Tuesday, September 26, 2006

Fertility Position

Has Greg Mankiw changed his position on the importance of fertility? Edward Hugh thinks so:
I recently berated Greg Mankiw (and the top ten world economists he pretends to cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.

Now since dependency ratios are really a function of three factors - fertility, life expectancy and net migration - it is hard to deny the obvious: that fertility is important.
In the first cited post, Greg said:
If you polled top economists and asked them to name the major economic problems facing Europe, China, Japan, and South Korea, I doubt that insufficient procreation would rank high.
In the second post, he cites Jeremy Siegel, who says:
Because of our aging population, I calculate that the average retirement age will have to rise by 10 years or more for workers to produce enough goods and services to provide for a comfortable retirement. This increase will greatly exceed the expected increase in life expectancy and lead -- for the first time in history -- to an absolute reduction in the number of years in retirement.
Anyone who has read my last two posts on the subject will recognize that I hold more with the first Greg Mankiw than with the second. But I’m not sure there is really a contradiction. Greg never said that fertility doesn’t matter; he only said that it wasn’t a big problem.

The big problem for the US is that, given our fertility rate, and given our retirement aspirations, and given our limited ability and/or willingness to accept immigrants, we as a nation are not saving enough. (Even that point is debatable, but it’s pretty clear that’s what Greg – along with the vast majority of economists, including, ultimately, me – believes.) One solution (but it’s pretty much too late now) might have been to have more children, but that probably wouldn’t have been a very good solution. Beyond the inherent moral problems with treating children as a means to an end, and the political problems with instituting fertility policy in a nation like the US, it’s not even clear that increased fertility would be an efficient way to solve the problem. A larger population would place a greater strain on the natural resources available to the US: we might still end up better off, but it’s far from an open and shut case. As for saving more, it offers a pretty clear advantage, retirement-wise, over saving less. A critical question, however, is to what extent we would be able to substitute capital for labor. I’m guessing that most of Greg’s hypothetical top economists don’t see that as a major difficulty.

In Europe and Asia, the issues are somewhat different. Asians, at least, are certainly saving enough already. If anything, the problem is that they are saving too much and running up against Keynes’ paradox of thrift. The US is conveniently providing a source of demand. What will happen if Americans finally get religion and start saving? One might reasonably worry about a worldwide Keynesian demand failure of the same genre as the 1930s. But could such a failure be blamed on demographics? After the 1930s, it was the recovery that came first, and then the baby boom.

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Blogger Gabriel Mihalache said...

US data is pretty much compatible with a Cobb-Douglas fit so any question of substitution should be easy to answer.

To make things a bit more explicit, if policy aims to keep GDP/capita at least at current levels then the steady state condition from the simple Solow growth model with exogenous progress should provide enough pure theory, after which it's an empirical question, the degree to which saving and technological progress a.s.o. will counter the decrease in the rate of population growth.

It also seems to me that education is an important aspect: manual labor the easiest substitute with robots so it makes sense to have that smaller population trained more.

P.S. Excuse the rambling comment... Tired.

P.P.S. I think it would be extremely interesting if you could find some time and comment on the '30s, the Great Depression and the like. You seem to subscribe to the original Keynesian idea of a global dip in demand. Maybe you could tell us, in short, why you find Friedman's monetary contraction hypothesis and Bernanke's non-monetary/financial debt/deflation hypothesis less appealing!

Tue Sep 26, 01:53:00 PM EDT  
Anonymous Anonymous said...

"Paradox of thrift" is a crock. Whatever pinko Keynesians may think, investing is simply not the same as hoarding,

Tue Sep 26, 02:43:00 PM EDT  
Blogger Gabriel Mihalache said...

Anonymous @02:43:08,

So you're saying that excess supply in the loanable funds market and excess supply in the consumer goods markets (driving prices and quantities down), as implied by oversaving compared with equilibrium, can never happen? Or maybe never persist?

Tue Sep 26, 04:06:00 PM EDT  
Anonymous Anonymous said...

It can happen if people are hoarding money under the mattress, which jtst means the Fed has to print more.

Wed Sep 27, 05:57:00 AM EDT  
Blogger knzn said...

But if the Fed prints more, people might hide that under the mattress too. That seems to be what happened in 1938. The Fed was trying to increase the money supply, but there was no demand. Maybe the Fed wasn’t trying hard enough. You could argue that quantitative easing was successful in Japan recently, but it’s debatable whether quantitative easing was the cause of the Japanese recovery, and it did take a hell of a lot of quantitative easing before the recovery got any legs.

Wed Sep 27, 09:29:00 AM EDT  
Blogger Gabriel Mihalache said...

No way, Knzn! The monetary base was simply growing on a steady, gentle path. But that was not enough, considering the multiplier. There was a drastic drop in money supply, in which case arguing about what was demanded is a moot point. You had a huge drop in M1, by historical standards, you had contagious bank runs caused by lack of cash... that was a monetary supply-side f*-up. The degree to which this alone can explain the data... it can't, but goes a long way. To this, if we add the Bernanke hypothesis, we get pretty close. So I don't see how you could take the drop in demand, the consequence, and turn it into a cause.

I'll stop here although my instinct would be to go into discussing the misbegotten gold standard and its impact and so on. But I think I made my point.

The liquidity trap scenario makes more sense in connection with Japan. But I just don't see it re: 1938.

As for "thrift", I don't think it required hoarding of cash. Economy-wide over-saving, as improbably as it is, could put pressure on the interest rate and the consumer market in ways which are obviously welfare-reducing... I think we can recast it in such terms.

Wed Sep 27, 05:24:00 PM EDT  
Blogger knzn said...

In 1938, the monetary base was rising pretty rapidly. But the reserve requirement was increased in 1937, so you can argue that money contraction was the underlying cause of the lack of demand, and that the Fed wasn’t trying hard enough to increase the money supply, or at least that it got involved too late in the game. (I wasn’t aware of bank runs being a major feature of the 1938 episode – as opposed to 1933 – but I could be wrong.) At least, though, the Fed had a devil of a time trying to correct its earlier errors: by mid-1938 money really was being hoarded, and printing more didn’t seem to solve the problem.

But the question that arises in my mind is: Does it make sense theoretically for quantitative easing to have an impact? If the interest rate is zero, people are (on the margin, anyhow) indifferent between holding bonds and holding cash. If the central bank arbitrarily replaces bonds with cash, why should that affect anyone’s behavior? I guess the answer would be that creating money gives banks the opportunity to earn a risk premium (on loans) that they couldn’t earn on government bonds. But if banks already have substantial excess reserves and are not making loans, why would creating more excess reserves induce them to start making loans? I guess it would work if the problem is just that banks are being extremely conservative about the quantity of excess reserves. But what if banks just don’t think there are any loans worth making?

Thu Sep 28, 10:13:00 AM EDT  
Blogger Gabriel Mihalache said...

You're right. Maybe I AM confusing the 2 episodes.

Re: your question I think we can never know. We can't know how many transactions would have taken place if enough money was available.

Of course, if you're right then it's a liquidity trap sort of thing in which case they didn't have such avant-garde policies such as "helicopter drops". ;-)

Thu Sep 28, 10:59:00 AM EDT  
Blogger knzn said...

A true helicopter drop would have a wealth effect, but open market operations just substitute one asset for another. However, forex intervention can have a price effect even if the interest rate is zero. And in a worldwide liquidity trap, I guess one could do commodity market intervention. But right now I don’t think the Fed is legally permitted to do either helicopter drops or commodity market intervention.

Thu Sep 28, 02:28:00 PM EDT  
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