Semi-Daily Journal

'how to prepare the U.S. public finances for the fiscal challenge posed by the retirement of the baby boom generation.'

And how to prepare for the associated growth slowdown. After all the only way to prepare will be with more saving. This means abundant capital, cheap interest, and logically, lower consumption, plus global excess capacity. Slower growth then, and sustained productivity? If this is the case then we will have a continuing output gap, and continuing deflationary pressure. I'm afraid that is the only horizon I can discern.

Remember this is not only a US phenonomen, the UN published its 2002 revision population forecast last week. 33 developed countries are going to have population shrinkage over the next 50 years, with Italy coming in 22% down, and most East European countries facing a whopping 30 - 50% decline.

Meanwhile a small number of LDCs will continue to have a population explosion. Thus we will have the real divergence big time. Taking China as a model, the only 'fix' I can see will be diverting all those excess savings into promoting growth in the developing world, but this will not be without its attendant pain in the already developed part. Come on everybody, did you really think the good times would last forever?

If you want the UN report:

Or see my blog post:

http://www.un.org/esa/population/publications/wpp2002/WPP2002-HIGHLIGHS.PDF
Or see my blog post:
http://pro2.blogger.com/blog_form.pyra?blogid=3587064&id=90395203

Whoops, bad link. How stupid of me, I've link you to my blogger editor. This one should be a bit better:

http://bonoboathome.blogspot.com/2003_03_02_bonoboathome_archive.html#90395203

While I'm back: after a quick shower and five minutes thought it might be worth noting that house prices may well play a very important role going forward. Once the post equity bubble shock ripples have worked there way through we'll be able to see the real direction more clearly. If, as I suspect, the upward drive isn't maintained, then this will have real implications for the savings/consumption ratio, and hence the associated prices of investment and consumption goods. Germany, you might like to recall has had virtually no upward pressure in the housing market since the mid ninetees, while Japanese prices are now back there in the early 80's. This is one reason people don't feel rich enough to spend freely, especially when (on aggregate) retirement time is getting near, and those pensions don't look any too secure.

Doesn't the notion of persistent excess capacity imply persistent bad decisions by managers? A sudden greater availability of capital could lead to mistakes for a period, but why persistent mistakes? Isn't it possible that greater savings will mean a shift in the mix of inputs, resulting in higher labor productivity, higher wages and a higher (or at least less reduced) level of consumption? Some of the Gale/Orzag (hope I spelled that right) work on the budget also argues that a higher savings rate means greater domestic wealth at any given level of output, because net obligations to foreign investors are reduced.

The fiscal challenge of the baby
boom generation's retirement is
not a distant problem that can be
left to our children. It commences
well within the ten-year planning
horizon that Congress has been
using for budget planning...

Good thing that the Bushies have already solved this by moving to a five-year horizon for budget projections.

Next year: four-year horizons...

This problem is likely to develop sooner.

Psychic, er, that is, financial advisor Suze Orman was on our local PBS station last night advising people to think. A relatively lost cause, but maybe influencial at the margins. But as an example of thinking, she encouraged those facing retirement in less than ten years, (she did not specify "boomers", but that's who she means) to think seriously about getting out of the stock market, regardless of recent losses or regardless of whether gains in the next decade will be at 4% or 12% annually. She says, instead, that everyone KNOWS they're going to need a place to live, and the place to put your money, therefore, is into your house.

That'll depress the stock market as the few thinking boomers at least divert new fund flows from IRAs and 401Ks,( if not pull funds out early). It may boost real estate prices in "retirement friendly" areas. And it'll put liquidity into bank/thrift markets where the mortgages are paid out early. What will those institutional investors do? Buy into the "booming" real estate market, at the same time the boomers are finishing up inflating that bubble?

"Isn't it possible that greater savings will mean a shift in the mix of inputs, resulting in higher labor productivity, higher wages and a higher (or at least less reduced) level of consumption?"

I know that the orthodoxy is that higher productivity means higher wages, but could that be wrong? It seems to me that productivity sets an upper cap on wages. However, a large supply of labor will drive wages below that cap. Therefore, tight labor markets (highly skilled) will be payed based on productivity. Labor markets with excess supply (unskilled) will be payed less than productivity. A common sense look at the world has lead me to this thought, but I have no real analysis.

