Chapter 5 and 6
Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The Future of Capitalism Main Page
Chapter 5: Plate Three: Demography - Growing, Moving, Getting Older
Growing
Populations exploded in the third world after World War II. The World Bank forecast that the world's population will grow from 5.7 billion to 8.5 billion by 2030. Two billion of those people will be in countries where earnings are less than $2 per day. These countries will not be able to make the investments necessary to provide water, food, education, or the tools their people need to earn a living. Currently eighty countries with 40 percent of the world's population already have water shortages that adversely affect agriculture. For per capita incomes to rise, population growth has to be less than economic growth. With population growth of 3 percent in the Middle East and Africa, and 2 percent in Asia and Latin America, these regions could have substantial economic growth without any real progress toward raising per capital incomes. If population growth rates continue as projected, without substantial economic growth, a Malthusian future with mass starvation would not be an unlikely outcome. (Note: World population as of July 1, 2019 was 7.7 billion).
To add more to this rather dark picture of the future, consider the environment. People are the ultimate source of environmental pollution and degradation. As the human population grows, the quality of the earth's environment declines. Over the course of its lifetime an American baby born in 1990 will produce one million kilograms of atmospheric waste, 10 million kilograms of liquid waste, and one million kilograms of solid waste. To become an average American, new Americans will need approximately $250,000 worth of education, infrastructure, plant and equipment, housing, and food until that new American is old enough to work. What all this means is that people born in poor countries with rapid rates of population growth will die in poor countries. Neither internal innovations, nor aid from first world countries can overcome a high population growth rate.
Moving
Massive population movements are taking place from the third world to the first world. In the 1980s, 15.2 million people legally moved from the third world to the first world. Nearly eight million of those came to the United States. In addition, there were 3.4 million illegal aliens living in the U.S. in 1992. Mass migrations in the late nineteenth and early twentieth centuries were different. Most of the people who moved were middle or lower-middle class families moving from richer countries (England, Germany, Italy) to empty countries (the U.S., Argentina, etc.). Empty countries needed people and unskilled labor. Today's industrial countries do not need more people or more unskilled labor.
Immigration policy could be redesigned to promote economic growth by accepting immigrants based on their youth, skills, or the funds they were willing to invest in America. Those who needed social services such as education and welfare could be excluded. This sort of policy could help improve the ratio of taxpaying workers to pension collecting retirees. But adopting a growth-oriented immigration policy seems very unlikely. Massive population movements are even more likely as transportation costs drop, and the affluent countries' high standards of living are viewed on TV by those in all parts of the world. For example, what is the worst thing that can happen if a poor Mexican villager crosses the U.S. border illegally? He might be caught and sent home, but eventually he will succeed. What is happening in the U.S. is mirrored in Europe and North Africa.
Today's immigrant, on average has less education, is more likely to drop out of high-school, and has an income less than those of native-born Americans. Past immigrants did not move to a society with a social welfare system. Today however, they are more likely to be on welfare than native-born Americans.
Massive population movements could be contained by using national identity cards with stiff penalties for those who hire non card holders, and a policy of deporting those without the necessary card. Other measures could be taken such as identity-card checkpoints along highways and by installing walls or high-voltage fences at our borders. Without these or similar policies, immigration cannot be stopped.
Growing Older
The most explosive part of the demography volcano is the aging of the world's population. For the first time in human history there is a new class of people who are economically inactive, affluent voters who require expensive social services and depend upon government for much of their income. They are destroying the government welfare system and threatening the investments that societies need for a successful future. On average, those over 65 in the United States receive 41 percent of their incomes from the government. Thirty-eight percent receive 80 percent of their income from government. This has made the elderly into one-issue voters who have a disproportionate impact on the political process. Today the welfare state plus interest payments on the national debt take 60 percent of total tax revenue. Expenditures on the elderly are squeezing government investments in infrastructure, education, and research out of the budget. Today's social security tax rate would have to be increased to 40 percent to provide the benefits already promised.
