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Tuesday, October 17, 2006

Much Ado About Ageing?

One of the rationales behind this blog, and I make no bones about it, is that Italy is an important case for a phenomenon which has global significance: that phenomenon is known as the demographic transition. Barely a week ago Federal Reserve Chairman Bernanke made a major speech about just this topic. The whole speech is worth a read, but the heart of the matter is this:

This coming demographic transition is the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Although demographers expect U.S. fertility rates to remain close to current levels for the foreseeable future, life expectancy is projected to continue rising. As a consequence, the anticipated increase in the share of the population aged sixty-five or older is not simply the result of the retirement of the baby boomers; the "pig in a python" image often used to describe the effects of that generation on U.S. demographics is misleading. Instead, over the next few decades the U.S. population is expected to become progressively older and remain so, even as the baby-boom generation passes from the scene.

Now Bernake is talking here about the case of the United States, but the issue is far more generalisable, and note what he says: "over the next few decades the U.S. population is expected to become progressively older". Bernanke is talking about the *population* here (ie median ages) and where he says 'remain so' he could just have easily said and 'will continue to do so', since this process has, at the present time, no end point. Median ages are rising and will continue to rise so long as life expectancy continues to increase. And which are the three countires with the highest median ages to date: why Italy, Germany and Japan (please consult the full list of countries, to ger a clearer picture).

So we are in the throes of a transition, and this transition will, as Claus Vistesen suggests, have important economic consequences, and I think anyone trying to argue the contrary needs to measure their words very carefully.

So the first point I want to make is that I didn't especially chose Italy, Italy chose itself, since according to the UN 2002 population forcecast Italy is set - over the next decade or so - to become the oldest country on the planet in terms of median age.

Now why do countries get older? Well in the first place this ageing process is due to a drop in fertility to below replacement level, and in the second place it is a result of a continuing increase in life expectancy. The drop in fertility narrows the base of the population pyramid, while the increase in life expectancy elongates the upper end.

Now why is this economically important? Well in the first and most obvious instance because of the shift in dependency ratios. Countries with rapidy increasing life expectancy and lowest low fertility (below 1.5 tfr) face the prospect of not only a decreasing proportion of the population working, but also of an eventual decline in the absolute numbers of the working population, and this as the number of elderly dependents increases both absolutely and as a proportion of the total population. So this is why government income and expenditure becomes important, because at the end of the day all of this has to be paid for, and if you run up substantial deficits during the relatively good times, then how are you going to sustain the more difficult burden which lies ahead? This is the heart of the issue.

Of course there are many details to this picture, and that is why a group of us set up a special blog devoted entirely to the theoretical issues posed by this transition.

Now Paris argues: "demographers have a fairly poor track record. First they told us that we should worry about over-population (in the 1970s) and now they tell us the problem is the declinding birth rate and the aging population."

Actually this is not so inconsistent as it seems. In the first place countries with high birthrates like Mali, Senegal, Niger etc, do have a problem, they have far too many children, and their economies cannot get off the ground. So those demographers who said that it was a priority to get birth rates down were right, but the problem is they have now come down so far in most developed countires that populations are not reproducing themselves. And this is the issue we must address.

Personally I now think there is some sort of inevitability about low fertility, that it has a perfectly comprehensible economic rationale in terms of trading quality for quantity in children, and that the pattern is now so general (see this list) that trying to raise fertility is a bit like trying to make the oceans go back, I don't think it is doable. Of course fertility in Italy is not as low as it seems (since there is a statistical postponement effect as well as a real quantity one) and we should expect some sort of rebound, but the true number is well below replacement.

My main beef with Paris's 'everything is just fine in Italy' take, and with the 'demographers get everything wrong' part, is that people have been saying this for a long, long time, but if back in the early 90s there had been a real child friendly policy in Italy - this would have been worth investing some of that enormous government debt in - then instead of fertility around the 1.3 mark, it might now have been around the 1.7 one. Also a lot could have been done to make the education system more efficient and the labour market more effective for young women entrants, so that instead of postponing childbirth to 35 they could have been having their firts child at 27 or 28 and again that would have made a big difference.

But we now have what we have, and in the significant time horizon fertility isn't going to change sufficiently to make any meaningful difference to the outcome.

Another area of effective policy would be extending the working life upwards, but many people in Italy are still retiring at 60. In the US the decision to increase orking life up to 67 was taken long ago, 25% of the Japanese population are now working at 75, in Germany they have decided to increase the age to 67, and in the UK they are talking about it, but what is Italy doing, would somebody please tell me, since this is far from obvious.

Finally, there is immigration. This of course can help to improve the pyramid structure and as such is welcome. But it wasn't so long ago that senior Italian politicians were threatening to shoot boatloads of immigrants out of the sea. So the change of heart in Italy on immigration is a welcome move, and the Prodi proposal to simplify nationality acquisition is again a move in the right direction, but one more time we are back with the fact that to attract migrants you need jobs, and to have jobs you need growth, and this growth is precisely what has been lacking in Italy over the last decade or so (more on this in another post).

