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2004 April 01 Thursday
Standard & Poor's See Huge Sovereign Debts Due To Aging

On current trends the costs of taking care of aging populations will begin to rise substantially around 2015 and accelerate from there.

Some countries, including Australia, Ireland, Sweden, and the U.K., are expected to do considerably better than the sample average and will be able to keep their general government debt burden below 70% of GDP even by 2050. On the other hand, some continental European countries such as France, Germany, Portugal, Greece, Poland, and the Czech Republic are projected to post debt burdens well above 200% of GDP by 2050, as will New Zealand. Predictably, Japan will continue to have the highest debt burden, which, at current trends, could reach an implausible 400% of GDP as early as 2030, according to the study. Canada's general government debt could climb to 136% of GDP by 2050.

S&P's analysts do not predict that the debts of these countries will absolutely get so large. The analysts are basically arguing that unless benefits are cut and taxes are raised that this is how big the debt burdens will become.

For more on the financial problem the United States faces from an aging population start at my previous post On The Medicare And Social Security Unfunded Liabilities. Also, read through the exchange by Alex Tabarrok and Tyler Cowen on this topic by clicking back from the links at Alex's And So It Begins post (the title of which sounds suspiciously like Alex is a Babylon 5 fan who likes Kosh's famous B5 line). I basically side with Alex, Laurence Kotlikoff, and Niall Ferguson in seeing huge approaching financial problems due to population aging which threaten to take a lot of the growth potential out of industrialized economies. What remains to be seen is whether living standards will decline in absolute terms due to high taxes or whether enough technological advances will happen to provide ways to lower the costs of taking care of such large aged populations.

To place this problem in a larger context of world demographic trends a good place to start is Nicholas Eberstadt's Power and Population in Asia. Surely East Asia has some big demographic problems coming up.

I think one of the most sensible things we should do in response to this problem is to change our immigration policy to keep out people who have low productivity and low earnings potential and to concentrate on letting in immigrants who can earn so much and pay so much in taxes that they will make our financial outlook better rather than worse. Currently our immigration policy is letting in too many low skill, low income, and low taxpaying immigrants. This policy is monumentally stupid. We can not afford it with now that the burden of an aging population is going to start to weigh so heavily.

Another very sensible response would be to accelerate research in biomedical areas that show promise of producing rejuvenation therapies that could extend the working lives of significant portions of the population. If people could work longer they'd be net taxpayers for longer and would become net tax benefit receivers later. Such treatments would have a bigger impact on our long-term financial outlook than any other policy options that can be imagined.

Share |      By Randall Parker at 2004 April 01 04:46 PM  Economics Demographic


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Comments
dan van Zile said at April 2, 2004 9:20 AM:

Randall I agree with your immigration comment. On the working longer the problem is there are not enough jobs for everybidy now. A lot of companies try to eliminate 50+ workers. They are pushed into the pension system. If one is layed off and over 50, in most cases ones career is over. You have commented before on the need for education acceleration, you are definitely right on a reality basis a lot of jobs have excess education requirements. this is done to resrict the labor force. With automation increasing Im not sure what will happen, but it will be something to be faced. I will talk about funding later. DAN

mike quinlan said at April 5, 2004 10:58 AM:

Randall, You are missing reality. The essential fact you omit about low wage immigrants is that they are all working. Furthermore profit is made and enabled by their work, which is often superior to the renumeration that they are forced by exigencies to accept for their labour. They clean your offices, pick your fruit, wash your dishes, mind your kids, dryclean your laundry, and perform countless other menial service jobs which you equate with low productivity. Also of note is that their individual circumstances tend to improve with time. As they integrate and become comfortable in English, they get access to better jobs and better wages.
You cannot take a snapshot indicator such taxes paid vs gov services consumed and have it mean anything. The fact is its meaningless when it comes to appreciating whether the investment is a good one or not. An immigrant may require substantial assistance in year one, and zero in year 10 whereby he is actually a net payer of taxes.
If the US economy doesn't need them how is it that they find work ? As workers are they not productive members of the economy, and contributing necessary labour ?
Furthermore, they have higher birth rates than the American average, and you need that next generation to fill the low productivity services that elderly care will entail.
Rejuvination therapies might be nice, but economic necessity is already forcing many seniors to extend their tax paying life. Would be nicer if they didn't require a walker to do it. But, I dont think your call for government funding will really be necessary. There is enough private demand and money out there to ensure research along those lines. It will
inexorably increase over the next 20 years.

