From First Things, December 2021:
A war is slowly brewing. It pits parents against their children and children against their parents. Longstanding social and economic trends are creating tensions between the generations. These trends, which show no sign of abating, have largely escaped the attention of the public and are rarely discussed outside of specialist circles. Yet, once seen, they cannot be unseen. And they have a distinct air of inevitability about them.
For the past few decades, a debate has been bubbling in macroeconomic circles. It centers on the question of demographics and their implications for society. As most educated people are aware, Western populations are growing older. Since the Baby Boom generation, birth rates have gone down, leading to increases in the median age in the wealthy West. This is not a good thing. Aging populations pose significant long-term economic challenges, of which few outside of economic and financial circles are aware.
Until now, debates about the implications of falling birth rates have not become part of a broader conversation. In part, this is due to the fact that macroeconomics is a nerdy discipline. Macroeconomists often appear to be communicating with each other in mathematical code, and when they speak in public, they give an audience the impression that they cannot agree on anything. Further, the abstract economic processes being driven by demographic decline are just that: abstract. Economists are rarely good at showing the public what a world with more old people than young people might look like. We need to do better, because such a world will soon be upon us.
In The Great Demographic Reversal, economists Charles Goodhart and Manoj Pradhan consider the economic implications of a rapidly aging population and predict severe problems. The most profound impacts, they say, will be a sharp slowdown of long-term economic growth and the rise of inflation. The reason long-term economic growth will slow is fairly obvious: Fewer working-age people means less production means less economic growth. The dynamics behind the inflation are a little more complex but can be explained by a simple example.
Imagine a place populated by a hundred people—call it “Bread Island.” Each person requires a loaf of bread per day to survive. Income is evenly distributed to ensure an equitable distribution of bread. Initially, fifty of the people in the economy are of working age, while the other fifty are either children or retirees—economists call this group “dependents.” In this economy, the workers need to produce one hundred loaves of bread. With fifty workers, this means that two loaves will be required of each worker. But over time the population ages, and twenty-five of the workers become dependents. The situation becomes desperate. Each worker is required to produce not two but four loaves of bread. Ever more pressure falls on the remaining workers to produce the goods needed to supply the growing population of dependents.
The pressure on resources depicted in the scenario of Bread Island can be described as a labor shortage relative to demand. This pressure leads to inflation. Prices rise when essential goods are scarce, and that includes the “good” of labour. As Goodhart and Pradhan note, an aging population continues to generate demand for labor, while the relative decline in the working-age population makes meeting that demand increasingly difficult. As is the case on Bread Island, inflation will accelerate as too many old people require too few young people to produce too many goods relative to their ability to do so. With workers in short supply, the price of labor will rise. Companies then must pass the growing wage bill along to the consumer in the form of higher prices.
Higher prices for goods and services isn’t the only effect. If we’re considering only the production of goods, inflation makes the wages paid to workers less valuable for the purchasing of products, and this renders the workers poorer. This process can take a while to become acute. If we consider savings and asset markets, however, trouble arises more quickly....
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