Guest Post: The OTHER Economic Crisis?

By George Washington of Washington’s Blog.

You know all about the subprime, alt-a, option arm, and commercial real estate crises.

You’re well-aware of the house of cards built with credit default swaps, securitized assets and other exotic investments.

You’ve heard about the massive debt overhang threatening individuals, companies and the country as a whole, and the massive de-leveraging which is still to occur.

You’re aware of the soaring unemployment rate, the tapped out consumer, and many other economic problems.

But do you know about the demographic crisis?

What Demographic Crisis?

Franco Modigliani won the Nobel Prize in Economics 1985, partly for his “life cycle hypothesis“, which states that spending and savings patterns are predictable and largely a function of age demographics. In other words, Modigliani’s hypothesis is basically that age demographics largely determine the health and robustness of an economy.

Harry Dent and other financial advisors who have examined American demographics say that we’re in big trouble.

Specifically, they say that the basic health of any country’s economy is largely driven by the number of its citizens who are in their peak spending years.

For example, the peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.

Dent says that this principle applies to all countries, although the peak spending years might vary slightly from country to country.

In the U.S., Dent says, 46-50 year olds are the biggest spenders, because that is when – on average – they are paying for their kids’ college, paying mortgage on the biggest house they will own during their life, and making other big-ticket purchases.

Claus Vogt agrees, saying that – all other things being equal – the country with the youngest population will experience the biggest growth in the future, as it will have the highest percentage of productive people in the days ahead (Modigliani’s age categories are somewhat different from Dent’s and Vogt’s, but – in general – people are having children later than they were in 1985).

Whether or not you believe Modigliani , Dent and Vogt, it should be obvious that countries with a large percentage of elderly people and a small proportion of productive workers will have less productive output and a larger demand for social services than those with a higher percentage of workers. It should also be obvious that this will tend to drag down the economy.

Which Countries Have the Most Favorable Demographics?

Which countries have the best demographics?

Let’s start by looking at the “age pyramid” for the United States. The following 2 charts from the National Institutes of Health shows that the population is aging:

This graphic (courtesy of Ed Stephan) shows the U.S. age pyramid from from 1950 through 2050:

male female
Population of the United States, by Age and Sex,
1950-2050 (millions)
information source: International Data Base, U.S. Census Bureau;
supplied pyramids were modified using Canvas, GraphicConverter and GIFBuilder.

[If you can’t see the dates at the bottom of the pyramid, click here].

As NIH notes:

The first of the postwar baby boom cohort, born 1946–1964, will turn 55 years in 2001. In just three decades, an extraordinary change in the age structure of the United States is anticipated. By 2030, one in five persons (20% of the U.S. population) will be aged 65 or older, increasing from the present ratio of one in nine persons (12.8%). The number of persons in the 65 and older age group will more than double, increasing from the current 34 million persons to 70 million persons. Moreover, within the older segment of the population, because of longer life expectancy and additional persons reaching older ages, there will be age shifts resulting in the 85 and older population more than doubling in size from 4.3 million persons to approximately 8.9 million persons.

An aging U.S. population means less productive workers, less big-spending consumers, and more dependent elders.

Here’s China:

As Reuters points out, China will have an aging population in the future, but not for some time:

China’s working-age population will peak in 2015 and plunge by 23 percent by 2050.

Brazil has a much younger age demographic.

And India’s is even younger than Brazil’s.

The following chart shows that Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:

Chart 2: Old Age Dependency Ratios for Selected Countries



And this chart shows that – as a whole – emerging markets have a higher percentage of working age population:

Chart 3: Working-Age Population as % of Total Population



You can find some interesting charts showing age pyramids for multi-country regions here. You can search for other countries or regions, as well.

What Does It Mean?

What does all this mean?

Well, initially, it means that – in addition to everything else they have going for them – 2 of the BRIC countries (Brazil and India) have much more favorable demographics than the United States. So they are at a competitive advantage to America for demographic reasons in addition to the other reasons that people write about.

Indeed, as Richard Jackson told the White House Conference on Aging in 2005:

If demography is destiny, global leadership may pass to the “Third” world…

Countries with slowly growing workforces may have slowly growing economies…

We live in an era defined by many challenges, from global warming to global terrorism.

None is as certain as global aging.

And none is likely to have such a large and enduring effect on the shape of national economies and the world order.

Moreover, Dent and another of the main writers focusing on the economic effect of age demographers – Daniel Arnold – say that America’s aging demographics point to a major depression.

