Demographic Time Bomb Ticks On

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Demographic Time Bomb Ticks On
By FREDERICK KEMPE
Expense of Aging May Bust
Budgets in Larger Nations;
A Warning From Greenspan
June 6, 2006; Page A9

At a private dinner shortly before he left office, then-Federal Reserve chief Alan Greenspan was so struck by projections of global population change that he said major investors who understood the U.S. numbers would rethink their long-bond bets.

His point: Once investors digest the extent of the population shift that is turning Medicare and Social Security into fiscal time bombs -- and its negative implications for the broader U.S. economy -- they will demand higher returns for their money and be far less willing to accept the current low rates on 20-year and 30-year U.S. Treasurys.

Mr. Greenspan's warning achieved the purpose of his host, Sen. Bob Bennett. The Utah Republican's dinner was part of a broader effort to win more attention for one of the globe's least appreciated and most powerful forces: demographic change. His numbers, based on United Nations data, show that as bad as matters look for the U.S. -- the cost of public pensions and health benefits is on track to double to 24% of gross domestic product by 2040 -- the nations with the three next-most important economies face even more peril: Japan, Germany and, perhaps most surprisingly, China.

Though the U.S. is aging -- the population over age 60 is expected to increase to 26.4% of the total by 2050, from 16.7% now -- it still is likely to remain one of the world's youngest countries. Japan's over-60 crowd would reach a budget-busting 41.7%, from 26.3% currently, and Germany's 35%, from 25.1% during the same span. The greatest threat to China's ballyhooed success could be a potential failure to deal with the desserts of its one-child policy -- which will leave 31% of its population over 60 by midcentury, three times the current number. More-youthful India is far better off in this regard.

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Mr. Bennett won't discuss the off-record dinner. Yet he has taken the lead on Capitol Hill in drawing attention to an issue that gets scant notice in Western democracies, where electoral cycles and politicians' attention spans are too short. He is confident his data are accurate to 10 years out, while longer-term projections are designed to quantify the impact of the world's current course if left unchanged.

Amid the debate over illegal immigrants to the U.S., for example, he has reminded fellow legislators of the economic peril in failing to embrace immigrants. "If we depend entirely on birth rate, we are going to turn into Europe," he says.

Mr. Bennett made studying population trends a priority issue of the Transatlantic Policy Network, an organization he heads that brings together U.S. and European legislators, among others. The European Union's aging and the growth of an unintegrated Muslim immigrant population, he says, will make the Continent less economically relevant and more politically volatile.

The deepest demographic hole is in Russia. President Vladimir Putin trumpets his country's new status as an energy superpower, but a decline in male life expectancy to pre-1959 levels has combined with declining birthrates to more than offset that advantage. "The real wealth of the modern world is human resources, and not what you have in the ground," says Nicholas Eberstadt of the American Enterprise Institute, Washington's leading expert on global demographic trends. He fears a new security challenge: a declining state with nuclear weapons that is relying on nonhuman resources for its power.

On a brighter note, Mr. Eberstadt has spotted a surprising and potentially positive trend toward lower population growth in developing countries, where concerns have focused for years on overpopulation and its relation to cyclical poverty. More than half the world is now living at subreplacement levels, including nearly every country of East Asia, many parts of the Mideast, Turkey and Brazil. The cause appears to be modern thinking seeping through to more cultures than previously thought, propagating the notion that a large number of children is more of an economic burden than benefit.

Yet geopoliticians are focusing most on China and the U.S. -- the world's fastest-rising power and its incumbent. China is following an aging course similar to that of Japan, but its trends hold more dangers as it begins from a lower income base with less-developed pension and health systems.

Mr. Bennett talks about a 1-2-4 equation, where one Chinese child supports two parents who support four grandparents, but in reality, many parents have no child to support them. "There's this slow-motion humanitarian tragedy coming down the track for China," Mr. Eberstadt says.

He says the U.S. trend is more a story of its "exceptionalism" among industrialized countries, with higher birthrates that grow out of significantly different attitudes. U.S. birthrates are 30% higher per family than those of Europe or Canada.

"This is the expression of millions of unorganized, spontaneous couples," says Mr. Eberstadt, who adds that the U.S. will be the only industrialized country to hold on to its share of global population in the next half century. That also will give it more of a risk-taking nature than allies on matters ranging from fighting terrorism to technological innovation.

"The U.S. will have less and less affinity with other developed countries," he says. "It will be harder and not easier to find common ground with allies."

• What do you think will be the most important global demographic change in the next fifty years?


Write to Frederick Kempe at Thinkingglobal@wsj.com with your thoughts. Also sign up to receive his AsiaLinks/EuroLinks Daily Alert.

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• Readers responded with emotion to last week's column about the Russian visa revocation of the country's largest foreign portfolio manager, Bill Browder. I asked readers the following: Should Bush administration officials intervene on Bill Browder's behalf? Is Mr. Browder right that Russian stocks remain a buy?


The majority of readers oppose U.S. intervention on his behalf -- disagreeing with my column's conclusion.

