People Just Don't Get Demographics

I love reading Barron’s every Saturday mornrning. It’s part of my weekly ritual, and the subject matter seems to go well with my mornrning cappuccino.

But a few weeks ago, I read an article so fundamentally misguided, it ruined an otherwise perfectly good brew (see “Pretenders to the Presidency” from the November 30 issue).

It was so bad, I actually tore it out and left it on my desk for a few weeks to let it settle. But I’m finally ready to tear it to shreds.

The piece, which essentially summarized a paper co-written by a London School of Economics professor and a Morgan Stanley economist, contends that changing global demographics – specifically a shrinking workforce – will result in slower growth, higher interest rates, higher inflation and higher real wages.

Well, on the first count, I actually agree. An aging North America, Europe and East Asia will almost definitely cause growth to slow. In fact, growth is already slowing and has been for years.

But the belief that an aging population will lead to higher interest rates, inflation, and real wages shows a complete misunderstanding of demographics… not to mention total ignorance of recent history in Japan.

And yet, that’s the problem. Nearly everyone recognizes these days that demographics matter. They just don’t understand them, and thus draw the wrong conclusion.

It’s really not that hard to explain. Economists focus on supply and completely ignore demand. They view an older person as one less worker rather than as one less consumer. And that’s their fatal mistake.

Most labor is pretty expendable these days. When a job gets expensive, it simply gets automated away. We got rid of elevator operators a long time ago because it’s cheaper to have the passengers press the button themselves.

Sure, labor shortages in certain in-demand professions like brain surgery and engineering may lead to wage inflation. But for most rank-and-file workers, that is absolutely not the case.

And while technology can replace an employee, it can’t replace a shopper. That’s something else that economists fail to appreciate.

Once we age into our late 50s, we start consuming less of virtually everything but health care.

Less spending means less aggregate demand in the economy. And this is why Japan has struggled to spur demand for the past two decades and why it still suffers from deflation and oversupply, despite having a shrinking population and workforce.

We’ll have inflation again someday. It will happen, and demographics will play a part.

But it won’t be the elderly causing it. It will be millennials settling down, getting mortgages, and falling into the trappings of middle-class family life.

Charles Sizemore

Editor, Dent 401k Advisor

Charles Sizemore

Charles specializes in finding value opportunities and income plays outside of the mainstream stock market.