So the point is, there are things which can be done, and they are pretty urgent, but simply saying 'problem, what problem', 'no problem here' won't do anything to make it easier to address all of this.

14 comments:

Paris ib said...

Don't miscontrue my arguments please. I never said Italy didn't have problems. You said that for me and quite frankly I don't appreciate the inference. Italy has problems but they are at the Government level and they involve things like Taxation. Why don't you look at what the French did to address their low birth rate. It was at the Government level and it involved TAXATION. There are problems and there are solutions.

Paris ib said...

In addition I do not believe that Italy's central problem is the birth rate. And I don't think that raising the Italian birth rate will fix "Italy's problems". Making demographics the central issue seems to me to be putting the horse before the cart. Does the world need more people? Why?

I believe that what the world really needs is effective government and the intelligent use of existing resources, not more people. Trying to make the "Italian case" fit your preconceived ideas about population really isn't doing anyone any favours. Though I guess it does give you a way to pass your time.

Edward Hugh said...

"Don't miscontrue my arguments please."

OK, I unconditionally apologise, but surely you can accept that that is what you seem to be saying. You don't seem to accept that this demographic transition is creating a problem for Italy. This is the point. So if you don't buy the idea that there is a problem, then you don't need to find answers. Or tell me I am wrong.

"Why don't you look at what the French did to address their low birth rate."

Yep, but the French have been doing this since the 1940s, the brunt of my argument is that this remedy is now too late for Italy, simply because when demographers started saying at the start of the 90s that low fertility was a problem, then a lot of people started to say they were wrong, and that it wasn't a problem.

So tell me, which are you saying. That it is a problem and that it needs addressing, or that it isn't a problem. I am genuinely confused.

Edward Hugh said...

"In addition I do not believe that Italy's central problem is the birth rate."

OK, you posted this while I was posting mine. Let me be clear, I am not saying it is simply the birth rate that is at issue, it is the whole transition that is the problem, or rather, better said, that presents the economic problem.

Of course, we may be better off with a planet with less people, I don't deny that for a moment. It is the how that matters. There is the little issue of intergenreational justice. A lot of people in Italy (and elsewhere) now in their 50s have paid pensions for the previous generation, and are faced with the problem of who is going to pay their pensions. These are the kinds of issues.

"Trying to make the "Italian case" fit your preconceived ideas about population really isn't doing anyone any favours. "

I'm not trying to make the Italian case fit any preconceived ideas, I am simply saying that if it continues like this it is going to go bust. To me at least that is obvious, and it isn't at all clear how it can avoid this eventuality.

Paris ib said...

The change in the French tax regime happened 20 years ago.

And I come back to the argument that putting demographics at the centre of Italy's problems is something which I don't accept. And, with respect, I think I know what I'm talking about here more than you do. So, in my opinion, the problems in Italy, virtually all of them, come down to poor Government.

Buy my main issue is this: putting demographics at the heart of the issue is so MEDIEVAL. What's the answer? Generate a big enough new generation (of slaves?) capable of supporting the aging population which voted itself in pensions and benefits which it never paid for? I don't think so. That generation which didn't pay for all these exciting new benefits and pensions will have to do without. THAT, in my opinion, is the answer to Italy's problems. Sorry (you old) guys will have to dig out all those savings you have hidden away and start paying for your own livelihood. The next generation has no intention of doing if for you. Life's a bitch and then you die.

Paris ib said...

I think we have basic agreement here somewhere. The problem is intergenerational conflict. I totally agree. And the solution will be simple: the current generation of tax payers is not prepared to pay for the outlandish pensions which previous generations have voted themselves and NOT FUNDED.

Take a look at the absolutely obscene pensions Italy's politicans enjoy. Mr. Prodi if you want ANY credibility AT ALL, you know where you should start working.

So the solutions are as follows: a) inflate your way out of the problem b) cut pension benefits or c) tax excess pensions like mad. And there is NO SHORTAGE of excessive, unfunded pensions in Italy. And yes you're right the system will go bust if it's not fixed. But if there is no money to pay for all this crazy stuff then, trust me, they won't get that money. All we are looking at here are the details of how that is done. But you may as well consider it done right now. Because this generation will NOT pay.

Paris ib said...

And that should have been: misconstrue.

Aapo said...

Very enjoyable reading, I've to say. Maybe you Edgar have already put a link somewhere but here is anyway a good UN database of all that and much more, ranging from 1950 to 2050.

Of that intergenerational conflict, that Paris mentions. What makes the problem even worse is that changing demography is surely changing voting patterns too. Babyboomers are expected to put Italy (and certainly not only Italy) in a nice and neat political handcuff and you can't really vote yourself out of it -because you're just not enough. So there's not a reform now, there probably won't be before it's too late and something has already hit the fan.

