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Saturday, May 9, 2015

Demographics and The Global Economy

As many regulars readers of Media Realism know, I have spent a good part of the past few decades keeping an eye on demographic trends. To me, demographics are an unstoppable tidal wave that determines a great deal of future events. In this post, I will address an issue regarding the global economy that I have hesitated to discuss until now. Essentially, it is that due to demography, there will be a glut of workers globally going forward.

How did this happen? Way back in 1980, there were approximately 1.7 billion people  around the world getting paychecks. Most of the rest of the world lived as subsistence farmers. They were living lives similar to medieval peasants. Some 48% of the global population had never had so much as an aspirin. And, forget about cell phone penetration.

With the fall of socialism particularly in Russia and China, there was an economic liberalization. By 2010, there were 2.9 billion workers drawing paychecks. Urbanization grew like wildfire especially in Asia and 900 million new non-farm workers entered the labor force (see Media Realism “Urbanization, Globalization, and Media, 5/22/12). Some 400 million were in Russia and China alone. As people streamed to the cities, many millions were lifted out of poverty and many joined the global middle class.

Many companies did very well with this new urbanization. Personal care product companies had an especially strong run as the amazing lifestyle changes for individuals who went from farm laborer to factory or office worker allowed them to use heavy quantities of soaps, toothpastes, and cosmetics. Yet, consumption of goods never seemed to match the forecasts of many economists.

Why? Here is my theory. In all of these countries that have exploded in worker growth--China, Russia, India, Indonesia, Philippines, Malaysia, Vietnam and others, there is no government safety net that most western nations have had for decades. Unemployment insurance, welfare, food stamps and other transfer payments largely do not exist in the emerging world. So, when a young person moves from the rural farm to the big city, they are very conservative with their spending. They know that they could lose their job and would then be on their own. In some recent years, China has experienced a savings rate of over 20% and Chinese companies have retained earnings that are much, much higher. This reality of a high savings rate is not without precedent. If you look at savings rates in the United States going back to 1789 and all through the 19th century, rates were often in the 10% plus range. Americans knew that employment was tenuous and they saved as a hedge against bad times. Also, in the late 19th century, when earnings went down, factories or industrial companies often cut wages of their workforce on a temporary basis.

Today, with globalization continuing to march (see Media Realism “Globalization and Advertising”, 9/9/2011), more workers are entering the work force daily. As these millions of largely unskilled workers enter the workforce, they are a real drag on global wages. Long term, this has to exacerbate income inequality even more as business owners can move plants to markets with a friendly wage climate. By 2030, THE ECONOMIST magazine has projected that 3.5 billion workers will be seeking weekly paychecks. This fierce competition among laborers for a slot in the middle class world has to put a damper on wages.

Adding fuel to the fire is the robot revolution. Increasingly, companies are using robots to do jobs that have previously been handled by unskilled labor. In mining, an industry will some skilled workers, big players are experimenting with robots which will lower costs and add to safety. It will also eliminate hundreds of thousands of good paying blue collar jobs.

In the U.S. and other parts of the western world, we have faced a dilemma since the Great Recession of 2008. Politicians rail about how education needs to be upgraded so our youth will have skills that will prepare them for the future. A lot is said but little has been done.

With regard to the economy, governments including ours in the U.S., seem to be relying on monetary policy to correct problems. Most of this is with interest rates near zero along with some money printing by the Federal Reserve. To me, this is a lot like fighting the last war. We are in a tight spot. The world has changed and globalization is very real. For example, if the Federal Reserve starts to ratchet up interest rates and make them more realistic (not at near zero), what may happen? Europeans, who now have negative interest rates, will flock to the dollar and bid the price of it up. That is fine for those of us who like to vacation in Europe. American multinationals will get hurt as American products will become more expensive across the world and they will not be able to compete as effectively as in the past.

What to do? That is way above my pay grade. Here is one idea that is discussed but little has been done. We need to make America and Americans more competitive. One thing that is clear is that the U.S. infrastructure is in very bad shape. Roads, bridges and airports are in disrepair (my last several trips overseas were telling as virtually every airport I have used was in better shape than any American counterpart). Municipal water  facilities are in terrible condition and need an upgrade.

Interestingly, China spends about 9% of Gross Domestic Product on infrastructure while the U.S. spends approximately 3%. Admittedly, the Chinese are starting from zero in some provinces yet the gap in alarming.

I have never been a fan of deficit spending but it is going to happen anyway. So, why not upgrade our American infrastructure? Candidly, despite comments from some of my libertarian friends, this has to be done by government at all levels with the exception of an occasional for profit toll road. A massive effort such as winning World War II or putting a man on the moon in 10 years is needed. America would be much more competitive with a total infrastructure overhaul. Additionally, millions of jobs could be created and many young people could learn marketable new skills. And, being fiscal rather than monetary policy, it would not have a detrimental effect in global markets.

The global workforce glut is not coming. It is already upon us. If we do not acknowledge it, things will get even worse over the next 15 years.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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