By FERNANDO NOGUEIRA DA COSTA*
The aging of our societies means that the social demand for public expenditures will increase rapidly.
Charles Goodhart and Manoj Pradhan, in the book released in 2020, The Great Demographic Revival, criticize the orthodox hypothesis of “consumption smoothing” over the life cycle. It is supposed to be decreasing, relatively and slowly, as age increases. This has not happened in Western consumerist societies. Instead, consumption tends to increase in the last years of human life by force of facts.
Medical expenses are concentrated in the last cycle of life. These expenses, plus those with care for the elderly, whether privately or as a public service, will become an increasingly greater burden, in the absence of an innovation in medicine in the treatment of dementia, which has not yet been announced for any near future.
Physical dependence, especially dementia, is an exponentially increasing function of age. Both research and care for dementia are underfunded by national states in view of the pressing social need.
Charles Goodhart and Manoj Pradhan not only took this into account, but also the steadily increasing average couple age when their first child is born. No economist's article discusses the economic effects of this phenomenon of changing the life cycle.
The extra burden of dependency on an aging population is borne by households, but the burden of pensions and health care costs tends to increase for the public sector. Worse, this occurs when real growth is low, thus reducing the taxable capacity on value added, that is, incomes.
The economists of mainstream they preach the retirement age to increase ahead of the rise in life expectancy, in addition to the relative generosity of retirement pensions being reduced. In most aging societies, there is a social movement rising up to direct public policy in just the opposite direction.
The pressures for fiscal balance on the part of holders of public debt securities are such that countries follow this path of increasing the retirement age and reducing pensions. This despite being politically unpopular.
Neoliberal presidents can attest to this by not getting what they wanted right away. Upward movements in retirement age and downward movements in relative pension generosity will be gradual but relentless.
Another problem with conventional mental models is that all investment takes place in the corporate sector, ignoring the need for public spending on housing. Old people don't move into nursing homes voluntarily—and they don't have to if they've paid off their mortgages on housing loans. New housing is needed.
The basic concept of housing deficit is directly related to deficiencies in the housing stock, in addition to encompassing those unable to be inhabited due to the precariousness of buildings or the wear and tear of the physical structure. Within these concepts, they need to be replaced.
Also considered as a need to increase the stock of residences is the factor of unwanted family cohabitation (families intending to constitute a single-family home and unable to do so), of low-income residents struggling to pay rent above 30% of income in areas urban areas, of residents in high-density rented houses and apartments. Finally, the case of housing in precarious buildings and places and for non-residential purposes, that is, makeshift homes.
In an aging society, there tends to be more households and poor distribution of space. For the time being, the largest number of elderly people still living separately observes the increase in the number of households due to young people living with their parents more, due to the high cost of separate accommodation. As a result, appeals to parents' financial reserves will reduce retirement savings.
For all these reasons, Charles Goodhart and Manoj Pradhan argue that mainstream economists in the neoliberal media are overly optimistic about the strength of future personal savings rates. Worse, corporate investment in advanced economies has been very slow in recent years, indicating low value added in the coming years.
Given the previous high profitability due to lower labor costs and very low financing costs abroad, a much larger investment was to be expected. In part, investment, like production, seems to have shifted to emerging Asia. In this case, only the reduction of globalization (“de-globalization”) will give any boost to domestic investment.
Another part of the explanation for low investment may be that the weakness of workers' bargaining power has allowed tertiary service sector employers to increase profits. To do so, they reduced wages in the “on-demand economy” [freelance economy], defining new work relationships between companies and temporary workers, “urberized” and/or “pejotized”.
They opted for this precarious employment relationship instead of going through the more difficult process of increasing employee productivity. This would be achieved mainly through investment in automation and/or robotization.
If the strengthening of labor bargaining power and the increase in the minimum wage are confirmed, due to the smaller population, this could encourage industrial investment in machinery and equipment to increase productivity. Therefore, Charles Goodhart and Manoj Pradhan do not expect the potential decline in the workforce (working population) to lead to an equivalent fall in corporate investment.
But they share the view that another reason for the stagnation of investment rates concerns the problem of corporate governance in capitalist economies, notably in the US capital market economy. Giving corporate executives huge bonuses, if they manage to increase stock valuations in the short term, encourages them to increase leverage, issuing debt just to buy back shares, and act against the dilution of equity holdings. With this, they immediately increase the dividends distributed to the remaining shareholders, instead of assuming long-term risk with productive investment.
They cannot resist the temptation to immediately secure their own personal future. The result is a large increase in corporate debt ratios, although the reasons for this are distinct from the drivers of debt ratios in the past. In Asia there are still productive investments, unlike in Western economies.
This increase in the degree of indebtedness is now faced with increasing nominal interest rates – and no longer close to zero. Debt service ratios will no longer remain low, including the financial burden of public debt.
In the recent past, given the unusual drive to reach a surplus in the business sector as well, while the personal finances of wealthy families remained in surplus, the public sector assumed a deficit in order to maintain macroeconomic accounting balance. This social accounting occurred with stagnant income.
The Financial Equity Matrix shows the net lending sectors of the Brazilian economy to be households and the rest of the world, while the net borrowing sectors are non-financial corporations and the government. The financial system is in equilibrium, due to its intermediation of resources.
The aging of our societies implies, at the same time, the social demand for public expenditure to increase rapidly. Spending on Social Security and Public Health is growing, while growth in real income to provide the taxable capacity to satisfy them is decreasing.
Abroad, this has been overshadowed in recent decades by an offsetting decline in nominal interest rates, leaving debt service ratios constant. But have these debts now grown so large that central banks can no longer raise nominal interest rates without triggering a financial meltdown?
Rich countries were trapped in a debt trap because low interest rates, plus governance, increased debt so much that now interest rates cannot be raised very much. O mainstream does not see this change in the relationship between fiscal policy and monetary policy. It does not perceive the need to revise its low inflation forecast, as well as low nominal interest rates, not to make it difficult to refinance the debt and financial coverage of deficits.
Charles Goodhart and Manoj Pradhan look at how to escape the debt trap. This should involve reducing the tax advantages of debt over equity and preventing companies from avoiding tax by using tax havens. It will also likely have to impose some new sources of taxation, for example on values of unproductive non-wealth generating land and air pollutants, such as a carbon tax. The tax base on top corporate executive compensation, especially CEOs, will also need to be reconsidered in this privileged executive society.
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network (Available here).
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