Thus I'm quite skeptical of that "this generation will not pay" thing. If it refers to emigration or even further tax evasion, then maybe yes. But through a political process it will be quite impossible.

Remember also how fast new medical treatments are developing. One point to remember is that it not only raises the life expectancy but makes health and elder care more expensive. Also in this context it'd be damn desirable to have your public finances in order.

Paris ib said...

Hello aapo, re your entry: can't pay, won't pay. Yes, we will see more tax evasion and under the radar economic activity and emigration. There is no way that the younger generation will pay all the bloated benefits the boomers have forced through (without having funded them) because they have the demographic/political edge. Too easy to vote yourself some nice benefits and expect someone else to pick up the tab!! So somehow, someway either those benefits will be cut or the older generation will have to dig into their savings to pay for their lifestyles.

Edward Hugh said...

Hi Paris,

I've been quiet since I've been busy, not because I am ignoring you :).

"I think we have basic agreement here somewhere."

Well good, I was hoping we'd get round to this sometime.

I want to make plain, I never intended to say that you didn't think Italy had problems. I'm sure you think it does have them, and I'm equally sure in the political arena we would pretty much agree about many of the things which are wrong.

What I was trying to say was that you didn't seem to take the problems posed by the demographic transition seriously as economic problems. I am pretty used to this since most economists (and most notably most US macro economists) don't. But that doesn't mean to say that I don't think I'm right.

Now you could try following the posts over at the demography matters blog (now in the sidebar, I'd forgotten about that one).

"And the solution will be simple: the current generation of tax payers is not prepared to pay for the outlandish pensions which previous generations have voted themselves and NOT FUNDED."

Well would that it were so simple. In the first place not all the people who are over 50 and are expecting pensions in the not too distant future are rich, and many of them have already made extensive contributions to the pensions of others.

Paygo, which is at the heart of the problem, works like this. You can blame Roosevelt who invented the thing, but unfortunately he is long dead. The idea was to incorporate a group of people who were poor and had never contributed into the system.

But as economists never tire of saying, there are seldom free lunches, and as Rabelais said, debts ultimately have to be paid. So this particular pyramid scheme, like the rest of its kind, now goes the way of all flesh.

But the problem is going to be a complex one. There are those who have paid and expect to receive, so who is going to pay them. If Italy does not wish to re-introduce the workhouse some minimum provision will have to be maintained, and this will be financed by the younger generations. At the same time those younger generations will need to take out their own private pension scheme.

And all of this while they are trying to buy a very expensive first flat and they find themselves increasingly caught in the mil-euristes trap.

Then there is the tax wedge, ie the situation whereby for each extra euro of tax on each job you lose a certain quantity of job creation. Another big headache.

Also, as you and Paola both highlight, since you are both qualified and out of Italy, the pressure is on bright young people to out-migrate. Marco, who is in the relatively prosperous Trento, has also told me of many similar cases he knows. But this out-migration only compounds the problem, since the more skilled leave and the less skilled stay, and even then there are still less young people left to produce and pay taxes.

So, all in all, complicated.

BTW take a look at Claus Vistesen and Alpha Sources, since he just put a link to your blog in a post, and he also said some fairly complimentary things about you, despite disaggreeing with you.

ITALIA said...

The problem with the demographic change in Italy is that there is a Muslim population not just in Italy but through out Europe that has a far higher fertility rate than the main population.
For me this is the real danger. By the end of the century Europe could have an Islamic majority and what we think of Italy and other European countries will be a thing of the past.

Edward said...

"what we think of Italy and other European countries will be a thing of the past."

Well apart from the somewhat dubious nature of your calculations.... I mean forgive me for saying this but you appear to have no idea at all about what the fertility decline is all about ... what you seem to be saying is that you would rather face poverty and go without a pension and a health system than adapt. Fine. That is your choice. But forgive us if the rest of us don't go along with you.

Nobody said...

I actually think Italia is absolutely right. In the future Europe will be hit by triple crises, superimposed one over another. It will be a class conflict between the class of pensioners and the working class, generation conflict and probably an ethnic one given that immigrants will be overrepresented in the next generation and because they are less into throwing their older parents to dogs, sorry entrusting them to nursing houses and similar facilities and so less dependent on the social system. It's nice to think about a world without borders and nationalities, however lets be realists. The stuff we are dealing with belongs to the realm of political/social sciences and not ideologies, doesn't it?

I would disagree with Paris lb that pensioners will be marginalized and pushed into relevance. They will become a major influential political block in every single country. Sustaining this situation exacerbated by Europe's generous welfare systems and a failure of the immigration policy would dictate an increased taxation burden for the rest of society which may trigger immigration of well educated native young people to the US and places like Latin America which I believe will see its best years in the next decades. Add to this increasing inter racial tensions in big European cities in particular with regards of the Muslim immigration and you have here a situation with a very pronounced snowballing effect. That's why I think Italia is quite right and you are not.

Nobody said...

pushed into relevance=pushed into irrelevance