Tuesday, November 9, 2010

Globalization of the Old and the Very Old

A recent article by Ted C. Fishman titled “The Old World” (the New York Times Magazine, October 17, 2010, pp.50-53), paints a very disturbing picture for the developing economies. Mind you that the current picture is as bad as “probably” can get, nonetheless the author gives the impression that it is going to be even worse. The author puts the following thesis: “The world is currently divided between those under 28 and those over 28”.Twenty eight seems to be the magic number. If you are one of those, I say REJOICE, if not read on. But, before getting into the nitty-gritty of the old age globalization thesis, let me begin by defining the globalization term. This may turn out to be as useful to understanding the current economic problems as it is for understanding the problems of an aging world population. So what globalization means and how did the term came about?
Robert Cox (1994) defines the global economy as a “system generated by globalizing production and global finance”. Thus, the definition conveys two things: First that the global economy is not a universe without borders. Rather, it is a socio-cultural, economic structure brought about by some event or events. Secondly, globalization is a process encompassing modes of production, trade and finance. Reinicke (1998), advanced the notion that globalization is a process brought about through transborder by firms undertaken to organize their development, production, sourcing and financing activities. The globalization process thus described links globalization of the world economy to the organizational structure of the firm. In short, it is an economic phenomenon undertaken to enhance competition in the belief that the market ideology and discipline enhance “world” welfare.
Having defined the concept as it has originated why the term did become imbedded in our lingo and when it is talked about it seems to conjure all sorts of influences most of them are not salutary. Two issues are commonly talked about. The first is outsourcing – exporting jobs and the resulting dislocation of workers giving rise to unemployment, wage differentials and hence income redistribution. These effects are magnified in stagnant economies and during severe and prolonged recessions. The second is the technical revolution and the rapid transmission of technology. A technology that makes low skills redundant have not only far reaching impact on low skills workers in both advanced and developing economies but also the changes the dynamics of production (where firms would locate) with far reaching implications for the world wage structures and balance of payments.
The US and many of its partners in the developed world is the engine that spurts technical advance and innovation. Put to practice, these advances are labor saving technology replacing workers by “workerless” production techniques and thus making labor redundant. Reallocation of labor across industries or occupations is not easy or rapid. When labor services become redundant, it has a devastating effect on workers, not only on those who lost their jobs but also on those in occupations or industries close to the ones that have experienced updated and/or new technical advances.
It is worth emphasizing that the middle age group—those between the ages of 28 (the magic number) and 40 will likely bear the brunt of redundancy and reallocation. The reason is that skills are acquired well before the age of 28. Augmenting skills to meet advances in technology is needed if the economy were to accommodate displaced workers. This task may be accomplished during periods of economic growth but may not be feasible when the local or the global economy is in recession. In short displaced workers with low skills have a long “row to hoe”.
How about the old-- those over the age of 40? This group traditionally has had the lowest unemployment rate. However, with outsourcing and a “executive watch over the bottom line”, their employment picture is far from clear. This group clearly have a mix of skills acquired by “being on the job” as well as through formal education. Hence, this group will experience job security as well as redundancy.
Let me now turn to the old and very old.
It need not be emphasized that “we, the people,” have brought the “aged-nonaged” problem on ourselves. How many articles and speeches were given about the need to restrict the size of the family to insure a better standard of living? The development of birth controls and their widespread use in the developed world was the medical response to the “Malthusian” prediction that population growth if left unchecked spell hunger, wars and disease. In his First Essay on Population (1979) reprinted 1926, Malthus wrote: “The power of population is indefinitely greater that the power in the earth to produce subsistence for man”. Another factor which took a life of its own is advances in medical technology that eliminated many of the ills that made life if not unbearable as one ages but also inspired the old to seek forcefully these cures to insure longer and healthy life. Initially, the benefit by far exceeded the cost. Children and their parents in the developed world enjoyed higher standard of living, higher educational attainment and better health. Unfortunately, the dynamics of these events meant that a smaller population has down side effects: a shrinking pool of the young and an expanding pool of the old. It does not take a “mathematician” to figure out the odds against the young. They have to bear the cost of “raising” their parents as their parents once did. That is o.k. The problem is that the scale has become unbalanced, not enough young to return the favor bestowed on them by their elders.
The cost of living longer is unattainable in a stationary population especially in periods of unemployment and stagnant economy. Short of undertaken “measures” at either end of the age structure, societies need to think of ways to address intergenerational transfers. It is worthwhile to remember that today’s old were yesterday’s young. They raised today’s young and educated them, they funded the public sector budgets, they made advances in health technology as well as other technical innovation possible, and they went to war giving up their life to secure the life and liberty of today’s young. Every generation bears the cost for the succeeding generation and under a social contract it follows that the younger generations transfers some of its wealth to the older generations. The problem is, when resources are diminished the social contract looses its imperative. Intergenerational transfers are reexamined.
Guess who will make such reexamination? With few exceptions they are likely to be made by the “younger generations”. They will have to legislate higher taxes, cut spending or both. The inescapable fact is that they have to face the question of intergenerational transfers.
Let me now return to the globalization of the old and the very old which is the title of this blog. A look at the population data is quite useful (Table 1).
A few examples suffice. Three types of data are shown: The age distribution of the population; the birth rate and the US unemployment rates by age group. The dat given covers 10 year periods. The story that emerges is what Fishman’s article sought to convey. The age structure of population in the developed world makes it clear that a shrinking pool of the young faces a growing pool of the old and the very old. Birth rate data show one of the fundamental reasons why the young pool has been shrinking over time. Without changes at either end of the age spectrum (not likely in the short run), the young need to garner higher intergenerational transfers. Short of

