The OTHER Economic Crisis → Washingtons Blog
The OTHER Economic Crisis - Washingtons Blog

Wednesday, October 7, 2009

The OTHER Economic Crisis

You know all about the subprime, alt-a, option arm, and commercial real estate crises.

You're well-aware of the house of cards built with credit default swaps, securitized assets and other exotic investments.

You've heard about the massive debt overhang threatening individuals, companies and the country as a whole, and the massive de-leveraging which is still to occur.

You're aware of the soaring unemployment rate, the tapped out consumer, and many other economic problems.

But do you know about the demographic crisis?

What Demographic Crisis?

Franco Modigliani won the Nobel Prize in Economics 1985, partly for his "life cycle hypothesis", which states that spending and savings patterns are predictable and largely a function of age demographics. In other words, Modigliani's hypothesis is basically that age demographics largely determine the health and robustness of an economy.

Harry Dent and other financial advisors who have examined American demographics say that we're in big trouble.

Specifically, they say that the basic health of any country's economy is largely driven by the number of its citizens who are in their peak spending years.

For example, the peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.

Dent says that this principle applies to all countries, although the peak spending years might vary slightly from country to country.

In the U.S., Dent says, 46-50 year olds are the biggest spenders, because that is when - on average - they are paying for their kids' college, paying mortgage on the biggest house they will own during their life, and making other big-ticket purchases.

Claus Vogt agrees, saying that - all other things being equal - the country with the youngest population will experience the biggest growth in the future, as it will have the highest percentage of productive people in the days ahead (Modigliani's age categories are somewhat different from Dent's and Vogt's, but - in general - people are having children later than they were in 1985).

Whether or not you believe Modigliani , Dent and Vogt, it should be obvious that countries with a large percentage of elderly people and a small proportion of productive workers will have less productive output and a larger demand for social services than those with a higher percentage of workers. It should also be obvious that this will tend to drag down the economy.

Which Countries Have the Most Favorable Demographics?

Which countries have the best demographics?

Let's start by looking at the "age pyramid" for the United States. The following 2 charts from the National Institutes of Health shows that the population is aging:

This graphic (courtesy of Ed Stephan) shows the U.S. age pyramid from from 1950 through 2050:

male female

Population of the United States, by Age and Sex,
1950-2050 (millions)

information source: International Data Base, U.S. Census Bureau;
supplied pyramids were modified using Canvas, GraphicConverter and GIFBuilder.

[If you can't see the dates at the bottom of the pyramid, click here].

As NIH notes:

The first of the postwar baby boom cohort, born 1946–1964, will turn 55 years in 2001. In just three decades, an extraordinary change in the age structure of the United States is anticipated. By 2030, one in five persons (20% of the U.S. population) will be aged 65 or older, increasing from the present ratio of one in nine persons (12.8%). The number of persons in the 65 and older age group will more than double, increasing from the current 34 million persons to 70 million persons. Moreover, within the older segment of the population, because of longer life expectancy and additional persons reaching older ages, there will be age shifts resulting in the 85 and older population more than doubling in size from 4.3 million persons to approximately 8.9 million persons.

An aging U.S. population means less productive workers, less big-spending consumers, and more dependent elders.

Here's China:

As Reuters points out, China will have an aging population in the future, but not for some time:

China's working-age population will peak in 2015 and plunge by 23 percent by 2050.

Brazil has a much younger age demographic.

And India's is even younger than Brazil's.

The following chart shows that Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:

Chart 2: Old Age Dependency Ratios for Selected Countries



And this chart shows that - as a whole - emerging markets have a higher percentage of working age population:

Chart 3: Working-Age Population as % of Total Population



You can find some interesting charts showing age pyramids for multi-country regions here. You can search for other countries or regions, as well.

What Does It Mean?

What does all this mean?

Well, initially, it means that - in addition to everything else they have going for them - 2 of the BRIC countries (Brazil and India) have much more favorable demographics than the United States. So they are at a competitive advantage to America for demographic reasons in addition to the other reasons that people write about.

Indeed, as Richard Jackson told the White House Conference on Aging in 2005:

If demography is destiny, global leadership may pass to the “Third” world...

Countries with slowly growing workforces may have slowly growing economies...

We live in an era defined by many challenges, from global warming to global terrorism.

None is as certain as global aging.

And none is likely to have such a large and enduring effect on the shape of national economies and the world order.
Moreover, Dent and another of the main writers focusing on the economic effect of age demographers - Daniel Arnold - say that America's aging demographics point to a major depression.

As Arnold writes:

2008 was the victim of a self inflicted sub-prime financial crisis. This has nothing to do with the demographics based massive depression that is yet to come, as described in the book. The sub-prime consequences are however very similar though mild so far compared to what is coming our way. The book clearly spelled out that along the way unpredictable short-term (1 to 3 years) disruptive events could happen. The sub-prime crisis is just that. It should be regarded as the “warmer upper” or “hors d'oeuvre” for the big one that is now rapidly closing in on us all.

I hope that he's wrong.

See also this and this.


