Demographics and destiny

Alan Reynolds
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Posted: May 20, 2004 12:00 AM

 One of Washington's best secrets is a classy quarterly magazine called The International Economy. Founded in 1987 by David Smick and Manuel Johnson, The International Economy really is, as they say, "read by central bankers, politicians, and bank officials as well as members of the financial community."  The eclectic advisory board ranges from George Soros and Paul Krugman to me -- a broad spectrum by any standard. And a list of contributing authors reads like an international Who's Who.

 International Economy often invites diverse specialists to comment on some major, long-term issue of enormous international significance. The last issue, for example, had 20 comments on the question: "Is the Aging of the Developed World a Ticking Time Bomb?" 

 The introduction was appropriately ominous: "The developed-world populations are aging and shrinking, producing huge fiscal, economic, political and social stresses given the unfunded liabilities of public entitlement programs. Does this phenomenon represent a global crisis? If a crisis looms, what kind of crisis is likely, when will it unfold, who faces the greatest risk and what if anything can be done?" 

 All 20 answers are well worth reading (at www.international-economy.com).

 The following sample, however, is just my own, relatively upbeat thoughts on this vital subject:

 In some parts of the world, such as China, India and Mexico, labor will be relatively abundant and capital scarce. In other parts of the world, such as Japan, Europe and the United States, capital will be relatively abundant -- at least in comparison with an increasingly scarce supply of willing and able workers. How willing and able those workers will be, however, is more a matter of incentives than demographics.

 Demographics alone present no fundamental economic problems for free and open economies. Nations relatively short of labor can either import workers through open immigration policies or they can import labor-intensive goods and services through open trade, including electronic imports of services. Nations relatively short of capital can either import financial capital by providing secure property rights and competitive taxation, or they can import capital-intensive goods and knowledge-intensive skills through open trade.

 Any nation that attempts to block mobility of both labor and capital leaves itself with no remaining option but economic stagnation. If a labor-short country blocks both immigration and imports of labor-intensive goods, for example, domestically produced labor-intensive goods will become increasingly expensive, reducing real incomes. If a capital-short country blocks both foreign investment and imports of foreign equipment and know-how, then real output and income per worker will remain depressed.

 Taxes and transfers complicate the picture. Aging populations of industrial countries could provide a more skilled and stable workforce, but not if taxes on work and subsidies for retirement virtually compel premature retirement. Japan, Europe and the United States are going to have to take work incentives more seriously. In the United States, for example, those foolish enough to keep working after age 65 continue paying taxes for Social Security and Medicare without receiving any added benefits. No private retirement or health program would dare try charging such a high fee for nothing.

 Taking the politics out of retirement planning and giving people much more freedom to take care of their own futures could do a lot to solve what politicians wrongly perceive as a demographic problem. Any remaining demographic difficulties can easily be managed through free trade in goods, services and capital. Nations with free and open economies, frugal governments and predictable regulatory regimes will prosper regardless of demographics.