On a demographic consequence of the First World War

Super column by Guillaume Vandenbroucke. It is connected to the work on linking institutions with supply of labor by Elena Nikolova . In that work, Nikolova  showed inclusive instis are more likely to emerge when we have shortage of labour. One of the example was world wars where economies like US allowed voting for women to incentivise women as supply of men has decreased post World Wars.

This column by Vandenbroucke goes a step back and shows how labor force has declined post WWI. This was because of decline in fertility. The fertility in turn declines because of expectations over loss in income and productivity. He actually makes a model factoring these expectations and shows it resembles the actual trend fairly closely.

Demographic Changes and Macroeconomic Performance: Japanese Experiences

Bank of Japan officials have been strongly emphasizing on the role of demographics in Japanese economy and recovery from the crisis. As per them, ageing Japanese population played a string role in slow recovery from the 1990s crisis. And many developed econs are in a similar Japanese position — Ageing population and deep financial crisis. hence, their recovery paths could also be slow and tardy like Japs.

This blog has continuously covered papers/speeches on demographic issues. I also wrote a paper on the topic.

BoJ goes a step further and has organised a conference on the topic. Its annual IMES conference is based on the demographic theme and its impact on macroeconomics. The papers are not still online so one has to wait.

The inaugural speech by BoJ Governor, Shirakawa is on the website. As always very interesting and more detailed than previous speeches on the topic.

Divorce rates help explain why Americans work more than Europeans..

A very longish paper by the trio explained in voxeu.

Why Americans work more than Europeans? This Europe vs US issue has always been a hot topic.

The authors say apart from higher tax rates in Europe, it is higher divorce rates in US which explain part of the problem:

How to ensure Demographic Dividend does not become a Demographic Bomb?

WB’s chief economist Justin Lin writes a post on the topic.

He says the population bomb is ticking in some countries esp Africa. It is upto them what they want to do with it. Do they want to cash on the dividend or let it become a bomb?

Civil Service and Military Pensions in India

This blog is really interested in research work on pensions as it connects so many areas of economics – microeconomics, behavioral economics, macro, financial economics etc.

In this superb paper Ajay Shah and Renuka Sane, review the pensions in India’s civil and military sectors. The paper tells you the pension system in each of these two areas and how the system is being moved to New Pension System. The transition has been easier in civil services compared to military services.

Why savings rate increased in China despite falling real rates?

Malhar Nabar of IMF looks at this interesting puzzle on Chinese household behavior.

Real interest rates have declined in China during 1996-09 but household savings (HH) as a % of GDP has risen from 19% in 1996 to 30% on 2009. This is a puzzle as one would assume as rates decline savings decline and consumption rises. This is the reason for rate cuts during the 2007 crisis (and previous crisis). In China you get a different behavior of savings rate actually rising.

Why?

Do women political leaders help women?

This is a timely paper given today’s election results. We have seen two women emerge as leaders in the state elections results – Mamta Banerjee in West Bengal and Jayalalitha in Tamil Nadu. Both have clean sweeped. It is not new for Jayalalitha as she has been the CM before but completely a change for West Bengal which has lived in communist rule for 34 years.

So what would one expect from a women leader? One of the first thing would be improvement in women security. As a woman it is a shame to live freely in this country. You have fear lurking in most corners of the country. As a woman you would ideally want to improve things somewhat for woman. Reduce crime rates against women, punish the culprits severely, make the police more sensitive and severe in case of women related crimes etc.

This paper by Lakshmi Iyer, Anandi Mani (University of Warwick), and Prachi Mishra and Petia Topalova (IMF) looks at these issues at a village level which has a female council head. Here is a nice discussion of the paper.

Transition from High Growth to Stable Growth: Japan’s Experience

A nice speech from Masaaki Shirakawa, Governor of the Bank of Japan. The speech is given on account of Central bank of Finland’s 200th anniversary. So there are some nice anecdotes linking Japanese economy with Finnish:

I felt it would be best to compare the experience of the Japanese economy from its high-growth period onward, with that of the emerging economies which are currently growing at a very rapid pace. Although it is not well-known, Japan’s automobile  industry  first ventured into the European markets through Finland back in 1962. At that time,Japanese automakers had little name recognition, and one firm, in order to prove the safety of its car to Finnish consumers, had the car driven off a ski-jumping hill. I have been informed that the car landed safely and the driver was not harmed. The 1960s, when such episodes of Japanese firms were born, was the heyday of the Japanese economic miracle.

He then discusses the Japan’s high growth phase:

How immigration works for US?

Dallas Fed annual report has a nice chapter on this topic.

It says immigrants form almost 17% of the Us workforce. Foucs is on low skill immigrants but high skill ones have risen sharply bas well. They help fill critical jobs in science and IT sectors leading to overall gains for the economy.

