Talking About Brexit with Andrew Stuttaford

“So far as the original founders are concerned, the journey [of European integration] continues. The problem is it is not what most British people thought they were signing up for.” ____Andrew Stuttaford.

Screen Shot 2016-06-19 at 6.15.53 AMAndrew Stuttaford is a British-born contributing editor at National Review and a frequent writer on British and European topics. In recent months, he has been an advocate of ‘Brexit’, the United Kingdom leaving the European Union. A few days before the June 23rd referendum, Stuttaford explains the factors that made him increasingly wary of further European integration. Read more

The Candidates’ Other Demographic Challenge

It is massively larger than 11 million illegals.

Hans Rosling, co-founder of Gapminder, calls it “the biggest change of our time”. It is Africa’s population growth from 1 billion people today to 2.5 billion by 2050 and 4 billion by 2100.

You could say that a close “second biggest change of our time” is the aging and stagnation of the population in rich countries. The combined population of North America, Europe, Japan and Australia/New Zealand is now at 1.3 billion and it will remain at 1.3 billion by 2050 and 2100 with small gains in North America and Oceania offset by declines in Europe and Japan. Read more

The Economy’s New Boss: Demographics

The next President will have to contend with unfavorable demographics.

An enormous amount of money will be spent in the last few weeks of the Presidential campaign. Each side will promote its candidate and his platform with much passion and conviction. In the end, one side will treat victory as the road to salvation and the other will see defeat as an unprecedented and largely irreversible calamity. But in reality, this time around, the identity of the winner will probably matter less to future growth prospects than in previous contests. This is because the demographic input in the economy for the next four years is already programmed on an immovable trajectory and it is less positive than in the past.

Because of the overhanging debt and a poor demographic picture, the next four years will continue to be challenging (though not necessarily recessionary), regardless of whether Barack Obama is re-elected or Mitt Romney replaces him. Like it or not, the boss of the economy, and therefore to some degree of all of us, will be demographics. One could argue that this boss has been with us since at least 2005 when the dependency ratio started to rise again in the United States.

Among all the important factors which drive economic growth, the demographic factor is now weaker than it has been in decades and as a result, domestic demand for most goods and services will be weaker than it has been in a long time. The most telling numbers are as follows:

– The US population grew by over 1% a year until 2007 and is now growing by less than 1% per year. Its rate of growth will continue to decline as the number of baby boomer deaths rises relative to the number of new births.  Since 2008, the US total fertility ratio (TFR) has fallen below the replacement level of 2.1 and is now approaching 1.9 children per woman. See the data here and here. (Note that the TFR is an imperfect measure and a decline may only mean that more women are delaying, not altogether foregoing, having children.)

– The total number of Americans aged 30 to 60 years, the most economically active bracket, grew by over 1% per year for 30 years, from the mid 1970s to around 2005.  It has levelled off and will essentially remain flat at around 120-125 million until the end of this decade. Stagnation in the size of the most economically active bracket combined with growth in the young and elderly brackets will result in lower economic growth. I made a case here that the resulting effect on housing will not be positive.

– The US dependency ratio, which is the sum of people under 14 and over 65, divided by the number of people aged 15-64, has declined for several decades from 0.67 in 1960 to 0.49 in 2005 but, according to UN estimates (see pages 478 and 479 of this UN report), it is now expected to climb back to 0.53 by 2015, 0.56 by 2020, 0.64 by 2030 and 0.67 by 2050. Discretionary spending is bound to come under pressure as more funds are diverted to take care of dependents. (Note that the dependency ratio as defined by the UN and others considers any person under 14 and over 65 to be a ‘dependent’.  This seems antiquated on both ends. In the US, a young person is still a dependent until at least 18, and in some measure as late as 25. And an older person may not become a dependent until the retirement age of 67, or more likely 70.  I ran the numbers for these brackets here and they show that raising the retirement age from 67 to 70 would buy us some time and help the economy.)

– Assuming a run rate of 1 million newcomers per year, immigration, though a clear net positive in the long run, will be insufficient to neutralize or reverse these negative effects in the short run. It would take a much greater number of immigrants to offset the slack. But as noted by some demographers, citizens of any given country become less welcoming of immigrants when that country’s fertility ratio declines or when the economy is weak.

Although much frustration is expressed on the stagnation of the economy, in particular the unemployment rate and the rising deficit, pinning the blame on one or the other of the two political parties ignores a stronger underlying dynamic. The next POTUS will be similarly constrained as POTUS 43 (Bush) in his second term and POTUS 44 (Obama) and will have to implement some steps to mitigate the negative demographic effect. If demographics are failing us, there are other levers to stimulate  growth but we will need to work them harder.

