Wednesday, October 28, 2009

Belshaw's world: Savings, aging and the challenge of the future

Note to readers: This post appeared as a column in the Armidale Express on Wednesday 21 October 2009. I am repeating the columns here with a lag because the Express columns are not on line. You can see all the columns by clicking here.

Last week I accompanied my wife to the second Sydney University Faculty of Economics and Business alumni dinner. The speaker was Chris Richardson from Access Economics, the topic “Has Australia dodged the bullet?”

The dinner itself was pleasant if a little long, with drinks on the lawns and then dinner in the Great Hall. Part gathering, part sales-pitch, it is the type of thing that Sydney does quite well. However, my real interest lay in hearing what Chris had to say.

As I said in this column at the time, I was quite angry with Chris and Access back in February for what I saw as quite alarmist head-line grabbing commentary. My own assessment was far more positive, and had been so from the beginning of the crisis.

By August, Chris’s assessment had changed. Australia had indeed dodged the bullet, although he expressed reservations that I agreed with and discussed in another column at the time. Now I wanted to see if his views had changed again.

They had not. However, he had some interesting things to say that I thought I might comment on.

The first thing that he drew out with some very interesting slides was the sheer size in the increase in net wealth that occurred across countries during the long boom. To put a simple number on it, net wealth grew from four times income to a peak in late 2007 of seven and a half times income.

This increase was associated with a twenty five year fall in interest rates. Both the cost of capital and risk margins fell, fuelling increases in asset prices. This went just too far.

The difficulty now is that the imbalances created within the global economy during the long boom have still to unwind. Question marks will remain over growth until they do.

The main imbalance presently concerning economists can be summarised as spenders vs savers. This is often expressed in terms of the US on one side, China on the other.

The long boom in asset prices allowed certain countries to spend more than they earned. This was funded by borrowings from countries that saved.

Many commentators, me included, have suggested that this could not continue. Back in 2001, I argued that the economy must turn down because such low savings rates were unsustainable. I was right, but had no idea at all as to just how long the process would take.

It is going to take time for these imbalances to be resolved.

In the meantime, as the threat of recession eases, other issues are coming to the fore. Here I want to mention just two cited by Chris Richardson.

The first is the practical implications of the Government’s commitment to cap increases in real spend in the post recession period to just two per cent.

This probably sounds okay, but it is going to force some hard spending choices given that spend in so many areas, health for example, is rising naturally by more than two per cent.

My personal view is that the two per cent cap is unsustainable. I am also concerned that some of the arguments being presented here in general discussion are, to my mind, misleading.

Issues here are beyond the scope of this article. For the present, we just need to be aware that there is a problem coming.

The second issue cited by Chris that I want to mention briefly is that of population aging and the inter-generational issues that it raises.

The baby boom after the Second World War, in combination with the later falls in birth rates, created a demographic dividend.

We had more workers relative to dependent groups, both the young who had to be educated and the old who had to be supported. This helped support rising living standards.

This process is now going into reverse. Australia will not be as badly affected as some countries such as Japan, Russia or the Ukraine, but the effects will be profound.

We do need to be planning for this now.

We face particular challenges at a purely regional level.

The North and North West are aging far faster than the Australian average. Down on the coast, population growth in some areas has been retirement driven. The Mid North Coast is one of the oldest areas in Australia.

Blind Freddy could see that New England faces very particular problems. However, this will have to be the subject of another column.

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