It has some interesting stats. It comapres US workforce and immigrants since 1910:

Demographics: a game changer in global economic growth prospects

This is the title of my new paper. Comments/suggestions are welcome.

Indian Banks should nudge to improve pensions planning for employees

RBI in this notice points  that there has been a change in Payment of Gratuity Act 1972. Under the act, people are eligible for pensions. However, as it happens in most pension cases, people did not choose to opt for the pensions. I am guessing a large% did not choose the pension plan just based on previous such studies.

Michael Lewis reviews Ireland’s economic situation

Michael Lewis (of Liar Poker fame) writes this superb account (as always) of Ireland’s economic situation.

Demographics problem – not just limited to developed economies

It was a matter of time before demographics again come to mainstream economics discussions. It was such an important area and then came the global financial crisis. Now, slowly people are again beginning to look at this issue.  

I posted on this superb speech from BoJ chief who shows why this recession could be different because of demographics.

World Bank has done two studies which point to a different idea. The two studies are – Some Consequences of Global Aging,  and case studies on in New EU Member States and Croatia: Challenges and Opportunities.

The studies say ageing problem is not limited to developed economies but is going to strike developing and middle income economies as well. What is worse is that unlike developed economies who are rich and some have buffers (though crisis has done a lot of damage), developing economies do not have any such things. They are likely to fall in this trap before reaching prosperity levels.

Balance Sheet Adjustment under Population Ageing

This is a very interesting and thoughtful speech from Kiyohiko Nishimura of Bank of Japan.

He links the demographics with the current crisis and Japan’s crisis in 1990s. Interestingly, both these crisis have happened at a time when demographics are worsening for  the economies.

For demographics, he uses a variable called Inverse Dependency Ratio (IDR). IDR indicates how many people of working age it takes to provide for one dependent person. He shows via various graphs how this IDR peaks for Japan just at the time of its crisis in 1990s. And same trend we  see for US, Spain and Greece as well.

Japan’s lost decade myth

Gulzar points to this superb article from Daniel Gros.

Gros says Japan’s lost decade is a myth as it grew faster than US in that period of 1990s. He says much of this talk of Japan’s lost decade is based on GDP growth. But it is not the right measure:

Beggar thy neighbor interest rate policy

Ronald McKinnon of Stanford University writes in this paper that US has not learnt from its past mistakes.

Learning about economic geography

Paul Krugman recently wrote a superb paper on one of the topics he knows best – economic geography. After all his work on International Trade and international geography got him the Sweden prize.

In a typical Krugman style he titles the speech as The New Economic Geography- Now Middle Aged In this paper, Krugman tells you about how economic geography became mainstream and how there was opposition from economists and geographers. He addresses the criticisms and then says how is his broad idea still relevant:

Mutual Funds should have a label like food products

Council on Foreign Relations (CFR) hosted 15 economists for a discussion on the financial reform after the crisis. The economists in turn have started issuing neat short papers(called Squam lake Working Papers as 15 econs first met there) on various financial sector issues post crisis.

The latest is a paper on regulation of retirement savings. It says:

Jeremy Siegel explains ageing

Jeremy Siegel has explained the impact of ageing population of the developed countries on financial markets.  It is an excellent analysis of the events to come.

He says there are 2 questions that need to be answered:

1. Who will produce the goods for workers and retirees to consume?
2. Who will buy the assets?

He focuses on the second question and says economists usually say retirees will finance their old-age via the wealth they have accumulated and this is where most problems lie.

….when people are asked what they are going to live on once they retire, they answer, quite naturally, that they are going to live off their wealth. They give such an answer because they have been told that humans accumulating wealth for retirement are similar to squirrels hoarding nuts for the winter. When winter comes, we live off our wealth. In simpler human societies where wealth consists of livestock or stored wheat and corn, the analogy works well enough. But in a modern society, the only way to live on wealth is to find someone else to buy that wealth because wealth, in the form of capital, has no intrinsic consumption value. Investors cannot eat their stock or bond certificates. They cannot eat the factories or the machines of the businesses in which they have invested. A modern society builds capital, and that capital must be sold before consumption can occur. The only way to live on wealth in modern society is to have workers who are earning money and have enough disposable income to buy assets for their own old age. They can then buy the assets (or wealth) of retirees who can then spend that money and consume.

Now in developed countries, where maximum people are going to be old, who will buy these assets? So what is the solution?

He says we need to understand that developing countries are the ones who have younger population and are the ones who can buy the assets of the elderly in developed. Now, developing can only buy assets if they continue to grow. Hence, sustainable growth of developing countries is important not just for their people but developed world as well.

