No Babies, No Stimulus
The last four years have seen a lot of back and forth about stimulus. Though the battle is carried out with studies and lots of historical analogy, I see little evidence that either side has done much persuading. The real battle is over ideology: Roughly speaking, those who think larger government would be swell are in favor of spending more government money on stuff, while those who want to shrink government until they can drown it in a bathtub are vehemently opposed.
But today, Tyler Cowen actually suggests a new way to think about stimulus: in terms of demographics.
- Government consumption's share of global gross domestic product has risen from 11 percent to 14 percent over the past 15 years. In 2013, it hit its highest level since 1980.
- At the same time, government debt-to-GDP ratios have hit record highs in many countries.
- Working-age populations are growing more slowly, or in some countries, such as Japan, beginning to decline.
- Accordingly, the window of opportunity for mature economies to bring government debt levels down to sustainable levels is narrowing, owing to demographic shifts.
- Given the situation in the government sector, private consumption needs to make a bigger contribution to the next phase of the recovery. Its share of GDP continues to hit multi-decade lows. Fixed investment is also making a smaller contribution to global growth than it did in the pre-crisis years.
I've written before about the havoc that demographics can wreak on debt levels:
Sweating this debt down by austerity alone would take ages, cause immense suffering among people who depended on the cut services, and -- as Greece has shown -- draw fierce public opposition. Moreover, commentators like Paul Krugman argue that it would actually make the problem worse in the short term, because government austerity makes the economy contract. As they see it, trying to close Europe's fiscal gaps with austerity alone is like trying to get out of a deep hole by digging harder.
Strong growth by Europe's troubled debtor nations would of course offer a different, and less painful, way out. After all, if you make $30,000 a year, a $10,000 credit-card balance is crippling; but if you make $300,000 a year, it's fairly trivial. The faster Italy's economy expands, the more manageable Italy's debt becomes.
But that's where the dearth of workers comes into play. Everyone agrees that rapid growth would be much nicer than higher taxes and slashed pension payments. The hitch is that over the past five years, growth in the Italian economy hasn't averaged even 1 percent a year. Soaring growth will be tough to achieve, because more and more Italians are getting too old to work -- and fewer and fewer Italians have been having the babies needed to replace them.
But I didn't explore one direct implication of this: that as our demographics change, perhaps our stimulus policy should as well.
If you do a big stimulus when the population is growing, you can expect, over time, to be able to spread debt payments over more people. The value of the debt may not change, but the per-capita debt burden will shrink.
But if you undertake a big stimulus when the population is stagnant, or even declining, then over time, the per-capita debt burden will rise ... and if your society encourages long retirements, the debt burden per-worker will rise even faster.
(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)
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