As Arnold writes:

2008 was the victim of a self inflicted sub-prime financial crisis. This has nothing to do with the demographics based massive depression that is yet to come, as described in the book. The sub-prime consequences are however very similar though mild so far compared to what is coming our way. The book clearly spelled out that along the way unpredictable short-term (1 to 3 years) disruptive events could happen. The sub-prime crisis is just that. It should be regarded as the “warmer upper” or “hors d’oeuvre” for the big one that is now rapidly closing in on us all.

I hope that he’s wrong.

See also this and this.

Note: Of course, different levels of development and technology also substantially affect the economy.

Print Friendly, PDF & Email


  1. Tao Jonesing

    As soon as I see the name “Harry Dent” cited as an authority, I know to not read any further. The guy is a snake oil salesman.

    There’s no need to “hope” he’s wrong because he is always wrong. Take some solace in that.

    1. George Washington

      Your criticism of Dent is well-placed (he’s made some amazingly wrong stock market predictions, for example).

      But Franco Modigliani is no slouch.

      And people like John Mauldin are very concerned about this issue as well.

      1. Tao Jonesing

        Thanks for the gimme on Dent. The next thing that stopped me from reading too deeply was the discussion of Japan.

        I’ve spent a lot of time in Japan, and we are not Japan. I just can’t accept an analogy there.

        As to Modigiliani, isn’t he of “M&M” fame? If so, I have no respect for the guy or the Nobel prize he won. I don’t care what the math says, a firm that provides dividends provide more shareholder value than one that does not. I blame M&M for fostering the modern fetish that exalts stock price as the essence of shareholder value when it manifestly is not. If we add in some additional variables to account for other forms of value that are considered in the utility analysis, M&M will quickly break down.

        Also, there’s the “plutonomy” thesis put forth by Citigroup in 2006 that says that most Americans don’t matter, that there really is no American consumer, that only the American plutocrats matter. According to this thesis, who cares about the vast majority of Americans when it’s only the rich that matter? Below is a link to that lengthy analyst paper, which I saw first on Matt Taibi’s blog at True/Slant. Apparently, the analyst report was discussed in Michael Moore’s latest film.

  2. jjj

    Actually looking at the graphs it looks like the US has the 5th youngest workforce in 2010, the 4th or 5th in 2020, and the 2nd youngest in 2050. Doesn’t look like much of a change to me.

    Even in terms of absolutes, by 2020 the US will look like Germany, hardly a basketcase of industrialized economies.

  3. Dennis

    By this measure, Africans should be excited. After all, they hardly have any older workers at all and their rapid population will surely create a massive and successful working class….except not.

    The vast majority of the Indians are peasants, stuck in villages or slums because of various structural problems in the Indian economy that have not gone away.

  4. Jojo

    Harry Dent and other financial advisors who have examined American demographics say that we’re in big trouble.

    Specifically, they say that the basic health of any country’s economy is largely driven by the number of its citizens who are in their peak spending years.

    This may have been true as long as we live in an economy where success was dependent on ever more growth in everything (jobs, houses, people, spending, taxes, etc.). That era is now dead but few are willing to acknowledge it yet. Every 1st world government is and has been trying to resurrect this dead model because they do not know what else to do. They do not know how to manage a society where growth has stopped.

    The simple reality is that we have too many people and not enough jobs, a result of uncontrolled birth, immigration (legal and illegal), rampant labor outsourcing to low-wage countries and ever increasing automation in the workplace.

    The there is the fact that the quality of our education system is dismal. California, for instance, has a high school dropout rate of 20% and a graduation rate of just 68%! (see: )

    Demographics is definitely a problem, but it is much bigger than the limited spending example this article was built on.

    On the one hand, we NEED more younger folks working to support the older folks via social security, Medicare and perhaps even helping them keep a roof over their heads. OTOH, with fewer jobs available now and into the foreseeable future, logically, we should reduce the birth rate to compensate. But attempting to mess with the basic programming of life by restricting births will surely fail.

    We’re probably going to need a major killing event to wipe out much of the world’s population so we maybe can start over again.

  5. keith

    well, kill all the old geezers off i say, forget health care – think of all the money that’ll be saved + the opportunity to make the big bucks in funeral service investments –

    an alternate possibility would be to have another really really big war – big bucks there + a quicker way to remove of all those under performing useless peasants from our beautiful world – and think of the money to be made in rebuilding in our image –

    after all what’s important here – life or the economy – obviously it’s the economy, everyone knows that – and – economics doesn’t work without growth for ever???

    damn all the old codgers getting in the way of growth for ever, we must have growth for ever and ever – spend, spend, spend – nothing else matters . . .

