Arnold Kling  

Population, Aging, and the Savings Glut

Dear Prudence... Our Fiscal Future...

Nicholas Eberstadt writes,

China’s national pension system as of 2025 promises today to be more or less the same system that has always provided for the country’s elderly and infirm: namely, the family unit. But herein lies a problem: The “success” of the Chinese government’s continuing antinatal population drive will necessarily translate in coming decades into a plummeting ratio of working-age children to elderly parents. Whereas the average Chinese woman who celebrated her sixtieth birthday in the early 1990s had borne five children during her lifetime, her counterpart in 2025 will have had fewer than two.

Read the entire article. It is not possible to do justice to it with an excerpt.

However, one thing that occurs to me is that perhaps economists are wrong to argue that the flow of savings from China to the United States is irrational. If population aging promises to be more problematic for China than for the U.S., then it makes sense for them to have a higher savings rate. Perhaps Eberstadt has provided a rationale for the savings glut.

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CATEGORIES: Growth: Consequences

COMMENTS (7 to date)
Robert writes:

In this context, this paper by Wolfgang Lutz explores a wrinkle in population forecasting for China

Essentially, the thesis is that state efforts to regulate natality have led to under-reporting of births, and we can only make educated guesses as to what the real numbers are.

John S Bolton writes:

None of the above considerations can hide the aggression which is used by the Chinese tyranny to extract huge sums for dollar support. We are receiving stolen items out of the hands of a dictatorship, in the form of Chinese export manufactures financed by the above means, helping to build up their military-industrial complex; and the monstrously dishonest are calling this 'free trade' and 'free competition' and solicitude for the poor.

knzn writes:

“perhaps economists are wrong to argue that the flow of savings from China to the United States is irrational”

It might be rational if, on the margin, investment opportunities in the US were better than those in China. China’s high savings rate pushes that margin out, but I don’t think it pushes the margin out far enough. China’s marginal investments are going to the US Treasury and earning just over 2% real, and that’s ignoring currency translation effects, which are not likely to be in China’s favor. Is there really nothing better to do with those savings inside China? (Considering all the FDI being drawn into China today, I doubt it.)

ErikR writes:


If China's problem is not enough young people producing goods and services for old people (in 2025 or whenever), then no amount of INTERNAL saving will do much to help.

Saving for retirement only works if there are sufficient goods and services available to trade one's savings for after retirement.

If there aren't enough young people in China to produce the goods and services needed for future retirees in China, then the goods and services must be imported. In that case, it would make sense to save outside of China (since the yuan would be severely devalued in such a situation)

The problem with this line of thinking is that I believe most of the foreign savings from China is from the central bank, not private investors.

knzn writes:

ErikR, You seem to be assuming zero substitutability between capital and labor. I think the experience of industrialized countries in recent decades suggests that there is a lot of substitutability in the long run. Depending on what technological constraints turn out to be, perhaps you don’t need any young people at all to produce goods and services for old people: it can all be done by robots. I don’t think that extreme case is quite realistic, but given China’s current limited state of industrialization, there is certainly a lot of room to provide for older people simply by making the few younger ones more productive (through domestic investment) rather than by purchasing IOUs from abroad.

ErikR writes:


No such assumption. But I think you vastly overestimate the amount of substitution possible in the timeframe we are talking about.

China has a huge problem -- hundreds of millions of poor, unskilled people living in rural areas. During the timeframe that we are talking about, China will be lucky to put most of those people to work in manufacturing jobs that are highly manual.

Another way of looking at this is from a potential investor in two Chinese companies, one company hires labor for less than $1/hour to do the job (a generous wage in most of China), the other buys machines to do the job -- in most cases the machines will cost many times more than $1/hour to do the same job.

If China were to invest in automation even to the extent of, say Japan, during the timeframe under discussion (rather than continuing to invest in infrastructure and jobs for productively using today's poor), it would leave hundreds of millions of poor people unemployed. And even with Japan's level of automation, there is still a need for a great deal of people to work.

So it would seem that you are suggesting that China invest huge amounts in automation in order to save future retirees from depravation (only achievable by creating a state of automation far surpassing Japan today), but in the process allowing hundreds of millions of rural Chinese to be deprived today and for the next decade or two. And at a time when virtually all economists agree that China has already massively over-invested (in some industries, China factories can supply more than the entire world demand for a product). Furthermore, it would involve investing in automated factories that today have massively higher costs than manual factories -- in other words, making investments that few rational investors would be willing to make.

I don't see how your suggestion is at all practical.

knzn writes:

I’m not suggesting that China invest heavily in automation today. But by moving workers from agriculture to industry, which in relative terms is more capital-intensive, China is already substituting capital for labor in the aggregate. All that is necessary is that China’s economy be able to produce enough goods and services to trade for what its population needs. Unless China’s anticipated shortage of young people results in a reversal of its economic growth in the future, there will (by definition of “growth”) always be more resources available to take care of its population (which will not be expanding and therefore not require expanding resources). There are going to be issues about distribution, but that is separate from the question of whether China in aggregate is making adequate (or excessive) provision for the future.

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