Thursday, November 1, 2012

Reality rears its ugly head yet again

When it comes to our economic crisis (or the world's economic crisis, if you wish), many commentators have pointed out that mathematics is inexorable.  One plus one always equals two, no matter how much some might like to pretend it doesn't.  Running up debt year after year, and never paying it down or living within one's means, will sooner or later result in bankruptcy.  That's a simple mathematical fact, and no amount of 'Keynesian economics', or  'quantitative easing', or 'deficit spending', or other creative accounting shenanigans will alter that fact.  We stand now upon the very brink of that reality taking effect.

Europe has yet another reality affecting its economic and fiscal future:  its demographics.  The Atlantic has a very useful article about it.  Here's an excerpt.

Not one country on the Continent has a fertility rate high enough to replace its current population. Heavy debt and a shrinking population are a very bad combination.

Since the invention of birth control and antibiotics, country after country has gone through a fairly standard shift. First, the mortality rate drops, especially among the young and the aging, and that quickly translates into a bigger workforce. Then, birthrates drop, as families realize that they no longer need to birth a basketball team to ensure that a couple members will survive to adulthood. A falling birthrate means that parents can invest more in each child; with fewer mouths to feed, more and better food can nourish each of them, and children can spend more years in school, causing worker productivity to rise from one generation to the next. As the burden of bearing and rearing children lightens, mothers can do more work outside the home, boosting both household resources and the national economy.

. . .

But the dividend does not last forever. Eventually, the baby bulge reaches retirement age, the labor force stops growing, and older workers start spending their savings, depleting the nation’s supply of capital. The virtuous cycle turns vicious. This is what is happening right now in much of southern Europe.

. . .

Is strong growth still possible once the demographic dividend has been paid out? Of course it is, at least in theory. Even if the workforce isn’t expanding, strong-enough gains in worker productivity can substantially lift the economy. Longer hours and longer careers can theoretically have the same effect. But it is far from clear that in practice, these solutions will work, given the advanced age of Europe’s workers.

. . .

It is somewhat ironic that the first serious strains caused by Europe’s changing demographics are showing up in the Continent’s welfare budgets, because the pension systems themselves may well have shaped, and limited, Europe’s growth. The 20th century saw international adoption of social-security systems that promised defined benefits paid out of future tax revenue—known to pension experts as “paygo” systems, and to critics as Ponzi schemes. These systems have greatly eased fears of a destitute old age, but multiple studies show that as social-security systems become more generous (and old age more secure), people have fewer children. By one estimate, 50 to 60 percent of the difference between America’s (above-replacement) birthrate and Europe’s can be explained by the latter’s more generous systems. In other words, Europe’s pension system may have set in motion the very demographic decline that helped make that system—and some European governments—insolvent.

Pension and other welfare benefits, promised long ago when the workforce was expanding quickly, are at the heart of Europe’s current fiscal convulsions, which are perhaps a harbinger of worse to come. In David Canning’s view, the 2008 crash and its aftermath have merely moved up a long-inevitable implosion by 10 to 15 years. European nations “had unrealistic systems that were eventually going to cause a crisis,” he told me.

There's more at the link.  Very worthwhile reading, particularly for those who praise the 'European model' to the skies and want us to adopt it.  That model's got more than enough troubles of its own for us to want to copy it here!

Obamacare is yet another example of the 'European model' in action - and it's going to bring with it even more of the problems Europe has experienced, unless we kill the whole damn thing as quickly as possible.  Remember that next week!


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