I argued with a German colleague about the relative health of our pension systems. At first I, a Brit, was very smug but I ended up wondering, apart from the unpredictability of the system how much gentler a stock market intermediated retirement system was than a tax intermediated one.

In ohter words, how much of the demographic timebomb that Germany, say, faces would remain in a fully privately funded system with the same demographics?

My colleague's second point about playing roulette with pension funds is getting better all the time.

What happens to housing demand when the boomers retire? Who will buy the boomer houses when they retire to their condominiums. Are we heading for a period of low demand low prices? As for boomers getting out of stocks, if they are not doing so already, they will be after they retire and are forced to cash in 401Ks. Stocks are on average overvalued compared to historical levels so it would not be surprising to see stock prices decrease further or an extended period with little to no increase in price.

Would opening the US to more immingration help the retiree to worker ratio?

Bakho, there is little danger of a widespread housing price collapse with current high immigration. The houses that Boomers will be selling (at least, the ones moving into condos) are unlikely to be ones for which there is insufficient demand. At most, prices will not rise as quickly. US population will not fall, as in Europe.

"Come on everybody, did you really think the good times would last forever?"

Actually, I think the 21st century will be a period of significantly *greater* per capita economic growth than even the 20th century...which was the greatest century in the history of mankind, in that regard.

I don't expect any worldwide depression in the 21st century. I don't expect any world war in the 21st century. (But if there *is* one, then all bets are off...the 21st century will be h@ll!) I expect both economic and political freedom to expand in the 21st century. And the worldwide average of both economic and political freedom are already greater, at the start of the 21st century, than they've ever been in history.

So, yes, I basically expect the "good times" to last forever. In fact, I expect the future to generally be even better than the present.

To get quantitative, here are the per-capita worldwide annual per-capita GDP growths I expect in the 21st century:

2000-2010: 1.5%
2010-2020: 2%
2020-2030: 2.5%
2030-2040: 3%
2040-2050: 3.5%
2050-2060: 5%
2060-2100: 5-10%

Worldwide, that gives the average person in 2050 about 4 times the income of the average person in 2000. And the average person in 2100 will have an income more than 100 times the average person in 2000.

Translating this to the U.S., that puts the median per capita income at approximately $100,000 in 2050...and over $2,000,000 in 2100. Not too shabby! :-)

I'm going to have to start calling you Mark "Singularity" Bahner...

:-)

Mark's numbers are not unbeleiveable if one assumes a steady growth of stable economic and political progress across most the developing world. If corruption is reduced, inefficient state-ownership phased out, and overly-complex or poorly administered government regulation of businesses simplified (not eliminated - I'm thinking of India and other formerly centrally planned economies), along with widespread gains in basic health services and education, these types of growth rates might be possible for most of the world.

Up until the 5-10% range, that is... While many economies may continue to grow that fast in the developing world as they "catch up", developed economies cannot and their still-immense share of world GDP will remain slower than average, retarding global growth rates.

"I'm going to have to start calling you Mark "Singularity" Bahner..."

I've been called worse. :-) (Including "fascist"...a very odd thing for a Libertarian to be called. ;-))

Seriously, though, I do strongly think that Ray Kurzweil is generally correct. I don't see the "knee" in either the economic or lifespan curves coming quite as soon as Ray Kurzweil thinks...but I definitely agree they'll both come in sometime in the 21st century.

Which reminds me what a good book "The Age of Spiritual Machines" is. (I heartily recommend it to anyone who hasn't read it.) I was particularly impressed by his empirical, mathematical analysis of trends in technology.

I was a member of the World Future Society last year, but didn't renew my membership. I thought they were amateurs. Ray Kurzweil is a pro. (Which isn't a guarantee of correctness, but it helps.)

Can't Mark Bahner's predictions of world growth rates be met while US median income remains stagnant? In other words, does improving the conditions and wages for a large proportion of the world's workforce produce those predicted growth rates, but not neccesarily preduce his predicted US income levels?

That would make for an interesting world, no?

"Up until the 5-10% range, that is... While many economies may continue to grow that fast in the developing world as they "catch up", developed economies cannot..."