Randall Parker said at April 5, 2004 11:49 AM:

Mike, I don't see how the growing Recipient Class of people who get more in benefits from the government than they pay in taxes is not part of reality in America today. That is not just a snapshot indicator. If (and this is the case) an entire group of people pays, on average less in taxes than it receives in benefits then whether some pay more in one year and less in another or get more benefits or less benefits from one year to the next is besides the point. The group average is that they pay less and get more in benefits. This group average isn't getting better for either Hispanics or blacks.

As for the cheap labor and the profits they generate for others: If those profits were high then more people would rush to create businesses that use that labor and the labor would be bid up in price. But that is not happening. Look at a chart of long term inflation-adjusted wages for the least skilled. Their wages are declining. Why? Because immigration is bringing in more low-skilled laborers.

In the case of agriculture the low-skilled laborers are a disincentive for automation and rising productivity. Australian grape growers use automated grape picking machines because they don't have access to cheap immigrant labor. American growers use cheap immigrant labor.

On the claimed "need" for labor: This is a fallacy. There is no absolute need for labor. There is only the price at which demand and supply meet. The low-skilled immigrants are not doing anything that is necessary. If they weren't there the economy would adjust and grow. The per capita growth of the economy would actually be higher if the low skilled immigrants were not coming in.

See the bottom chart on this post Samuel P. Huntington Comes Out Against Immigration From Mexico about Hispanic immigrant high school graduation rates. You assume that immigrants will, with time, pay more in taxes and eventually become net assets. But a group that has such incredibly low scholastic achievement is not going to become productive enough to become net assets in later generations. So they do not help us with our aging population problem. They make our financial problem worse.

As for the idea that the Hispanic immigrants can be hired to take care of old white retirees: That is too expensive and is not a solution. If their labor is cheap enough to be affordable to work in nursing homes and in providing medical care then they are not getting paid enough to pay enough taxes to pay for their own eventual retirement. The way retirees could be taken care of is with automation and robots.

mike Quinlan said at April 5, 2004 3:38 PM:

Randall, how about a definition of ''recipient class'' that goes beyond equating it with black and hispanic. Not all blacks are members, nor hispanics, nor most likely a majority of each, but they do so happen to be over represented in the ''recipient class''. And let's note it has some white membership to boot. Furthermore, it makes a difference that the group or class of people your are analysing is not static from year to year in terms of its individual composition. People get off the system and bring in someone to restock their racial quotient in your 'recipient class'. You focuss on the failures and fail to treasure the successes. Just think in a slave based economy, the slaves upkeep being dependent on the master, would make all off them a recipient class as well. Could you argue then their economic output has no value ?
To state and I quote
''There is no absolute need for labor. There is only the price at which demand and supply meet. The low-skilled immigrants are not doing anything that is necessary. If they weren't there the economy would adjust and grow. The per capita growth of the economy would actually be higher if the low skilled immigrants were not coming in."
Well all I can say is you cannot be serious. First its based on a very restrictive definition of labor. Secondly labour markets don't follow classic supply demand curves.
And especially low end wage rates whose increase over the years owes more to minimum wage legislation, than it does to market largess. Thirdly, if they weren't there the economy would contract. Fourthly in your economic world it makes no difference that that many fewer people would benefit from economic access to such services. So long as a price is achieved who cares about actual people, and the interest of the many vs the benefit to the few is just whining. Which raises another point in terms of the consumer savings that are realized by getting lower labor input costs, and the ability to delay significant investment-- which we all know the consumer would ultimately pay. But for today and the years you point to the big spending consumers get these savings as added value for their dollar. And last, your last point works as a mathematical equation but thats about it. If higher wage earners can pass off some of their necessary labour (as in life), and therefore spend more time at high wage activity, the economy benefits. If suddenly they cannot, and have to give up work time, the economy suffers. Write this large accross the economy and it wont be growth that results. Look around you, who constitutes a large part of the service class that makes certain ways of life possible in America for certain people ?
The mexican educational statistics are sad. All the more reason for educational initiatives, and perhaps a special program to reach through the isolation of mexican mothers.

Randall Parker said at April 5, 2004 11:15 PM:

Mike, I talk about group averages. Why? Because group averages are useful to look at. Are all blacks or Hispanics less educated than all whites or Asians? No. But the gap between those groups is remarkably stable when looked at over decades.

I know that there are poor dumb white people. I grew up with lots of them. Half my 98% white 8th grade class didn't graduate from high school. But on

What would be the point of spending a lot of time treasuring successes? Doing that doesn't solve any problems. I'm not out there reading the economic and social science data looking for reasons simply to feel good. I have no need to happy lucky stories. I'm interested in solving problems or at least in preventing problems from getting worse.