Democracy's ultimate test is to confront the growth in entitlements for the elderly. But no one knows how to solve this problem because the elderly are unstoppable politically, since those under eighteen legally cannot vote, and those between eighteen and thirty tend not to vote. Means-tested benefits (benefits that decrease as income and wealth increase) would produce dramatic cost savings, but there is little political support for that sort of policy.
Private firms face similar problems with their pensions and healthcare programs for retired workers. In the United States private pension plans are underfunded by 20 percent. Some companies (e.g., auto) would have little or no equity if their pension obligations were fully reflected on the books.
The group that needs the most investments for a successful economic future is the group that is getting the least. The government spends nine times more on the elderly than it spends on the young. In the post-World War II social contract, parents took care of children and society took care of parents. Today that contract is collapsing.
Reforming the Social Welfare System
Although politicians have already decided that the elderly problem cannot be solved, the problem has to be solved. Society cannot continue to transfer so much to a group that has above average incomes. In the current system, the poorer members of society are subsidizing the richer members. The age of retirement has to be raised and early retirement has to be eliminated. The appropriate retirement age (from a government finance perspective) could easily be calculated based on the projected tax dollars available, the number of elderly, and their expected life spans. Self-financing (IRA, 401(k), 403(b) plans etc.) also needs to be expanded, but workers in general and lower-paid workers in particular don't take advantage of the current tax-free opportunities to save. Workers could be forced to save using a system similar to Singapore's Provident Fund where every person must contribute 20 percent of their wages to a personal savings account that is matched by employers. But given our current system of intergenerational transfers, it is only possible to move slowly toward a self-financing system since today's workers must simultaneously finance the elderly and their own old age benefits.
Most of the elderly have convinced themselves that they have earned what they get, but this is not entirely true. Most people in the past have received much more than they paid into the social security system. However, there are significant generational differences as illustrated in the graphic below adapted from Politifact. Earlier generations were the big winners. More recent generations are not doing as well in terms of social security, but including Medicare benefits and taxes turns everyone into a welfare recipient. In any case, the perceptions of the elderly do not change the fact that a payroll-tax financed social welfare system is not sustainable in the long run.
Chapter 6: Plate Four: A Global Economy
Today's technology, transportation and communication costs have made it possible for anything to be made anywhere and sold everywhere in the world. Social attitudes and government actions based on those attitudes have also helped create the global economy. After World War II the U.S. could have retreated into isolationism since economically it did not need the rest of the world. But the indirect threat of communism lead it to an internationalism strategy instead. The outside threat of communism was a one-world ideology, i.e., forming one big Communist country combining the Soviet Union, Eastern Europe, and China. Global capitalism was needed to contain global communism.
Global capitalism included military alliances and wealthy partners that could share the military burdens that containment required. The GATT-Bretton Woods system included a series of trading rounds dismantling tariffs and quotas, U.S. leadership, and an open American market. The United States used its large, open, rich market to tie people elsewhere in the world into the American system. Countries became rich by focusing their exports on the American market (e.g., Japan). After the war, formerly wealthy countries (Germany, Japan, Great Britain, France, the Netherlands) had to be rebuilt to preserve capitalism. The Marshall Plan brought huge amounts of aid to these countries. Foreign aid also went to those who agreed to stay out of the Communist system regardless of whether they were dictatorships or believed in capitalism.
Today the global economy makes everyone mutually interdependent and linked by supply and demand. It is physically embodied in our ports, airports, and telecommunication systems. It is also embodied in our mind-sets.
