos­ing to work longer rather than re­tire and live off sav­ings. As of Oc­to­ber, the num­ber of em­ployed peo­ple 65 and older in Canada had grown 8.7 per cent over the pre­vi­ous year, a rate more than twice as quick as their rate of pop­u­la­tion growth.

The de­mo­graphic push to­ward sav­ings is a global one, en­com­pass­ing coun­tries from the United States through Ja­pan. Most im­por­tantly, China is ag­ing rapidly, a con­se­quence of the one-child pol­icy in ex­is­tence from 1979 to 2015. As a re­sult, Chi­nese house­holds have been sav­ing fran­ti­cally against a day when they have nei­ther enough govern­ment sup­port or enough chil­dren to sup­port their re­tire­ments, and are flood­ing the world with cap­i­tal as a re­sult.

In a pa­per pub­lished in Septem­ber, the San Fran­cisco Fed­eral Re­serve be­came the lat­est to em­pha­size the de­mo­graphic rea­sons for lower rates, lament­ing that the trend could limit the power of cen­tral banks to use pol­icy to off­set fu­ture re­ces­sions. There are plenty of other im­pli­ca­tions as well. With low rates, savers are go­ing to be chal­lenged to take more risk to get de­cent re­turns. More risk is go­ing to be the or­der of the day in gen­eral, since low rates al­ways fuel spec­u­la­tion. In a speech this week, In­ter­na­tional Mon­e­tary Fund first deputy man­ag­ing di­rec­tor David Lip­ton noted that trend, in turn urg­ing that fi­nan­cial-sec­tor reg­u­la­tions be tight­ened as a way to mit­i­gate the worst of it.

In the best case, de­mo­graph­i­cal­ly­driven low in­ter­est rates fuel a boom in pru­dent risk-tak­ing, en­trepreneur­ship and in­no­va­tion. For those things to hap­pen though, we will need a whole new set of poli­cies, ones more so­phis­ti­cated than merely ad­just­ing in­ter­est rates up or down.

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