Yes, labor markets do follow classic supply demand curves. See my post Immigration Lowers The Price Of Labor about a paper by Harvard labor economist George Borjas. He's published a lot of papers on this subject. Yes, labor markets are not immune to the law of supply and demand.

Low end wage legislation? Are you aware that if the US had kept increasing the minimum wage to keep up with inflation in order to maintain the same level of minimum wages that current US minimum wages would be twice what they are today? I happen to be all for raising minimum wages by that amount because one effect would be to greatly decrease the influx of illegal aliens. Force employers to pay at least $12 per hour and they will suddenly find reasons why they need far less labor.

Mexican educational statistics: You are missing the point that the level of educational achievement is low even among the 4th generation descendants. The problem is not the "isolation of mexican mothers."

I do care very much about actual people. The actual people who I care about are American citizens. I want what is best for my country's people. I think their lives are made worse overall by a large influx of low skilled immigrants.

mike Quinlan said at April 12, 2004 12:35 PM:

Randall, Your concept is an economic class. Its racial composition provides really very little to the understanding of the phenomenon. It gets fuzzy at the edges, and doesn't consider the totality of the social relations involved. I think you over emphasize race and it distorts your view of the world.
And I am not making an accusation of racism here, because I think you are a reasoned man
and ethnological questions are legitimate to pose. But it's your exclusionary prescription as solution to economic and cultural ills that I find hard to fathom. Surely you recognize the theoretical nature of your arguments, more importantly their limitations. You can't be confident that your solution won't be a case of the cure is worse than the bite, nor that it will not simply lead to new and unforeseen problems as inevitably occurs with grandiose projects of social control. It's not for nothing that economics is termed the dismal science.
Immigration is a complex and real historical phenomena. It has social and political dimensions. It's also integral to the lifestyles of many groups and individuals in American Society--Aunt Winnie who couldn't bear to be without her Columbian maid for one. It's also part and parcel of people's hopes and dreams, and of those who depend upon them. We can't allow ourselves to fall into the trap of thinking the lowliest amongst us are without value in this world. That their presence isn't meaningful to our lives or intertwined at certain levels with the way we experience our own.
Moreover, your's and Huntington's real underlying concern is a perceived crisis in the American cultural identity, and adherence to its core values. The argument made is that there are inherently conflictual values amongst differing civilizations, and that immigrant allegiance will even over time differ from the American archetype. This creates a kind of foreign presence and influence in the American political and ideological space. A hegemonic malaise so to speak symptomatic of the presence of spreading foreign ideas taking root with their own political agitators and demands. Moreover, by respecting and even encouraging such differing groups, a monolithic american identity is being undermined by such relativism which degrades its specificity. Not only does this undermine said identity, it also limits american capacity and willingness to affirm itself and to recognize and act upon in its own self-interest. How or why this is done or exactly by whom pretty much go begging.
Then you start to get into questions such as is the welfare-state an American value ? You will want to state no. Hispanics according to surveys are more likely to be in favor, and this comes to be seen as a cultural cleavage. I maintain this is a strict ideological divide. Those with less want more and those with more want to give up less. Is generosity not an American value, in the same sense as self-reliance? Yet its easy to see how these ideals can conflict in their application. Teaching someone to fish, can be in conflict with ones desire to keep selling fish to that person.
Frankly, I think the concept of self-reliance is very dubious and doesn't concord with experience. We can speak of individual responsibility, but the notion of self-reliance tends to ignore the interdependency and social reality of human existence.
I mentionned Mexican mothers, because the educational achievement of kids is very dependent upon the degree their mothers' value education. It is viewed as a luxury more than as a necessity. The necessity is income and their kids are encouraged to contribute to the family income. Unfortunately the immediacy of short term need takes precedence over long term gains. Statistics such as Huntingtons are illustrative of these indidual choices and circumstances, not of some general failings of hispanic culture.
Besides in getting back to Huntington is it not possible that the crisis in american civilization owes more to a disconnect between traditional values and the practices of modernity ? What are the values that underlie our technology ?
Low birth rates in the west are principally due to widespread access to birth control. Blame it on the pill and women's desire to ''free themselves from biological destiny''. Of course the causal chain underlying the development and widespread usage of such technology goes back to the feminist movement, and its philosophical underpinnings. Can feminism be seen as part of the erosion of american civilization. ? Ethically could it be deemed to be bad. I say no, and besides civilization develops. I think it even attracts immigration and that is a sign of health. As might be its spread, but you cannot reppel and attract at the same time. Lot's of food for thought.
All the best


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