The Great Demographic Reversal (eBook)

Preface (April 4 Version) 5
Contents 8
Abbreviations 10
List of Diagrams 13
List of Tables 17
1 Introduction 19
1.1 The Demographic ‘Sweet Spot’: How the Fundamental Forces of Demography, China and Globalisation Shaped Our Economies in Recent Decades 20
1.1.1 The Rise of China… 20
1.1.2 …and the Re-integration of Eastern Europe 20
1.1.3 Benign Demography in the AEs 21
1.1.4 The Economic Effects Have Been Dramatic 22
1.1.5 Social Effects: Winners, Losers and Inequality 25
1.2 The Great Reversal Is Now Starting—The Sweet Spot Turns Sour 27
1.2.1 The Sweet Spot Is Turning Sour 27
1.2.2 Care for the Aged Raises Economic Costs Dramatically 28
1.2.3 Slowing Globalisation 29
1.2.4 Economic Effects 29
1.3 Where Could We Be Wrong? 32
1.3.1 How Could All of This Leave Policy and Policymakers Unscathed? 37
2 China: An Historic Mobilisation Ends 39
2.1 Three Acts of History that Shaped China’s Place in the World 40
2.2 Centralisation of Economic Power, Decentralisation of Political Power 45
2.3 China’s Great Reversal 50
3 The Great Demographic Reversal and Its Effect on Future Growth 59
3.1 The Demographic Sweet Spot…. Slowly Turning Sour 59
3.2 The Demographic Cycle: Uniform Geographically, Lopsided Economically 62
3.3 Output Growth 65
4 Dependency, Dementia and the Coming Crisis of Caring 70
4.1 Introduction 70
4.2 Ageing Is Hazardous 71
4.3 The Costs of Dementia 75
4.4 Implications for the Macro-Economy 80
4.4.1 The Growing Redirection of the Labour Force into Health Care 80
4.4.2 The Supply of Carers 81
4.4.3 The Changing Life Cycle 83
5 The Resurgence of Inflation 86
5.1 Inflation as the Product of the Outcome Between Savings and Spending 87
5.1.1 Inflation from Dependents Versus Deflation from Workers 87
5.1.2 The Phillips Curve and the Impending Rise of the NRU 88
5.2 Sectoral Balances: Private Sector Surplus Set to Erode, Can the Government Reduce Its Deficit? 89
5.2.1 The Household Sector Surplus Is Set to Erode 89
5.2.2 The Unusual Surplus of the (Non-financial) Corporate Sector Should Move into Deficit 96
5.2.3 Will the Public Sector Really Be Able to Reverse Its Deficits in a Time of Ageing? 100
5.3 Overall Macroeconomic Effects 102
6 The Determination of (Real) Interest Rates During the Great Reversal 104
6.1 Introduction 104
6.2 Will Declining Growth Cause Real Interest Rates to Remain Low? 105
6.3 Sectoral Changes in ex ante Savings and Investment 106
6.3.1 The Personal Sector: The Life Expectancy-Retirement Age Gap, and China 107
6.3.2 How Will the Non-financial Corporate Sector Respond? a Tricky Story 111
6.3.3 And What About the Public Sector? 113
6.4 Risk Aversion and a Shortage of Safe Assets? 113
6.5 Political Pressures 115
6.6 Conclusion 116
7 Inequality and the Rise of Populism 117
7.1 Introduction 117
7.2 Inequality 119
7.3 Explanations of Rising Inequality 124
7.3.1 Ineluctable Trends 125
7.3.2 Technological Changes 125
7.3.3 Concentration and Monopoly Power 126
7.3.4 Globalisation and Demography 126
7.4 The Rise of Populism 127
8 The Phillips Curve 132
8.1 Introduction: The Historical Development 132
8.2 A Horizontal Phillips Curve? 138
8.2.1 The Phillips Curve Is Dead 138
8.2.2 Expectations Dominate? 139
8.2.3 Successful Monetary Policies 139
8.2.4 A Changing Structure of Employment 140
8.2.5 A Greater Role for Global Factors 141
8.2.6 A Shifting NRU 142
9 ‘Why Didn’t It Happen in Japan?’ A Revisionist History of Japan’s Evolution 144
9.1 Introduction: Flaws in the Conventional Analysis 144
9.2 Domestic Investment—The Boom and the Bust 148
9.2.1 Corporate Expansion—The Heady Years 148
9.2.2 From a Multi-Decade Boom to a Multi-Decade Investment Recession 149
9.2.3 Outbound FDI: The Investment Boom Outside Japan’s Borders 151
9.2.4 Why Has Outbound FDI Not Received Greater Attention? 154
9.3 The Changing Composition of Domestic Production and Employment 155
9.3.1 Globalisation 157
9.3.2 ‘Insiders’ vs ‘Outsiders’ 157
9.3.3 Participation 160
9.3.4 Why the West Won’t Follow Japan 161
10 What Could Offset Global Ageing? India/Africa, Participation and Automation 163
10.1 At Home: Automation, Participation, Migration 164
10.2 Can India and Africa Offset Demographic Headwinds in the Ageing Economies? 171
11 The Debt Trap: Can We Avoid It? 177
11.1 Introduction 177
11.2 The Build-Up of Debt 180
11.2.1 Households 181
11.2.2 Corporates 184
11.2.3 Public Sector 186
11.3 Can We Escape the Debt Trap? 188
11.3.1 Growth 188
11.3.2 Unexpected Inflation 190
11.3.3 Renegotiation 190
11.3.4 Default 191
12 A Switch from Debt to Equity Finance? 193
12.1 Introduction 193
12.2 Levelling the Net Fiscal Advantages of Debt and Equity 195
12.2.1 ACE—A Tax Allowance for Equities? 196
12.2.2 Border Taxes 197
12.3 Reforming the Incentive Structure for Corporate Managers 199
13 Future Policy Problems: Old Age and Taxes, and the Monetary-Fiscal Clash 203
13.1 Introduction: The Rocky Road Ahead 204
13.2 Two Things Are Inevitable: Old Age and Taxes 206
13.2.1 Reforming the Basis of Corporation Tax 208
13.2.2 A Land Tax 209
13.2.3 A Carbon Tax, Aka, Let’s Put a Smile on Greta’s Face 212
13.2.4 DBCFT 213
13.3 Monetary Policy 213
14 Swimming Against the (Main)Stream 216
14.1 Our Approach and Main Thesis 219
14.2 Where and Why Does the Mainstream Disagree with Us? 220
Postscript: Future Imperfect After Coronavirus 226
References 232
Index 247