Global Aging and the Crisis of the 2020s, Demographic Storms Ahead

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From the fall of the Roman and the Mayan empires to the Black Death to the colonization of the New World and the youth-driven revolutions of the twentieth century, demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. By the 2020s, an ominous new conjuncture of demographic trends may once again threaten widespread disruption. I am, of course, talking about global aging, which is likely to have a profound effect on economic growth, living standards, and the shape of the world order.

Long-time readers of Outside the Box are familiar with the work of Neil Howe, co-author of one of the most prescient books of the last few decades, The Fourth Turning (written in 1997), which described and indeed virtually nailed our current social climate. When Neil writes, it pays to pay attention. He has recently written a piece called "Global Aging and the Crisis of the 2020s," an article he co-authored with Richard Jackson. They work with the Center for Strategic and International Studies on the Global Aging Initiative. This week’s OTB was just published in the January 2011 issue of Current History, who have given me permission to send it to you.

Howe and Jackson are also the authors of "The Graying of the Great Powers" and other commentary on the impact that demographics will have on our future. You can see that paper and others here.

Here in Cabo San Lucas we are staying at Casa Oliver, which was recently featured in the Robb Report. The owner, Dene Oliver, is a very generous man who donates the use of his home to various charities, which is how Jon Sundt and his partners at Altegris secured the place, at a charity auction for an anti-drug organization sponsored by Jon.

The whales are cavorting a little way off the beach . The kids are in the pool. The sun is setting over the Pacific. Jon Sundt and company have picked a great place for our annual meeting. A great place to kick back and reflect on the future, which seems to be coming at us ever faster.

They are calling dinner, prepared by a serious world-class chef, Pia Quintana, so it’s time to go. Sushi night.

Your living larger than usual analyst,

John Mauldin, Editor Outside the Box

Global Aging and the Crisis of the 2020s

by Neil Howe and Richard Jackson

"The risk of social and political upheaval could grow throughout the developing world – even as the developed world’s capacity to deal with such threats declines."

From the fall of the Roman and the Mayan empires to the Black Death to the colonization of the New World and the youth-driven revolutions of the twentieth century, demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. By the 2020s, an ominous new conjuncture of demographic trends may once again threaten widespread disruption. We are talking about global aging, which is likely to have a profound effect on economic growth, living standards, and the shape of the world order.

For the world’s wealthy nations, the 2020s are set to be a decade of rapid population aging and population decline. The developed world has been aging for decades, due to falling birthrates and rising life expectancy. But in the 2020s, this aging will get an extra kick as large postwar baby boom generations move fully into retirement. According to the United Nations Population Division (whose projections are cited throughout this article), the median ages of Western Europe and Japan, which were 34 and 33 respectively as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility. In Italy, Spain, and Japan, more than half of all adults will be older than the official retirement age – and there will be more people in their 70s than in their 20s.

Falling birthrates are not only transforming traditional population pyramids, leaving them top-heavy with elders, but are also ushering in a new era of workforce and population decline. The working-age population has already begun to contract in several large developed countries, including Germany and Japan. By 2030, it will be stagnant or contracting in nearly all developed countries, the only major exception being the United States. In a growing number of nations, total population will begin a gathering decline as well. Unless immigration or birthrates surge, Japan and some European nations are on track to lose nearly one-half of their total current populations by the end of the century.

These trends threaten to undermine the ability of today’s developed countries to maintain global security. To begin with, they directly affect population size and GDP size, and hence the manpower and economic resources that nations can deploy. This is what RAND scholar Brian Nichiporuk calls "the bucket of capabilities" perspective. But population aging and decline can also indirectly affect capabilities – or even alter national goals themselves.

Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline. As societies and electorates age, growing risk aversion and shorter time horizons may weaken not just the ability of the developed countries to play a major geopolitical role, but also their will.

The weakening of the developed countries might not be a cause for concern if we knew that the world as a whole were likely to become more pacific. But unfortunately, just the opposite may be the case. During the 2020s, the developing world will be buffeted by its own potentially destabilizing demographic storms. China will face a massive age wave that could slow economic growth and precipitate political crisis just as that country is overtaking America as the world’s leading economic power. Russia will be in the midst of the steepest and most protracted population implosion of any major power since the plague-ridden Middle Ages. Meanwhile, many other developing countries, especially in the Muslim world, will experience a sudden new resurgence of youth whose aspirations they are unlikely to be able to meet.

The risk of social and political upheaval could grow throughout the developing world – even as the developed world’s capacity to deal with such threats declines. Yet, if the developed world seems destined to see its geopolitical stature diminish, there is one partial but important exception to the trend: the United States. While it is fashionable to argue that US power has peaked, demography suggests America will play as important a role in shaping the world order in this century as it did in the last.

Graying Economies

Although population size alone does not confer geopolitical stature, no one disputes that population size and economic size together constitute a potent double engine of national power. A larger population allows greater numbers of young adults to serve in war and to occupy and pacify territory. A larger economy allows more spending on the hard power of national defense and the semi-hard power of foreign assistance. It can also enhance what political scientist Joseph Nye calls "soft power" by promoting business dominance, leverage with nongovernmental organizations and philanthropies, social envy and emulation, and cultural clout in the global media and popular culture.

