« Harvard Business Review Back Issues Now Available Electronically   |   Main   |   Encryption for the masses »

Population, trade, and growth

Jeremy Siegel, a professor of finance at Wharton, writes in The Wall Street Journal to acknowledge the worries about trade deficits and job outflows, but entreats:

But look at the big picture. The trade deficit is a consequence of larger demographic and economic forces at work in the world. The rapid aging of the developed countries combined with the striking economic growth in China and India are the major cause of these trade flows. Europe and Japan will eventually run trade deficits, too, and the result will not be as dire as many think.

The most critical problem facing the U.S. — and all developed countries — is the aging of the population, which impacts not only our trade balance but also the viability of Social Security and Medicare. Aging will also influence the value of all our assets, including stocks, bonds and real estate.

This is important from a capital markets perspective because of the numerous retirement-triggered security sales that are in some cases mandated by law, and in others merely promoted as portfolio rebalancing to serve greater needs for liquidity and shorter time horizon. Those securities will need takers from somewhere, otherwise we risk a large fall in value as supply far exceeds demand.
Prof. Siegel continues:

A self-sufficient economy needs enough workers to produce goods that will be consumed not only by the workers and their families, but also by all the elderly. Historically this has never been a problem, since the young have always greatly outnumbered the old. But the demographic picture is now different. In 1950 there were seven workers per retiree in the U.S., a number now down to five. Starting in 2010, when baby boomers begin to retire, this ratio will plummet. By 2030, it will fall below three.

This demands a huge increase in productivity, as more work will need to be performed by fewer bodies. And that’s precisely where the rest of the world fits in.
But right now, it’s our very productivity that’s causing short-term equilibration problems.
In the last few years, we’ve wrung huge productivity gains out of the economy and it’s precisely because of this fact that our ‘jobless recovery’ has hurt so much. All of the promising technology evolved in the last 10 years - from better run networks, to less buggy software, to horizontal productivity applications like sales force automation, supply chain management, and customer relationship management - has resulted in more efficient operations. Perhaps not as much as touted in the glossy brochures, but these tools have enabled people to do more with less. And that has definitely enabled organizations to merge once-discrete job functions into compounded positions. Layer on top of that the value destruction from the cratered dot-coms and you have an economic vacuum - especially in places like Silicon Valley. So, even in the US - before we talk about trends such as offshoring - we already have fewer chairs that demand higher performance and offer lower pay. And those demands and conditions are unpopular, but what gets still more outcry is when those jobs go offshore.
These are difficult issues and make for tough times, but the merciless logic of demographics dictates that we’re going to need help. [Unless we find some sort of Moore’s Law of productivity (looking for stats on rolled-up productivity gains over the last 10 years, would love to project them onto our estimated needs 15 years out to see what it would take to fill the baby boomer gap)] Absent another boom, drawing on the developing world to fill our population gap (Europe and Japan have the same issues) will involve great complexity as we learn how to effectively offshore both production and knowledge based functions. It will help to have this head-start.

Source: WSJ.com - The Way We Live Now