Demographics, Welfare, Saving and Growth

The most Common economic viewpoints predict that the aging societies of the Developed Countries, especially Japan, portend lower economic growth in the future because their aging populations are likely to save more (consume less) than younger populations. Increased savings, then, is viewed as being negative. Higher levels of consumption, conversely, are viewed as positive. Also implicit in the framing of this argument is the idea that higher growth is automatically better than slower growth or no growth. It is one of those assertions that quietly passes without scrutiny, and yet it reveals a preconceived notion that impedes clear thinking on the issue. Lets see if we can clear up some of these wrong headed Ideas.

Savings and growth

Let's begin with the obvious intuitive understanding of savings as deferred consumption. An individual or country can invest only what he has saved (or borrowed, in which case someone else must have done the saving). Savings, then, is by definition always equal to investment, which becomes the key ingredient in the formation and or maintance of capital.

Capital often gets a bum rap, perhaps because it is an abstract concept, or perhaps because it carries, in liberal circles, a negative connotation. So that most people generally interested in helping "the poor" don't want to hear about capital. They seem to be more interested in aid programs and theories of exploitation. This is unfortunate, because capital is as innocuous as it is essential. The creation of capital is the chief source of all of man's material progress and is most responsible for his advancement beyond the status of a primitive hunter and cave dweller. Capital can be likened to a lever, which helps man lift weights far beyond what could be done with his bare hands. Capital gives a like advantage in economic matters. Capital is like a snowball rolling downhill: At first accumulation is slow but as it proceeds the accumulation becomes rapid…and the element of self-denial declines. If this were not true, there would rapidly come a point at which further self-denial, or saving, ceases. Discoveries and improvements require less additional capital the more you have to work with. It is easier to get computer technology to a certain level today than it would be to achieve that same level when computers were still in their infancy and the computing power of today's common desktop, once filled a whole air conditioned, dust free room. That it takes fewer resources is intuitively obvious. Capital is what is used to build houses, bridges, roads, schools, and churches. It is used to manufacture automobiles, boats, airplanes, washing machines, and television sets. It is essential in food production, in creating new medical breakthroughs and is critical in any research. Without capital (savings) we would all be living like simple hunters and farmers. So, capital is critical to growth, and savings are essential to the creation of capital.

Why, then, would savings, the backbone of all material progress, be thought to hinder growth? Where does the thought that there is such a thing as excess savings originate. Those critics must think that all of what we have, just arrived spontaneously and that it is not ever going away. A society that chooses to no longer accumulate capital is like one that freezes time and creeps slowly backwards as the capital get consumed and/or breaks down for lack of savings to replace it. Just look at Cuba or the former Soviet Union. Savings, ironically, is the only viable way to grow. It is the only way to create investment and capital and to further along the improvements in the standards of living that are generally associated with growth, without which there would be no means to help the poor and disadvantaged.

Growth and the alternative

Another unquestioned assumption by anti-savers is that growth, for growth sake is automatically the goal of everyone. The fact that consumers are constantly balancing their wants and needs to consume now against their wants and needs to consume in the future, and allocate their resources accordingly is completely ignored.

For example, how much growth is the right amount of growth? Is it 5%, 10%, or 3.63%? Who decides and why? The beauty of the free market is that each individual decides for himself how much to save and how much to consume. The collective net result of all these individual decisions determines how much capital a society generates and impacts the future growth of the economy. There is nothing to worry about. No policy decisions are needed, no interest rates need to be manipulated and no tax incentives are required. Growth is a derivative byproduct arrived at naturally by consumers saving. Therefore, any attempt to manipulate growth is an attempt to do something that the consumers themselves have not chosen to do. Economies are created and maintained as a means for individuals to satisfy wants and needs, they are not designed to satisfy the arbitrary preferences of economists or politicians.

Even so, the very idea of growth itself is highly abstract and nebulous. It defies easy definition and measurement. Growth of what? Again, in a free market, there is no concern as the actions of consumers dictate where and when growth will take place.