The expectation that global aging will diminish the geopolitical stature of the developed world is thus based in part on simple arithmetic. By the 2020s and 2030s, the working-age population of Japan and many European countries will be contracting by between 0.5 and 1.5 percent per year. Even at full employment, growth in real GDP could stagnate or decline, since the number of workers may be falling faster than productivity is rising. Unless economic performance improves, some countries could face a future of secular economic stagnation – in other words, of zero real GDP growth from peak to peak of the business cycle.

Economic performance, in fact, is more likely to deteriorate than improve. Workforces in most developed countries will not only be stagnating or contracting, but also graying. A vast literature in the social and behavioral sciences establishes that worker productivity typically declines at older ages, especially in eras of rapid technological and market change.

Economies with graying workforces are also likely to be less entrepreneurial. According to the Global Entrepreneurship Monitor’s 2007 survey of 53 countries, new business start-ups in high-income countries are heavily tilted toward the young. Of all "new entrepreneurs" in the survey (defined as owners of a business founded within the past three and one-half years), 40 percent were under age 35 and 69 percent under age 45. Only 9 percent were 55 or older.

At the same time, savings rates in the developed world will decline as a larger share of the population moves into the retirement years. If savings fall more than investment demand, as much macroeconomic modeling suggests is likely, either businesses will starve for investment funds or the developed economies’ dependence on capital from higher-saving emerging markets will grow. In the first case, the penalty will be lower output. In the second, it will be higher debt service costs and the loss of political leverage, which history teaches is always ceded to creditor nations.

Even as economic growth slows, the developed countries will have to transfer a rising share of society’s economic resources from working-age adults to nonworking elders. Graying means paying – more for pensions, more for health care, more for nursing homes for the frail elderly. According to projections by the Center for Strategic and International Studies, the cost of maintaining the current generosity of today’s public old-age benefit systems would, on average across the developed countries, add an extra 7 percent of GDP to government budgets by 2030.

Yet the old-age benefit systems of most developed countries are already pushing the limits of fiscal and economic affordability. By the 2020s, political conflict over deep benefit cuts seems unavoidable. On one side will be young adults who face stagnant or declining after-tax earnings. On the other side will be retirees, who are often wholly dependent on pay-as-you-go public plans. In the 2020s, young people in developed countries will have the future on their side. Elders will have the votes on theirs.

Faced with the choice between economically ruinous tax hikes and politically impossible benefit cuts, many governments will choose a third option: cannibalizing other spending on everything from education and the environment to foreign assistance and national defense. As time goes by, the fiscal squeeze will make it progressively more difficult to pursue the obvious response to military manpower shortages – investing massively in military technology, and thereby substituting capital for labor.

Diminished Stature

The impact of global aging on the collective temperament of the developed countries is more difficult to quantify than its impact on their economies, but the consequences could be just as important – or even more so. With the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anticompetitive changes in the economy. We may see growing cartel behavior to protect market share and more restrictive rules on hiring and firing to protect jobs.

We may also see increasing pressure on governments to block foreign competition. Historically, eras of stagnant population and market growth – think of the 1930s – have been characterized by rising tariff barriers, autarky, corporatism, and other anticompetitive policies that tend to shut the door on free trade and free markets.

This shift in business psychology could be mirrored by a broader shift in social mood. Psychologically, older societies are likely to become more conservative in outlook and possibly more risk-averse in electoral and leadership behavior. Elder-dominated electorates may tend to lock in current public spending commitments at the expense of new priorities and shun decisive confrontations in favor of ad hoc settlements. Smaller families may be less willing to risk scarce youth in war.

We know that extremely youthful societies are in some ways dysfunctional – prone to violence, instability, and state failure. But extremely aged societies may also prove dysfunctional in some ways, favoring consumption over investment, the past over the future, and the old over the young.

Meanwhile, the rapid growth in ethnic and religious minority populations, due to ongoing immigration and higher-than-average minority fertility, could strain civic cohesion and foster a new diaspora politics. With the demand for low-wage labor rising, immigration (at its current rate) is on track by 2030 to double the percentage of Muslims in France and triple it in Germany. Some large European cities, including Amsterdam, Marseille, Birmingham, and Cologne, may be majority Muslim.

In Europe, the demographic ebb tide may deepen the crisis of confidence that is reflected in such best-selling books as France Is Falling by Nicolas Baverez, Can Germany Be Saved? by Hans-Werner Sinn, and The Last Days of Europe by Walter Laqueur. The media in Europe are already rife with dolorous stories about the closing of schools and maternity wards, the abandonment of rural towns, and the lawlessness of immigrant youths in large cities. In Japan, the government has half-seriously projected the date at which only one Japanese citizen will be left alive.

Over the next few decades, the outlook in the United States will increasingly diverge from that in the rest of the developed world. Yes, America is also graying, but to a lesser extent. Aside from Israel and Iceland, the United States is the only developed nation where fertility is at or above the replacement rate of 2.1 average lifetime births per woman. By 2030, its median age, now 37, will rise to only 39. Its working-age population, according to both US Census Bureau and UN projections, will also continue to grow through the 2020s and beyond, both because of its higher fertility rate and because of substantial net immigration, which America assimilates better than most other developed countries.

The United States faces serious structural challenges, including a bloated health care sector, a chronically low savings rate, and a political system that has difficulty making meaningful trade-offs among competing priorities. All of these problems threaten to become growing handicaps as the country’s population ages. Yet, unlike Europe and Japan, the United States will still have the youth and the economic resources to play a major geopolitical role. The real challenge facing America by the 2020s may not be so much its inability to lead the developed world as the inability of the other developed nations to lend much assistance.

Read the rest of the article

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