  6. Michael

    India’s population demographics is all well and good, but it wont help the stability of the country when some natural occurrence wipes out the crops one year, or potable water runs out.

    And you think you have wealth disparity in the usa! They’ve already got a nascent civil war in a large part of the country driven pretty much by economic inequity. e.g.

    Economists with their trend lines always pointing to the sky need a dose of reality – nothing can grow forever. Growth is not good for the economy – in the long run.

    1. Hubert

      Well argued and a good move (out of Germany).
      You probably have thought about it more than me: Where would you move to with wife and young kids ?

  7. michael

    Well the US problems are negligible compared to Japan or Germany.
    I have left German because the situation will blow up in their faces within the next 10 years. And when I retire in 20 years or so I don’t want to be one of those left holding the bag.

  8. craazyman

    The advantage of older people is that they get drunk less and are generally more productive on the job — assuming they have one. This could, in fact, be a productivity miracle in the making. When your back is to the wall and the great beyond is staring you in the metaphysical face, there’s no time for narcissistic indulgences, like a productivity destroying office romance or a hangover that keeps you in bed past noon. After a certain age, it’s best to stay sober, lose yourself in your work and wait for the apocalypse, assuming that God will find favor with those whose hands aren’t idle or up to no good.

    There must be a way for the acquisitive mind to profit from this. And there may be an economy that could launch from it. I wonder.

    Speaking of Mr. Dent. Anyone with a historical memory that stretches back longer than the standard “Trailing 1-, 3- and 5-years” that defines the awareness of the stewards of our society’s wealth, Mr. Dent may be a familiar author.

    Back when they were making Cave Paintings and when Helen of Troy was merely a self-absorbed 11 year old — i.e. in the late 1990s — Mr. Dent’s “The Roaring 2000s” was, I think (Edwardo correct me if I’m wrong) a best seller, for business books. Mr. Dent’s optimism about the great demographic boom and the wealth that awaited us in the first decade of the 21st century was “robust” as they say in the corporate think tanks. I think we all know where the Nasdaq was then and now, and housing prices, and Gold, and etc. etc. etc. Nothing like a little multi-variate reality ruin the best laid correlation.

    Mr. Dent’s fortune telling was nothing compared to that of Dr. Ravi Batra, whose 1986 best seller “The Coming Great Depression and How to Profit from It” made Mr. Batra quite a lot of money, possibly at the expense of his readers. But hey, an author is an author, and an author has certain inalienable rights — among them: “caveat lector.” And there are few things more engaging than persuasive descriptions of the hell that awaits us. Poor sinners that we are. Hollywood has that number.

    And Mr. Batra appears to be still at it — judging from his web site — cranking out the prose. Like Hemingway, his themes are eternal and somewhat singular. But therein lies a certain genius. He’ll eventually be right.

    As Carl Jung himself would no doubt observe, The Pied Piper comes clothed in costumes limited only by the imagination. I still think of him looking a bit like the Jolly Green Giant or Robin Hood, but time waits for no man.

  9. rd

    The US and Canada have one enormous advantage in this issue over most of the rest of the world. North America was built by immigrants. The “melting pot” culture is unique in the world. We can import young labor (if they want to come) without missing a beat. Nearly all other countries have built in racial and cultural biases against immigrants that don’t allow for efficient assimilation.

    While we go through protectionist and isolationsits periods, there have been intervening periods of massive waves of immigration, esecially when other parts of the world go through turmoil and their own peoples have to get out for a variety of reasons.

    1. Jojo

      @rd said “The US and Canada have one enormous advantage in this issue over most of the rest of the world. North America was built by immigrants. The “melting pot” culture is unique in the world. We can import young labor (if they want to come) without missing a beat.”

      Yes, but what jobs will they work at? On average, there are 6 people for every available job right now.

      And will they be willing to have all or nearly all of their pay be confiscated and redirected to supporting us old folks?

  10. jabre

    This does not include the potential changes over time as an educated and capable population ages – if society is willing to change. Japan requires that their population retire at age 60. Let’s hope that attitude of pushing a productive member out of the workforce is prevalent in Asia and Europe in the next 40 years. The continued deterioration of retirement benefits in the US will likely lead to an overall greater productivity of the higher aged wage earner – due to necessity. That can significantly skew the assumptive impact on productivity over time in the US.

  11. Aki_Izayoi

    Does anyone think National IQ is an important variable. Has anyone read IQ and the Wealth of Nations and IQ and Global Inequality by Richard Lynn and Tatu Vanhanen?