Regional Trading Blocs
Regional trading blocs emerged as a transitional step in the evolutionary process of moving to a truly global economy. Although there was more free trade within blocs, there was more government managed trade between blocs. Most developing countries will have to negotiate access to the wealthy markets, although a few third world countries will have automatic entry (e.g., Mexico). Every country in Latin America wants to join NAFTA (North American Free Trade Agreement), and all of middle and much of Eastern Europe want to join the European Community. Of the three trading regions that existed in 1995, NAFTA was probably in the worst shape. Mexico and Canada were both financially distressed and the U.S. had to undertake enormous financial commitments to prevent their collapse. Free trade areas cause falling wages and prices in contrast to common markets that use social investments to bring wages and prices up. Free trade is painful for many even though those who benefit tend to be more numerous.
The European Community is a common market, but it has some difficult foreign policy problems to solve such as the Bosnian conflict (e.g., the Bosnian genocide of 1995), establishing a common currency (The euro was introduced on January 1, 1999), and its lack of leadership in creating trade with the old Communist countries of Eastern Europe.
Pacific Rim countries including the U.S., Canada and Australia promised to create a free trade area by 2020 (Asia-Pacific Economic Cooperation or APEC). The Pacific Rim includes Japan (an economic giant, but a military pygmy), China (a population and military giant, but with an economy less than 7 percent of Japan's), and a number of other countries that have neither the population or military power of China, or the economic muscle of Japan. Including America (the ultimate Trojan horse) means everyone would be squeezed by the American market they need and the Japanese funds that they want. The rich developed countries want free trade in services, while the poor countries want protection. What all this means is that free trade between all these countries seems unlikely because the fundamentals for a trading bloc simply do not exist.
Global Challenges to National Economic Policies
A global economy is one where extra-national geo-economic forces dictate national economic policies. National governments lose much of their ability to control the economic environment (antitrust, and the regulation of securities and investment banking activities). This essentially means that national government regulation of business is over. Activities go to where they are not regulated, often electronically, without requiring anyone to physically move to another location. In high-tax countries, business firms simply move to low-tax countries. Government expenditures that benefit business (training and infrastructure) can still be defended, but consumption benefits become harder to finance with business taxation. For a while at least we will have capitalism with much less government regulation.
Global Challenges to International Organizations
There is no system of rules to guide the new global economy. The old system (Gatt-Bretton Woods) was designed around MFN (most favored nation), meaning every country will give all countries the best deal it gives to its most favored trading partner. But now, in a multipolar world no one is willing to do that. In a multipolar world without a dominant economic focal point, who will manage the system, who will be the lender of last resort to stop financial panics, and who will provide the open markets for those who wish to develop? The United State cannot continue to be the export market for everyone, and Japan is closed to third-world imports.
Some countries want to preserve their culture (France), but there is no easy way to separate economics and culture. Traditions, heritage, languages are all affected as today's technology and communication systems bring programing (e.g. soccer) into every home. And what are the right rules for intellectual property rights? A global economy encourages free riding. Everyone in the third world has to pirate everything if they want to catch up to join the first world. In a global economy governments also focus less on basic research and development and more on creating more jobs and higher wages that get their politicians reelected.
The world clearly needs a new trading system that can address the issues related to cultural exports and intellectual property rights, but it does not have one. The European Common Market will probably write the rules for world trade because it is the only international group in the rules writing business (e.g., ISO 9000). The International Monetary Fund (IMF) and the World Bank are both searching for a role in the global economy, but these organizations were not designed to solve the problems in the third world that need first world help. Some new institution needs to be designed for this purpose.
Democracy, The Nation State, and a World Economy
A workable global economy requires cooperative policies, and giving up a substantial degree of national sovereignty, but this is undemocratic. Developing an elected democratic world government would be democratic, but this seems highly unlikely to occur since it would not be politically acceptable to either the Left or the Right. As a result, the global economic game will be played in an environment where the rules are not written, and where it is not clear who would enforce them even if they were.
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Go to the next Chapter. Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Chapter 7).
Related summaries:
Friedman, T. L. 2005. The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century. Farrar, Straus and Giroux. (Note).
Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).
Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press. (Summary).
Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).
Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).