I'm quite confident that the U.S. could grow at 5-7% per year, if the U.S. federal government was reduced by 70-90%. It's a simple extrapolation of a large amount of data from developed countries (and U.S. history):

http://www.house.gov/jec/growth/function/exh-4.gif

http://www.house.gov/jec/growth/function/exh-5.gif

http://www.house.gov/jec/growth/govtsize/fig-2.gif

Farther out, when computers get smarter than human brains (circa 2020-2025), economic growth should really, really take off. (So I could very well be underpredicting for growth in the second half of the 21st century. Truly, it may be the "end of economics.")

"Can't Mark Bahner's predictions of world growth rates be met while US median income remains stagnant? In other words, does improving the conditions and wages for a large proportion of the world's workforce produce those predicted growth rates, but not neccesarily preduce his predicted US income levels?"

End of my lunch time, but I think the answer is "no." Never in history has there been such mobility of capital and human beings themselves. We'd all move to Russia. (Which would have been an outrageous thought even 10 years ago...but I don't think it will be outrageous at all, 30 years from now.)

"I'm quite confident that the U.S. could grow at 5-7% per year, if the U.S. federal government was reduced by 70-90%. It's a simple extrapolation of a large amount of data from developed countries (and U.S. history)"

"Simple extrapolation" is right. I'm not sure what comparing the US to countries that are giving people high school educations and electricity for the first time accomplishes.

Oops. That's the problem with trying to get answers in at the end of lunchtime.

David Glynn asked, "Can't Mark Bahner's predictions of world growth rates be met while US median income remains stagnant? In other words, does improving the conditions and wages for a large proportion of the world's workforce produce those predicted growth rates, but not neccesarily preduce his predicted US income levels?"

I answered "no"...and then basically babbled a thought that I can see is irrelevant.

David Glynn's good question can be rephrased to, "Will growth in the U.S. in the 21st century be less than, essentially equal to, or greater than average world per capita growth?"

My thinking still is that growth in the U.S. will be essentially equal to the average world per capita growth.

My (hopefully more rational reasoning is):

1) China and India will continue their huge growth (India's absent a nuclear war with Pakistan). So I think they will continue to catch up with the U.S. throughout the century.

2) I think Russia is a real good bet for the 21st century.

3) The Middle East looks bad...and Africa looks like a disaster. Both places don't have economic or political freedom, and seem unlikely to get either one, soon. And Africa has AIDS. What a mess (at least until there's some sort of vaccine...and even then, they'll have lost an awful lot of people).

4) I don't like Europe or Japan for the 21st century.

In other words, I'm basically guessing that the world will continue on it's current trajectory for the entire 21st century. The current trajectory is that U.S. growth has been *approximately* equal to the world average.

http://www.theglobalist.com/nor/GlobalistPapers/2001/07-18-01.shtml

Overall, though, I think that what might be behind David Glynn's question will be true for the 21st century: I see overall wealth being more equalized, primarily due to the fact that I think China and India (1/3rd the world population at present) will continue to outperform the rest of the world.

Jason McCullough writes, "'Simple extrapolation' is right. I'm not sure what comparing the US to countries that are giving people high school educations and electricity for the first time accomplishes."

Sigh. Perhaps Mr. McCullough might care to actually look at my links, before assuming such a sneering tone? :-/

The data I linked to were for OECD countries from 1960 to 1996. Britain, France, West Germany, Belgium, Luxembourg, Italy, Spain, the U.S., etc., from 1960 to 1996, hardly qualify as "countries that are giving their people high school educations and electricity for the first time!"

My "extrapolation" was not from dissimilar countries, but simply because I was advocating less government than existed in those countries in that period. (Those countries basically becoming socialist/social democracy/command economies in the period.)

Specifically, I was advocating a U.S. federal government 1/10th to 1/3rd its current size (I understand that the 1/10th couldn't realistically be done with our current interest payments on the debt being >1/10th of federal spending).

My proposal would leave the federal government spending at roughly 2-6% of GDP. (I wouldn't change state spending, or would even increase it, possibly substantially.) Therefore, my proposal would put total government spending right near the bottom of the available data (i.e., about 13-16% of GDP).