Letters continue to roll in on a previous column about how the Global Goldilocks, a.k.a., the global economy is facing the three bears of inflation, oil price increases and the flattening of housing prices. I have included the most thoughtful one as well below.

Missy Kelly of Chester, New Hampshire, writes: For the better part of a decade I have been reading Browder's comments on Russia and thought: What an idiot! What a 'useful' idiot!

He had an excuse for everything bad that Russia did. For a while I just figured he was just one of those too blind to see. Or an equally odious 'wishful thinker.'

But it was I who was too blind to see. I should have put it together! Browder is the 'grandson of former American Communist Party leader Earl Browder.' Ahhh....

No, no intervention. Leave him hoisted on his own petard.

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Brett W. Beveridge of Atlanta, Georgia writes: I am not an expert on Russian affairs but Mr. Browder's case is not very compelling. His grandfather committed treason against the US and actively aided the USSR in any way he could. We now know the American Communist Party which he led was little more than a front for the Soviet Union. He knew of the show trials, the forced collectivization of the farms, and the Terror, yet he remained a communist.

Now, his grandson has extensive Russian connections but is a big believer in the free market? It is almost too hard to believe. Why should the US help him? Perhaps he should have thought about this before he gave up his US passport.

Mr. Beveridge is an attorney

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Steve Fleischer of Monument, Colorado, writes: Mr. Browder is considered one of the savviest investors in Russia and his exile came as a surprise to him; what else is he not anticipating? Nobody can predict when either the growing nationalistic impulses or simple greed will overcome the minimal rule of law that still exists. The current government is a kleptocracy. Witness the fate of Yukos.

Russian stocks may be undervalued, but there is an old rule in business; "You cannot do a good deal with bad people." If the U.S. government supports Mr. Browder's visa application, then they are implicitly endorsing foreign investment in Russia; I don't think that is their role.

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John Chown writes: I have been doing some advisory work (mainly on the taxation of financial markets) over the last few years. I am also a relatively unworried investor in a couple of Russian funds.

You mentioned the effect of the oil price: when I am in Moscow, we generally organise a dinner for fellow economists and a couple of years ago our main subject for discussion was just that. We concluded that Russia needed an oil price in the range $30-40. Below that, they would have difficulty balancing the books while above, they would be under no pressure to listen to the views of the reformers.

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Frederick Kempe responds: I stand by my argument that the U.S. should intervene on Mr. Browder's behalf. I certainly don't believe he should be condemned for his grandfather's leadership of the American Communist party. The point is that Russia is keeping out of the country a man who represents $1 billion in American investments while providing him neither right of appeal nor the reasons behind the action. I have greater sympathy for the several readers who suggested Mr. Browder should have held onto his American passport, although that is his personal choice and may have many reasons. It does concern me that a fair number of well-off Americans with deep pockets abandon their passport each year for tax reasons even though it is the U.S. that opened up a world of opportunity to them.

As for the future of Russia, Mr. Chown may be right that the only answer to its wayward course could be a lower oil price.

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On Goldilocks and the three bears, Yamazaki Kazuo writes: I believe the argument of (New York University's Nouriel) Roubini has been miserably proven inaccurate and false last year when he predicted the ominous outcomes of the global economic performance, especially that of the US, by the end of the year. The US recorded 3.9% GDP growth with low unemployment rate and the dollar appreciated instead of depreciated.

However, we are taken off guard by the economic events seen this year; i.e. volatility in the equity and currency markets, the USD falling against yen and Euro. It seems that the argument of Dr. Roubini was not inaccurate but simply early. Last year, the USD appreciated despite its unsustainable current account deficit mainly due to the Fed raising its rate while other banks did not.

2006 is not 2005. This year, ECB has already raised its rate and is scheduled to raise some more on June 8th, perhaps 50 basis point which is why Euro has appreciated significantly in the last month. The rest of the world's central banks have also raised their rates due to the oil price rising sharply.

If the Fed does not raise its rate on the upcoming FOMC meeting on June 29th, the USD should depreciate furthermore. Not only will the USD depreciate, domestic inflation in the US may rise and both stock and bond markets may take hits.

On the other hand, if the Fed raises its rate, we may see more emerging economies with high current account deficits take hits. By the end of the year, Euro and JPY should appreciate some more, the dollar should depreciate some more, countries with high current account deficits may see their overvalued currencies fall and countries with their currencies undervalued should their currencies rise. In other words, this year is a year of clean-up and it may be painful for some countries.

Mr. Kazuo works at Mitsubishi UFJ Trust & Banking Corporation (U.S.A.)

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Chandler Atkins writes: With every problem comes an opportunity. With the world markets digesting energy instability, housing corrections, and inflationary fears it will propel us to image new directions for energy stability and different places to park money other than housing.Thus, I see great opportunities now, world wide, to substitute knowledge and creativity for tradition, to find different ways to fuel our economic engine worldwide, to reinvest in equities that will platform our new growth and open our eyes and minds to insights and visions of ways to obtain more for less and choke inflation.

Dr. Atkins is a business professor.