China vs. India: Demographics

I thought that it would be worth looking into the demographics of China.  It would be nice to actually quantify its effect a bit more closely.  Luckily, I found a paper that did just the type of analysis that I was looking. David Bloom and Jeffrey G. Williamson wrote “Demographic Transitions and Economic Miracles in Emerging Asia”, published in April 1998. They used demographic and economic data from 1965 through 1990 to generate estimates on the impact of a demographic dividend.  They measured the impact of the growth of the population, the growth of the working age population (15 through 65) and other common variables on per capita GDP growth.  I took the average of the coefficients in table 4 to do a country specific analysis of China and India.  On average, the growth of a working age population helps per capita GDP growth by about 1.7% for every additional percent growth in working population, while every percent growth in the total population hurts per capita growth by 1.4%.

Without a demographic Dividend, China’s GDP growth would be marginally lower:

The demographic dividend’s effect (blue line) is disappearing, and will go negative after 2015. The orange line measures the total impact of population on GDP, combining the dividend’s effect on per capita income with the overall population change.

For India, their demographic dividend is mainly in the future.

India’s overall GDP growth will slow down with their general population growth, but their per capita GDP growth will be benefiting from a demographic dividend for quite some time.

This analysis relies on coefficients from 1965 through 1990, so the impact of the elderly is not going to be properly quantified.  There were no countries facing an abnormally large elderly population that expected benefits from the government. When the Bloom & Williamson paper separated out the youth dependency and elderly dependency ratios, they found that an elderly population actually added marginally to growth (Which makes some sense since unlike with youth the elderly population is marginally productive).  However, after economies have had to deal with the potential fiscal crisis due to their aging population the effect might be found to be quite a bit more negative.

I suspect that some measure of this nature might be helpful in separating out convergence growth from demographic driven growth. Unfortunately, the nature of the demographic dividend is that the dividend occurs during convergence, so a simplistic analysis can only explain so much.  

Data: April 2010 IMF WEO database was used for PPP GDP data. The 2008 UN World Population Prospects database (medium variant projections) was used to get the age structure of China and India.

Aging and Saving

The Consumer Expenditure Survey by the BLS just released an interesting article highlighting their 30 years as a continuous survey.  I decided that it could be interesting to see what their data combined with Census demographic projections imply about the future trend in savings. One way to do this is to break down the savings rate by age and project it forward.

Years: 2004-2008

All consumer units

Under 25 years

25-34 years

35-44 years

45-54 years

55-64 years

65-74 years

75 years and older

Average Savings Rate









As the savings rate obviously wasn’t 17.5% over the past few years, it should be noted that the CES implied measure of savings is rather different than the personal savings rate data calculated by the BEA.

In 2004, the CES changed the way it calculated income for incomplete survey responders, so the savings bias is calculated as an average of 2004 through 2008, which is about 15%.

The analysis assumes that the savings rate of each group will remain constant, and combines CES data with the US Census projections with constant net immigration to predict the future path of savings rate. The census cohorts are adjusted by the relative amount of consumer units because they suffer the same discrepancies as household data, with fewer young consumer units per capita.  This savings rate is adjusted downward by about 15% to be comparable to the BEA’s personal savings rate data.

The results are interesting in their mildness. The savings rate is only expected to drop a little over 1% due to demographic factors.  Of course, this study is biased for many reasons.

  1. The accuracy of the using the aggregate consumer expenditure data without adjustment is questionable.
  2. Social security and other retirement benefits are assumed to exist at levels comparable to the past few years. This biases the savings rate of the old cohorts higher compared to a likely scenario in which government and pensions have solvency issues due to the increasing dependency ratio. 
  3. The educational and racial composition of the projections is held constant when the savings behavior of these cohorts is actually rather variable.
  4. Wealth effects are completely ignored.

Update to Demographic Political Projections

The Census also has voter participation data broken down by age or race, but not both.

This chart shows us what everyone knows: Old people are more likely to vote. This chart also explains why social security reform is not likely to happen, as old people won’t vote to give away their benefits and they may even vote against other reforms that only affect the young out of paranoia. The same could be said about programs that might have knock-on effects to Medicare down the road.

A little bit more surprising is the contrast between turnout in presidential election years and congressional election years:

I repeated the study using age based voter turn out numbers from the last two years as a guide, also adjusting the Hispanic voting population down by one third to adjust for the illegal immigrants who are unable to vote.  One surprising effect was that the slightly lower age of the growing minorities was not enough to affect the general thrust of the voting pattern.

Next I looked at the race based voter turnout.


And again, I compared it presidential election turnout with turnout from the previous year:


The results were rather extreme, showing how off year elections had a much bigger impact when voting by race was taken into account than when voting by age was taken into account.  This is because more whites vote during off years, with their off year voting at 75% of presidential election voters while only 66% of minority voters in presidential elections decide to vote during off years.

No model is ever truly complete, and this model is still lacking in numerous ways.

  1. The predilection for the youth to vote for democrats has not been taken into account. An older population might be more conservative in nature, which would be a boon to the republicans.
  2. Secondly, the recent data on black voter turnout was driven upwards by Obama’s election and it remains to be seen whether or not this recent shift will revert to the mean. 
  3. Gerrymandering and state based Electoral College make national projections of the total popular vote less important than close analysis of swing states.
  4. Short term economic fluctuations and personality politics means that the above charts are at best vague projections to show the direction of things to come where the emergence of a larger minority population makes republicans fall behind by an average of 0.1% or 0.2% of the population each year.