  12. Hugh

    “Note: Of course, different levels of development and technology also substantially affect the economy”

    Funny how that last note blows up about 3/4 of what went before. You also need to take into account that a lot of boomers are going to have work past 65 because their retirements have blown up (401ks) or will blow up (pensions) and Social Security won’t pay the bills.

  13. anonymous

    I have to laugh (and cry) when I see people so afraid of automation. Only in this absurd economic system would automation strike fear into the hearts of men. Information technology, AI, and robotics are easing our burden by orders of magnitude. We haven’t developed and deployed them nearly as much as we could precisely because of the unemployment (wage slave labor) concern. So — this amazing godsend of human ingenuity is being held back by ignorance, recalcitrance, and fear — not to mention the power-obsessed monsters at the top of the pyramid scheme who will stop at nothing to maintain their differential advantage. Everyone on the planet should be living the good life by now. If you think we’re limited by energy, to you I say we have a hydrocarbon economy precisely because it is easily controlled, not because it’s our best option. The untapped energy in the biosphere is more than enough to meet our needs in perpetuity (e.g. geothermal, ocean thermal, tidal, ocean currents, wind, photovoltaic, bio-fuel — among others). Anyone holding back human development for personal advantage deserves to rot in jail for life.

    1. Jojo

      Eventually, like with the Medicare tax, the upper limit on the SS tax is going to have to be eliminated. More money is needed and someone is going to have to pay the bills.

      You can’t tax the unemployed more, because they aren’t bringing in any income.

      And re: SS, they are going to have to stop people from collecting benefits while they are still employed. I know one person who is 67 years old and who has been working full time, while also collecting his full SS benefit. That’s just wrong IMO.

  14. Tenn Slim

    Interesting, accurate, old news.
    Demographics can be used to prove or disprove points.
    Old Age folks have one thing demographics dont show. PROPERTY. We own the place. Usualy debt free. Given that, the ebb and flow of the youngins income tends to not disturb our eqaunimty.
    Semper Fi

  15. reason

    Those are correct who say this deterministic view of the world is wildly exagerrated. A couple of points
    1. Its always a dead give away when people say so-and-so is good for the economy. I couldn’t give a sh.. about the economy, I’m only interested in what happens to the people the economy serves.
    2. There are plenty of underemployed, wasted resources we can take advantage of. Especially of course the unemployed. The 1950s had a relatively slowly growing work force, but things went pretty well. I also think when labour is scarce, the incentive for innovation (to relieve overwork) is pretty high for everyone. Resistance to change is higher, when change means unemployment.
    3. Spending WITHIN an economy, is pretty irrelevant in a globalised world.
    4. A hefty proportion of income will flow to capital owners – it is not just the distribution of labour that counts.

  16. Praedor Atrebates

    I hope the demographic prediction is correct, or better yet, understated. Perpetual population growth, perpetual increase in consumption (of resources, open space, water, etc) is impossible to maintain and detrimental. It is time to dial back on all of it.

    Population needs to decline, consumption needs to shrink, and sustainability of both society AND wildlife/nature needs to be the focus.

  17. winterwarlock

    In neutral markets, intelligent kids are operating
    unimpeded. In a depression, somebody pissed
    off the intelligent kids, and a generational war is
    well underway. The intelligent kids win that war every
    time, because their energy to mass ratio minus
    participation costs have exponential comparative
    advantage over the older generations, and they
    are free of Pavlov.

    That is economic History in a nutshell.
    Attempting to enslave these kids to the promise of
    pensions for older complying generations, while simultaneously liquidating all value from the economy, triggered their emigration. With the destruction of the family, they had no reason to stay.

    At a minimum, it is best to give them a wide berth.
    Economics is war. If you want to win the war,
    now that it is upon us, employ these kids. They
    only ask for what they require because their objective
    is to minimize economic participation, to maximize
    freedom to pursue their talents.

    The financial blackhole is fully loaded with non-performing
    assets, abandoned by the kids, and will continue to
    expand and gobble up neutral assets. The idea
    of programming computers to replace the
    programmers was seriously ignorant. Now the older
    generations, including the wealthy, are completely
    dependent on them, and they have no idea how to
    keep them running.

    Natural selection is random in the aggregate. You
    never know which kid is going to determine your
    fate, but the kid knows. Attempting to begin the
    “education” process at birth only accelerates the
    growth rate of the blackhole.

    Everyone is standing upon a temporary bridge that
    the kids have already crossed.

    Makes for an interesting show, but winter is approaching.

Comments are closed.