  1. it doesnt seeem that chiny have young population. it demographic piramid looks very similar to US's

  2. Prognosticating demographic trends reaching out to 2050 may -to some- not seem the leap it is.

    But if one has spent enough time reading older texts and gauging the veritable worth of similar -well-aged- projections, our discomfort here should be striking us hard with the more realistic perspective-salami.

    Clearly the impending extinction of the baby-boomers' -PARENTS- is a major contributor to the housing crisis.

    These really-oldsters -still own perhaps 10-15% of the country's prime residential and vacation real estate. Look around. Look around and gauge increasing disproportion in the supply and demand.

    The boomers themselves will go extinct someday not too far off too, -off to that Grateful Dead concert in the sky.

    This article -can- be wildly misread though, -misread to imply that countries with younger populations are going to be richer.

    Look before you leap to your logical conclusions.

    Such a country -MAY- make some small gains, but -total wealth-, -per capita wealth- and -standard of living- are other items altogether, and historically too often determined by many other factors.

    So -the focus here is skewed.

    Clearly it is skewed by the same bean-counter's abacus that led the same class of paper-napkin statisticians to conclude back in the Seventies that Japan would soon enough dominate world economies. The Japanese still dominate sushi.

    Coincidentally and perhaps more importantly -I read this -this morning- -an article -I interpreted as being about yet another immoral sexual deviance, this of the "Quiverfull" -a Christian cult intent on flaunting their social responsibility to keep -over- population -under- control.

    I'll be the first to admit, we're treading new ground here. But I am appalled at people who have large families. No one can know what the future will bring, but having ten kids isn't likely to provide for a better future for anyone.

    From our American perspective, having stolen a continent from a varied-race -sent nearly extinct by our diseases and our genocide, if there is anything we can generalize about demographics -it's that THIS country, -the US-of-A- has the population today that India had in about 1940, and, about the population today that China had in about 1800.

    Of course there are those who think that within another two-hundred years the human species, or at least the thin, well-educated, articulate, well-read and good-looking Americans -of all races-, will be populating other galaxies, and probably fighting the Klingons for their Empire too.

    And there others who think the Second Coming is right around the corner.

    Neither world view is a viable excuse not to face the demographic reality that is coupled with unequivocal evidence -the standard of living for human beings on this planet has been in rapid decline for hundreds of years.

    Diversity is a prime indicator of enjoyment and quality of life, -and as such- diversity is something we all should morally strive to protect for future generations.

    -Diversity is definitely on the decline in almost any category we examine.

    Keep your head down in your bunker as you make predictions about the demographics and the economies of the future.

    For gauging national wealth -a smaller population is preferable to either an older population or a younger population.

  3. Wasn't Harry Dent the guy who write the Roaring 2000's. He predicted DOW to be over 30,000!

  4. It may end up over 30,000, but 30,000 might not be worth much. Measure the Dow in ounces of gold instead for a more realistic picture of how the market is doing. The Dow was about 50 ounces of gold in 2000, and is worth about 10 ounces of gold now. Down about 80% in terms of what many consider the only type of real money. In non-inflation adjusted terms, what would it help you to have the Dow at 30,000 if gold at the same time has risen to 100,000 and a loaf of bread costs 100 dollars?

  5. Dan Robertson: Do you really believe "the standard of living for human beings on this planet has been in rapid decline for hundreds of years?" Man, that's incredibly lame comment as is most of what you have said. In order for the population to remain stabile, the reproduction rate of a country must be greater than 2.x children per family. Muslim families and the "Quiver-full Christians" you referred to are reproducing at a much higher rate. The most "civilized"--or modern segments of society, read "those who readily use contraception"--are actually shrinking. Civilization as we know it, based on this pattern may well take a drastic turn towards the highly religious viewpoints of these large groups who are opposed to birth control---and are intentionally (this has been well-reported of Muslim leadership) growing in democratic countries to become the majority in the not-so-distant future.

  6. Still mulling this piece over but off the top of my head seems to be a lot of pieces of the Perfect Storm being left out of this equation. Peak Oil for one and the crash of the dollar for two. Stopping there for now it would seem a nation with less demands for scarce goods would be more stable than a nation with a ton of hot charging young folks who want their suv. I'm working up a post on my blog on this because I believe there are a lot of factors that may not make this a US crisis has he claims.

  7. Read "The Second Great Depression" by Warren Brussee. Published in 2005, Brussee comments that the demographic problem issue mainly overlooked is -WHO ARE YOU GOING TO SELL YOUR DOW 30000 PORTFOLIO TO IF THERE AREN'T ENOUGH GREATER FOOLS AROUND TO BUY IT?? This demographic problem will adversely affect the Boomers delusional retirement 'plan'...PONZI IMPLOSION DIRECTLY AHEAD.

  8. According to Fig 3 above the 40 - 60 year olds increase from 1995 to 2030 in the USA.

    You can draw the exact opposite conclusion than the one portrayed here.

    Yes the population is aging, but the total population is increasing. Also people are working longer now.

    This particular trend will contribute to our economic vitality.


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