that, the very old will see the social contract crumbles and they have to find ways to cope with the loss of support.
A look at the US unemployment rate by age groups, population in the two age brackets (34-44 and 45-54) have typically enjoyed the lowest rates of unemployment. If this scenario were to change a further stress on society resources will be manifested. That is not only transfers of resources will have to take place from the young to the old but also from the working population to the unemployed population.
Putting the unemployment issue aside (for another blog), the question that was raised in the Fishman’s article is how to deal with the old and especially the very old. One solution which has been practiced not only in the US but elsewhere is to alter the social contract—raising the retirement age, taxing pension benefits and health benefits and so on. The problem is these remedies are ad hoc solutions that are not likely to “remove” the problem of aging from the social agenda.
Good minds and not such good minds have advocated many solutions ranging from “privatizing” the social insurance system including pension and medical care to keeping the old and the very old in the work force. But as Fishman puts it “one conundrum for aging societies is how to keep older people employed”. Obviously, if that was possible, then tax revenues rise, benefit payments fall or pushed further into the future. This scenario has been achieved to some extent in the US but the problem of an aging population did not go away. As outlined above, the problem gets exacerbated when economic conditions worsen and when technical advances favor the very young. Mr. Fishman is very pessimistic about the future outlook of aging societies. According to Fishman “…as the world gets older, we need to anticipate how this extraordinary change might undermine our commitments, weaken nations and push able people to the side…it now looks as if global power rests on how willing a country is to neglect its older citizens”.
Well… I wonder how old is Mr. Fishman? Would he retain this thought when he gets to join the “army of the old and the very old”?
What kind of solutions are likely to emerge if the age structure continue as it has been in the past? If the future is a repetition of the past, societies will have to revisit those solutions advocated by many. Mind you, these solutions are not new—they are worn out so to speak, but there they are:
• Negate or abolish the “implicit” social contract—you pay, do not pass go and do not collect your “owed” pension.
• Curtail the delivery of medical care through rationing—if you are over 50 you are on your own—sink or swim (The British National Health Service ration medical care to the old).
My prescription is:
• “Do not send the young to do the business of the old. If the over 40 politicians need to change the world through war-like engagement, they should send the age group over 40, over 50 and over 60’s (that should end war quickly).
• Lend credence to the world globalization by allowing free movement of people. Migration is one way to populate a country by the “young”. Of course that means not only migrants have to be young but also possess needed skills. This option not only will chip away at the “outsourcing” problem but also will neutralize the effects of aging throughout the global economy.
Alas, these solutions, at least for the moment, are far fetched solutions. Nonetheless, they should give us all a pose, perhaps food for thought.