Europe: Aging Population Undermines Longer-Maturity Bonds

ANCHALEE WORRACHATE writes in Bloomberg News and highlights the adverse rise of the dependency ratio undermining European debt reduction efforts:

The euro-region’s ability to grow its way out of the debt crisis faces a roadblock — an aging population.

While Italian Prime Minister Mario Monti and his Spanish and French counterparts push for measures to spur an economic expansion, Italy’s structural dependency ratio exceeds 50 percent. In other words, the number of working-age people is less than half the total population. The government forecasts the ratio will reach 63 percent in 2030 and 83 percent by 2065.

Aging and shrinking labor pools are adding to budget woes in the region where the unemployment rate is already at a record high. The risk is that without an overhaul of benefit programs, governments will be unable to balance their books as tax revenues shrink and unfunded pension and health-care liabilities balloon. Longer-maturity bonds in Spain, Portugal and Greece are underperforming their shorter-dated counterparts amid concern the nations’ finances will keep deteriorating.

“You just can’t create growth out of thin air and the demographic trend in the euro zone isn’t conducive to growth,” said Humayun Shahryar, who helps oversee $100 million as chief executive officer at Auvest Capital Management Ltd. in Nicosia, Cyprus. “For a long time, the economic expansion in the region was fueled by low borrowing costs that came with the monetary union. That’s no longer the case and the shrinking working-age population is a problem.” READ MORE.

California Voters Approve Pension Cuts


LOS ANGELES — As Wisconsin residents voted on Tuesday not to recall Gov. Scott Walker — who has become an enemy of labor unions nationwide — two California cities dealt blows of their own to organized labor.

In San Diego and San Jose, voters overwhelmingly approved ballot initiatives designed to help balance ailing municipal budgets by cutting retirement benefits for city workers.

Around 70 percent of San Jose voters favored the pension measure, while 66 percent of San Diego residents supported a similar measure.

“This is really important to our taxpayers,” Mayor Chuck Reed of San Jose, said Tuesday night. “We’ll get control over these skyrocketing retirement costs and be able to provide the services they are paying for.” READ MORE.

CBO: US Entitlements Put Federal Debt on Unsustainable Path


The latest long-term budget outlook from the Congressional Budget Office reads like a particularly dark noir: Things start out pretty bad. And then they get worse.

“Over the past few years,” the report’s first sentence explains, “the federal government has been recording budget deficits that are the largest as a share of the economy since 1945.”

Before the year is out, debt held by the public — the federal government’s outstanding debts to outside parties — will equal 70 percent of the total economy. That’s not a pretty picture. And it’s not likely to get better. It is a foregone conclusion that large entitlements, Medicare and Medicaid in particular, are destined to cost far more as a percentage of the economy due to the aging of the Baby Boomer generation, the rise in health costs, and long-term care expenses born by Medicaid. If today’s laws are kept on the books, “spending on the major federal health care programs alone would grow from more than 5 percent of GDP today to almost 10 percent in 2037 and would continue to increase thereafter.”

In a quarter century, entitlements, which currently account for about 10 percent of GDP, would alone chew up a full 16 percent of the economy. That would represent a massive historical shift: For the last four decades, the entire federal government, including entitlements, has consumed an average of 18.5 percent of the country’s economic output.  Relative to the size of today’s economy, that would be like spending an extra $850 billion annually on entitlements. In a growing future economy, it will be far more. READ MORE.


New York Times: US Public Pensions are Underfunded


Few investors are more bullish these days than public pension funds.

While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes. READ MORE.

The Economist: Demography is Back

In its May 19th 2012 issue, The Economist magazine writes:

DEMOGRAPHY is back. Not that its subject matter—the size and structure of populations—ever went away. But from the 1980s to the late 2000s demography retreated to the wings of public debate, a concern mostly of geeks and obsessives. Over the past few years, though, that has started to change. Population science is once more centre-stage, pushed by climate change, which raises worries about the impact so many billions have on the environment of the earth, and food-price spikes, which imply doubts about whether it will be possible to feed them all. read more.

Bjørn Lomborg: How To Get Food on Every Table

Bjørn Lomborg writes in Slate:

We have enough food to feed everyone. But we need to produce even more. Here is why.

The problem of hunger can be solved. The planet creates more than enough food to meet everyone’s needs. But there are still about 925 million hungry people in the world, and nearly 180 million preschool-age children do not get vital nutrients.

In 2008, the last global Copenhagen Consensus project focused attention on the problem of hidden hunger. A team of Nobel laureate economists found that micronutrient interventions—fortification and supplements designed to increase nutrient intake—were the most effective investment that could be made, with massive benefits for a tiny price tag.  read more.