Demography and economics: Look past the past
Charles A.E. Goodhart, Philipp Erfurth 04 November 2014
Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing. This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.
Our history is our database. When seeking to peer dimly into the future, our normal response is to examine what happened in (similar) past episodes and then to extrapolate those outcomes into the future. This assumption, that the future will mimic the past, is hard-wired into almost all our forecasting exercises, from the most simple to the econometrically and technically most complex.
Global economy Labour markets
forecasting, demographics, Ageing, fertility, globalisation, savings, consumption, life cycle, old age, healthcare, Retirement, investment, interest rates, labour productivity, technology, technology transfer
Monetary policy and long-term trends
Charles A.E. Goodhart, Philipp Erfurth 03 November 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).
Financial markets Macroeconomic policy Monetary policy
monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy
For economies, age is not just a number
Harun Onder, Pierre Pestieau 20 May 2014
The world’s population is ageing, due to both increasing longevity and decreasing fertility. This column shows that the net effect of ageing on capital accumulation (and therefore growth) depends on which of these two factors dominates, and also on the structure of the pension system. Under a pension system with defined contributions, a reduction in fertility induces adjustments in savings and working life that unambiguously increase capital per worker.
An ageing world population is expected to shape the economic future of the globe. According to UN calculations, the total world population will increase by 40% and the median age will increase by 7.8 years by 2050. Compared to a few decades ago, these rates represent a significant deceleration in population growth and a sizeable acceleration in ageing.
Frontiers of economic research Labour markets Welfare state and social Europe
pensions, fertility, demographics, Ageing, longevity, Social security, population, Retirement
The future of Japan’s Long-term Care Insurance Program
Satoshi Shimizutani 12 September 2013
Policymakers in the developed world are fretting over how to care (and pay) for their ageing populations. This column unpacks the thinking behind Japan’s extensive Long-term Care Insurance Program, arguing that there are too many sweeping assumptions about the elderly and how they behave. So how can we best design policy for long-term care? As ever, it is only from well-funded and comprehensive datasets – such as the Japanese Study on Aging and Retirement, now in its fourth year – that effective policy will come.
The debate of social-security-system reform in Japan is now entering a crucial stage. On 6 August this year, the Government’s National Council on Social Security Reform delivered its final report calling for creating a '21st-century model' of social security, proposing a shift from the current age-based burden sharing to a ‘capacity-based’ one (and aiming for implementation by 2025).
Health economics Welfare state and social Europe
Japan, Ageing, care
Fiscal consolidation and implications of social spending for long-term fiscal sustainability
Rossana Merola, Douglas Sutherland 31 March 2013
During the economic and financial crisis, fiscal positions across OECD countries deteriorated sharply. This column agues that population ageing and trends in social spending will further challenge the sustainability of fiscal balances. Research suggests that the scale of fiscal consolidation that will be needed to ensure long-term sustainability is large, but policymakers can look at the potential benefits of policy reform in mitigating budget pressures.
Predicted demographic developments over the coming decades are well known. Due to low fertility rates and rising life expectancy, OECD nations will see a ‘greying’ of their populations. The fiscal implications have been widely discussed (Kotlikoff 2012). One angle that is under-appreciated is the interaction between increasing spending on health and pensions, the post-crisis growth slowdown, and ongoing fiscal rebalancing efforts.
Monetary policy Poverty and income inequality Welfare state and social Europe
pensions, fiscal policy, Ageing
Eurozone: Looking for growth
Laurence Boone, Céline Renucci, Ruben Segura-Cayuela 25 March 2013
What happens after the crisis ends? This column estimates the long-term effects of the current cyclical downturn on Eurozone economies. In the absence of any real impetus for bold reform, estimates show that the damage will indeed be long lasting, permanently impairing growth for an ageing population that requires higher growth capacity more than ever before.
The financial crisis that erupted in 2008, prolonged by a sovereign crisis in the Eurozone, led to a massive contraction in trade, as well as in investment in physical and human capital; thus undermining the foundations of future growth. This may well continue as growth will not rapidly rebound while deleveraging slowly proceeds across Eurozone economies. Empirical evidence suggests deleveraging episodes accompanied by a housing crisis will take on average five and a half years across high-income OECD countries (or seven years when accompanied by a banking crisis (Aspachs-Bracon et al.
Europe's nations and regions Productivity and Innovation
growth, productivity, Ageing, Eurozone crisis, Solow
Public investments for long-term economic growth: the case of health
Michael Stolpe 22 March 2013
The crisis has shot holes in government budgets devoted to pro-growth public goods. This column argues that health-related public goods support long-term economic growth. Governments may be more inclined to focus on spending related directly to jobs, such as education and welfare-to-work programmes, but health should not be forgotten
Crisis or not, healthcare cries out for large-scale public investments that lock in what appears to be an historic trough in government borrowing costs in many of the world’s advanced countries.
US, Europe, Japan, investment, Ageing
Things we must consider in shaping Japanese economic policy for the future
Keiichiro Kobayashi 10 February 2013
Japan is under new leadership, bringing fresh attempts to tackle deflation. This column argues that the lessons we can learn are Going forward, a change of party politics with every change of government will likely become a recurring event in Japan. In order to restore people’s confidence in the fiscal management and social security system in the light of that prospect, institutional systems should be designed in a way to allow flexibility, premised on the fact that the government cannot make commitments into the remote future. Political leaders – whether they belong to the ruling or opposition parties – need to come up with new ideas toward achieving that end.
With the Japanese government now under the stewardship of Prime Minister Shinzo Abe, Japan is set to pursue economic policy that calls for bold monetary easing in order to end deflation. The policy is predicated on the perception that once Japan successfully exits from deflation – by setting an explicit inflation target and taking bold monetary easing measures – the economy will grow and jobs will be created.
Institutions and economics Politics and economics
Japan, policymaking, Ageing
Ageing – saving or working more?
Torben M. Andersen 06 January 2009
How will the shrinking labour force pay for the pensions and healthcare of the growing elderly? This column argues that linking retirement ages to longevity would alleviate a significant part of the deterioration in public finances and ensure that the burden of adjustment is carried by those gaining from increases in longevity.
Most countries face an ageing problem, as the elderly (65+) population increases relative to working age population. Driving this demographic shift are the baby boomers’ retirement and increases in longevity. Public finances will be strained as more persons depend on pension expenditures and old-age care, while a stagnating or shrinking labour force produce matching revenues.
Labour markets Welfare state and social Europe
fertility, Ageing, longevity, demographic change