In other words, the solution for the above two questions is one- developing world. Hence, developed world should make efforts to ensure that they support globalization, let developing countries grow etc.

Excellent analysis from Siegel. He also points out to his model which shows that developed world’s contribution to world output would shrink from 53.3% to 22.9% in 2050. This kind of long-term analysis is a specialisation of Jeremy Siegel. His analysis of historical returns across asset classes (where he shows equity returns the most) is a part of finance folk-lore.

Read the entire speech.

Impact of Ageing on economy and fin markets

This topic is being widely researched and debated worldwide. As populations age in developed world what is likely to happen is the question which interests all. So all experts from various fields – public finance, financial markets, labour etc are looking at how ageing would impact their areas of specialization.

Reading each one is desired but takes time and effort to comprehend.  Jean Claude Trichet helps a lot by doing a literature survey on the same in his recent speech and it is a very useful one. Let me quickly summarise the findings. 

First, People ageing is a natural phenomenon then why is it a concern? So far, the ratios of young and old in the population has been stable and favored the young. So as a result, you have a larger young population. Now the problem is because of low fertility rates and longevity increasing due to medical care, slowly there is larger % of population in the old age, usually referred to as 60 years and above. This would have wide changes but it would be only over a period of time.

Impact on Savings: As majority of the people age, the idea is that they would need more savings to finance their expenditure in the old age.

One of the main tenets of the life-cycle theory is that individuals try to smooth consumption over their lifetime. As income tends to be relatively lower when individuals are either very young or retired, their savings typically follow a hump-shaped pattern, with a higher savings rate during their working life. For a given retirement age, population ageing increases the proportion of households with a relatively lower savings rate in the economy and therefore tends to reduce private savings.  

The literature has estimated that a 10 percentage points increase in the old-age dependency ratio could reduce the savings rate by around 9%. Simulation exercises based on models that assume that households behave as predicted in the life-cycle theory have found that the private savings rate in the European economies could fall from 15.9% of GDP in 1990 to around 4.5% by 2060 

Impact on public finances: Well this is where problem is going to be severe as you would have more number of people asking for pensions and fewer contributing to it. And with old age people increasing, demand for healthcare also increases. This would put strain on public finances.  

In the absence of significant reforms in pension systems, the Economic Policy Committee’s Ageing Working Group estimates that the costs related to old-age pension schemes will push government expenditure up by 2.6% of GDP in the euro area by 2050. Quantitatively, public healthcare costs are projected to increase by between 1% and 4% of GDP over the period 2000-2035, exacerbating the fiscal imbalances just discussed. 

Impact on Investments:

The productivity of physical capital is typically influenced by two main factors: technological progress and the capital intensity of the production process. While it is not straightforward to identify clear links between ageing and technological progress, the literature has explored how demographic developments could affect capital intensity.  The degree of capital intensity in the economy depends on the relative abundance of the different productive factors: the capital stock and the labour force. All other things being equal, ageing would presumably generate a fall in the rate of growth of the labour force, if not a contraction in its size. The production process would therefore become more capital intensive and the relative productivity of new capital purchases would be lower.Consequently, investment rates are expected to decelerate, and the growth rate of capital stock could gradually decline to better accommodate the relatively scarcer labour force. 

Impact on interest rates: It would depend on whether the impact of savings or impact of investments is greater. As both are expected to decline, it would matter which happens first and faster.  

If investment decelerates or falls faster than domestic savings – at each level of aggregate income – the real interest rate that clears the market for loanable funds is expected to fall, since it is difficult for savers to find profitable investment opportunities. Alternatively, if domestic savings were to fall faster than investment, the real interest rate would rise to reflect the relative scarcity of financial funds. What about the evidence available on the same? 

Although the savings rate is expected to fall, the quicker projected drop in investment could push the equilibrium real rate down by around 50 to 100 basis points over the period 1990-2030, followed by a partial recovery by 2060 as the baby-boom effect disappears.

Impact on Fin Markets: As fin markets are forward looking do they see the above changes?

Some economists have suggested that expectations of such developments may have already started to exert some influence on the pricing of bonds. Among other things, these analyses suggest that ageing could have contributed to the “flattening” of the yield curve that has been observed over the recent past.  But then there are many factors for the same and one should be careful in stating the same. 

International Mobility: Immigration from developing countries could mitigate the above effects but looks remote as immigration laws are pretty stiff especially in Europe.  

Impact on Mon Policy: Ageing Populations would depend more on wealth for their consumption needs and higher inflation might lead to lower real value of assets. Hence mon pol would have to be even more committed to fighting inflation. 

It is an excellent speech from Trichet and sums up most of the research on the subject. It has a rich reference list as well. Highly recommended.