Again, see this figure:

http://www.house.gov/jec/growth/function/exh-5.gif

However, I tell you what: let's cut federal spending by only 30%...to about 14% of GDP. Adding in 12% of GDP for state and local spending, that puts us at 26% of GDP, total government spending. With that, I think the data show pretty convincingly that we could average 4-6% per year GDP growth. That's *significantly* better than we've done since the federal government got really big, circa 1960.

Wow, Mark, I like your numbers. I wish I could believe them. At present I'm having difficulty finding a convincing estimate as to what global growth for 2003 is going to look like. I think the cautious person would treat with a fair amount of distant respect any estimate for 2004, and from there out the uncertainty only grows.

I share your respect for Kurzweil, only I read him differently. We can see Moore's-Law-like unit cost declines approaching fast in almost every area of cutting-edge technology. This means only one thing for me, protracted deflation, especially if we use hedonistic price calculations. So I guess that's good felicity curve news (you'll get to be on a higher one for less money), and bad dollar in your pocket news. Especially bad news for all those taking out large debts to buy their condos now.

One interpretation of the industrial revolution is that it was a shift from low fixed-variable capital to high fixed-variable capital ratios. Hence the problem for the developing world to get in. India and China in particular got left behind at the starting block and had trouble regaining lost ground.

But the information age seems to be different. We seem to be coming back nearer to the old ratios. For a low cost you can have one of the most powerful devices in the planet at home. If you link up with your friends you can have something even bigger, and if you have a broadband connection and good skills you have a myriad of information at your fingertips. The entry costs just went down, bigtime.

Two consequences: Romer's human capital engdogenous research model (which assumes high fixed costs) just blew out of the window. Secondly there can be a selection advantage in being an outsider as you put less value on your time. You can spend less of it running the world of today and more of it preparing the world of tomorrow. How many CEO's do you know who run good blogs?

My guess is that you're right about China and India, but wrong about the timing. They could be online in a big way within a decade. India based global services may not be for tomorrow, but 5-10 years, then for sure.

David Glynn is on the right lines. What is going to matter is human capital value (parenthesis: perhaps one of the big problems in all this debate is our understanding - or lack of it - of the concept 'value', what a pity that since the days of Harrod and Kaldor this has really gone out of fashion), you need to look at countries by age structure, and distribution of education. Immigration obviously is one part of the solution, but any country with a lower average level of education (the US?) in its 20-40 age group than in its 40 to 60 age group is likely to be facing problems.

One last point, you're way off beam on Russia. They have rising mortality, falling life expectancy, fertility bajissimo, and educated emmigration towards western Europe. Bottom line: economic implosion. In fact my impression is that (originating in the Asian Russian republics) we are currently witnessing the biggest westward migration taking place since the time of Ghengis Khan.

On the housing part, see this interesting speech yesterday by Alan Greenspan. Obviously I'm not the only person to be worrying about what all this could mean:

http://www.federalreserve.gov/boarddocs/speeches/2003/20030304/default.htm

"Wow, Mark, I like your numbers. I wish I could believe them. At present I'm having difficulty finding a convincing estimate as to what global growth for 2003 is going to look like. I think the cautious person would treat with a fair amount of distant respect any estimate for 2004, and from there out the uncertainty only grows."

I don't know what the weather is going to be like tomorrow (since I haven't checked the weather forecast).

But I can tell you, to a good approximation, what the climate in Durham, NC will be 50 years from now. (Basically, what it is now.)

Do a plot of worldwide economic growth, from the birth of Christ to today. Notice how all the growth has been in the last 3 centuries...with the last century even better.

Now, think about what creates economic growth: economic freedom, including free trade and the Rule of Law. Education.

There isn't much doubt at all that the 21st century will be one of spectacular economic growth...absent a World War, as I noted.

Now, as to whether the median per capita income in the U.S. in 2100 is $2 million, or $200,000 (which I think is almost certainly too low)...does it really matter?

Excuse me; I was thinking of the study from memory, which parts of do rely on wacky timeframes:

http://www.house.gov/jec/growth/govtsize/govtsize.htm

http://www.house.gov/jec/growth/govtsize/tbl-4.gif

"We obtained data on central government spending, nominal and real national output (gross national product or gross domestic product) for five industrial nations: United Kingdom, Denmark, Italy, Sweden, and Canada. Excepting Canada, in every case data are available for over 100 continuous years. The British data go back to 1830, near the end of the British Industrial Revolution. Italy's statistics began in 1862, at the time of Italian unification and before that nation began its "take-off" into sustained economic growth. The Scandinavian country data begins in 1854 (Denmark) or 1881 (Sweden), before or at the time these nations began their major growth spurt.11 The data for Canada begin only in 1926."