The real problems of aging populations

The economic problems that arise from aging demographics are not economic problems but arise as an outgrowth of the welfare state. They are political problems.

To the extent that governments around the world have promised to pay some form of social security and/or provide medical benefits for its aging populace, to that extent there is going to be a problem as the demographics shift to an ever larger aging population. For obvious reasons, such plans can only "succeed" when there is a sufficiently large number of workers to support each retiree. However, percentage wise, the ever decreasing younger generations will tolerate only so much increased taxation. Again, this is a political problem. Political problems demand political solutions and in this case it means pushing back the time that beneficiaries are eligible or reducing benefits or some combination of both. This is no easy task, since government has created a class of dependents that expects something because they believe that they have already paid for their benefits. Few realize that all entitlements are on a pay as you go plan and that there really is no Trust Fund. Even if there was a trust fund, with the money all safely stored in a "Lock Box" and the money invested in treasury bonds, then what? When it came time to cash in the bonds they would have to be paid off out of then current taxes. Now these ever increasing ( both percentage wise & absolutely) older people can and do vote and hence you can see how these programs, which probably should never have been put in place to begin with, ( at least not in the form that they are in) are going to be terribly difficult to either extricate ourselves from, or to fix.

Conclusion

Aging populations' tendency to save more, then, is not the problem that it has been assumed to be. The real problems stems from aging demographics, arising out of the nature of a welfare state and the unrealistic pyramid (Ponzi) scheme it represents. Economic stagnation due to increased burdens borne by society via the welfare state is quite a different matter from the benign voluntary savings of aging populations. Quite the contrary, if the savings rate of the aged were indeed large enough (which I doubt is possible) it could then allow for the savings of these rich elders to fund the welfare programs of all the rest of the seniors.

There is also one simple solution, involving the free market, and that is simply eliminate any form of mandatory retirement and reduce all impediments for seniors who would choose to continue to work past 65. This would release a huge pool of talent and experience helping to fund those the either can't or choose not to work.

If we were really smart, we would institute mandatory retirement only for politicians, over the age of 55 or after 8 years in office, which ever comes first.

It might also be a good Idea to mandate early retirement for Lawyers, let's say above the age of 29 Ok ok 39?

SOLUTIONS

The first thing we all have to do is get over our wrong headed thinking that work is a punishment for eating an apple some 5900 years ago. For a great many of us work is a blessing and it is the absence of a job that one enjoys doing that is the real curse. Once we can understand that, then the next obvious step is to eliminate all mandatory retirement laws and replace them with laws that encourage people to continue working should they wish to do so. That would also have to be in conjunction with new laws that eliminate punishing companies from employing older workers. Just think of all the highly qualified and experienced great retired teachers that would love to come back to work if encouraged to do so.

How about all those retired HR people, Marketing Heads, accountants, comptrollers and yes even Presidents and Chairman who instead of an advanced college degree have 40 years experience, might they too not have more than a little something to contribute" Especially once we show them that they are still needed?

If we were to use even some of all that knowledge and experience and yes physical talent that we are now just warehousing until they just rot away from lack of use; it would push our country's Production Possibilities Curve dramatically to the right and greatly expand the living standards not only of our country but the rest of the world as well.

Unfortunately no one will even pay for my missives let alone take their advise: So Governments will do what their socialist thinking wrong headed members have always done and that is to attempt to INFLATE their way out of trouble. But alas that won't work and we will be hit with first, inflation/stagflation, second by recession followed closely by a financial and monetary collapse, ending up with the recession turning into a world wide depression: when everyone finally realizes that Fiat paper is NOT Capital (money) its just paper.

GOLD

The only thing left to do is re-read my past articles, stay with your gold, sleep well and watch as your purchasing power steadily increases.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)

Palm Beach Gardens, FL

[email protected]

561-840-9767

June 17, 2006

DISCLAIMER

The above is my personal opinion, and in no way be deemed investment advice to buy or sell anything. It is submitted purely for informational purposes, based upon my understanding of the markets.