You're right, though, the OECD data doesn't suffer from that problem. However, in the OECD data there's a nasty little problem where all the smaller government states have significantly smaller per-capita income than the big government states. "Technology catchup" explains it just as well, seeing how Mexico and South Korea are OECD members.

Most importantly, correlation isn't causation.

I checked out the graphs and the report. I don't know which is worse. That this sort of sophomoric stuff is on the House Joint Economic Committee's web site or the report itself. To give but an example (even from the time of the report itself). The report purports to find a relationship bewtween government size and economic growth and shows a dramatic growth in government for the US beween 1960 and 1996 and finds growth fell 2.2 percent when one compares 1960-66 and 1990-1996. The obvious answer to this is that the latter period included a recession and the former a recovery. If one compares growth between 1965-1970 and 1995-2000 one finds that government grew dramatically and growth in the latter period was 1.3 percent higher thereby proving growth is aided by bigger government. Similer criticisms can be leveled at the remainder. They are selective in both time period and countries and therefore arrive at these conclusions.

For instance poor countries, tend to have small governments, because they are poor and can't sell bonds or collect much in taxes. However as the grow, because their economies are small they have very high growth rates, as they grow larger their growth rates fall and their governments grow. Growth rates fall because the larger the base for the percent change the greater the level required for a significant increase. Thus small economies can have GDP growth that is small in magnitude and large in terms of percent changes. Thus one is correlated with another but one is not caused by another.

Having said this I am sure that there are government policies that effect growth. Whether it be heavy governmental endebtedness or absurdly high taxes.

"This means only one thing for me, protracted deflation, especially if we use hedonistic price calculations."

It seems to me that, if the federal governments of countries like Japan, the U.S., and various OECD countries get together, and act as a cartel to simultaneously monetize a significant portion of their debts, deflation won't be a problem. (Inflation will.)

"Especially bad news for all those taking out large debts to buy their condos now."

I bought a townhome just over a year ago. The way I look at it, the only problem that could occur is if I lose my job. (Or the federal government no longer allows a mortgage deduction on taxes.) Otherwise, I was a complete sap for renting all these years. (I was never confident enough in keeping my job to take the plunge.) Barring job loss, home ownership is simply a much better deal, unless we start taking about deflation HUGE deflation rates...over 5% per year.

"My guess is that you're right about China and India, but wrong about the timing. They could be online in a big way within a decade. India based global services may not be for tomorrow, but 5-10 years, then for sure."

I'm predicting that China and India will continue to grow at the rates they've grown for the past decade or so. I think that's like 7% per year for China, and 5-6% per year for India. Those are pretty huge rates. I don't see how those could increase substantially. (China still doesn't allow free speech, and both India and China still have substantial amounts of socialism left in their countries.)

"David Glynn is on the right lines. What is going to matter is human capital value..."

What matters is whether that "human capital" is used. It can't be used properly, unless people have economic freedom, consisting of such things as low taxation rates, protection of property (through the rule of law, rather than rule by men), freedom of trade, low levels of regulation, governments not inflating the money supply, or creating black markets by limiting prices and wages, and things like that. In short, calculating an "Index of Economic Freedom" provides a pretty good way of predicting future GDP growth.

But as I've posted here, at least for OECD countries, the simple level of total government spending is a good predictor of economic growth. (Because they've generally stopped the things like hyperinflation and wage/price controls.)

"One last point, you're way off beam on Russia. They have rising mortality, falling life expectancy, fertility bajissimo, and educated emmigration towards western Europe. Bottom line: economic implosion."

No way. I'd be happy to bet you $10 at even odds that Russia's GDP per capita increase is among the top 25 countries in the world, from 2000-2009. And I'd be happy to bet you another $10, this time giving you 2-to-1 odds, that Russia's GDP is above the world average, over the same time period.

Russia has just instituted a flat 13% income tax. That puts them right at or near the world leadership position, in terms of income tax policy promoting growth. If you don't have that in your economic model(s), you'd better change your model(s).