Furthermore, this analysis assumes no large shifts in party politics that might change racial voting preferences.  It does suggest that any big move towards the center is likely to be made by the republicans and not the democrats, as the democrats are riding a trend towards more power and while they may occasionally get ahead of themselves as they have with the healthcare legislation, the voting population is drifting further left every year.

The Republican Party's Demographic Future

Stereotypes are often statistically significant, and that is why the relative and absolute decline of the white population is going to hurt the Republican Party. After the last four years the talk of a permanent Republican majority seems especially ridiculous, but even when the Republicans were in charge their long term prospects have been tentative at best.

Source: US Census

Of course, politics is more complicated than just white people vote republican and other people vote for democrats. In order to narrow down the results further, I averaged the CNN exit polls from 2008 and 2004 (Counting the Nader voters as Democrats) to get the table below. 






















Using this table and the US Census data, I generated the following projection:


This projection is obviously a bit off, as Republicans were equal or ahead of democrats in 2000 and 2004.

There are a few factors that bias the analysis towards making democrats appear stronger than they are:

  1. Minority voters are younger and lean more democratic.  Young voters don’t show up in the same numbers as older voters, so an age weighted analysis would show Republicans as better off.
  2. There is some amount of over counting of Hispanic voters, as many of the Hispanic population are illegal aliens and unable to vote.
  3. There is a possibility of over counting of Hispanic voters voting democratic and under estimating the extent to which non-Hispanic white voter’s lean republican because all Hispanic people in the census were assumed to act as if they were Latino. It is very likely that a significant fraction of the Hispanic population told exit polls that they were white instead of Latino.
  4. The Electoral College based system gives Republicans a chance to retain control of the senate and white house via the smaller states with white majorities for far longer than the above chart would suggest.

Even given the above irregularities, it is obvious that demographic trends mean Republicans face an uphill battle. Democrats get the minority votes by supporting entitlement programs that disproportionately benefit minorities. Republicans then imitate the democrats in order to try and get votes, a strategy that is generally ineffective in terms of netting votes and has the effect of permanently expanding the entitlement infrastructure. Brown’s win in Massachusetts may have temporarily halted healthcare reform, but the demographic trend means that victory is only temporary.

The only way demographics are on republican’s side is that the consistent increase in age based entitlement spending from Medicare and Social Security means that a few years down the line the government will not be able to afford any additional entitlement spending without making everyone pay for it.


Working Age Population Demographics: The one place where the US is okay?

One aspect of demographics that is often overlooked is the change in the working age population, the population between the ages of 20 and 65.

Source: UN Medium Variant Projections, World Population Prospects: The 2008 Revision


In the above graph, the US looks like it is pretty well situated compared to Japan and Western Europe. Japan’s economy, in addition to its other problems, needs to overcome one percent of shrinkage in its work force each year. Incidentally, this means that the nominal 3% GDP target recently announced by the government is in reality more of a 4% nominal GDP per worker target.  Australia, New Zealand and Canada (Not pictured) are in pretty good positions, with their steady immigration policies preventing their working age population from shrinking.


The United States looks like Canada and New Zealand, but the composition of workers is quite different. Australia and Canada’s immigration laws encourage educated immigrants. In the United States, the most fecund populations and the largest share of immigrants are not educated, but are instead composed largely of illegal immigrants who are periodically granted amnesty or their children who are natural born citizens.  Data from the US Census shows that the earnings gap per person is currently relatively significant:



Total Money Income in 2008 (Mean)

White, Nonhispanic


Black Alone


Hispanic Alone


Asian Alone



The Census’s constant migration model of the US population shows that white non-Hispanic working age group is actually shrinking:




Assuming that the wage differential between ethnic groups does not shrink to a negligible size, this adds up to a working age demographic picture that isn’t quite as rosy for the United States when compared with Canada and Australia. Even so, it is still in better position than Europe and Japan who will have have to run the red queen's race to keep their economy the same size.

Introductory Post

The goal of this blog is to focus on long term problems while avoiding the pessimistic bias by recognizing the positive impact of human ingenuity compounding over long time periods

I’ve free ridden off of some of the very insightful analysis of the blogosphere for some time. This blog is my attempt to get some of my ideas out there and free ride off of the insightful commenters.

Below are a few of the themes that I think are important:

1. The time preference of the average person and average policy maker

There is a problem with the excessive focus on the short term. The existence of this focus is well documented in behavioral economic studies of hyperbolic discounting.  Policies that have tradeoffs with benefits in the short term vs. large expenses in the long term are often favored.  To take one example, the current state and local pension problems occurring all around the United States exist in part because the time preferences of politicians are far too short term.  Further more, demographic pressures mean that Keynes’s famous quote “The long run is a misleading guide to current affairs. In the long run we are all dead.” is changing to “In the medium run we are all dead” for more and more voters as the population of the developed world ages.

2. Globalization and its impact on the middle class of the developed world

Globalization is unequivocally increasing the wealth of this world. Basic comparative advantage proves that when trade is opened up, the pie grows. However, the inefficient producers of goods produced by new trading partners do often lose out. In this day and age, those inefficient producers tend to consist largely of the middle class of the developed world. The upper class has capital that is benefiting from globalization while the lower class has service jobs with manual labor that can’t be replicated by someone working for much cheaper when they are halfway across the globe.  The interesting question is whether the benefits of cheaper goods outweigh the costs of slightly worse jobs for the middle class.  Even with globalization, total compensation has been trending upwards for labor, people just don’t notice it because a lot of compensation goes towards labor costs and many simplistic commentators like showing the inflation adjusted household median income chart that leaves out noncash forms of compensation.  

Source: US Census and BLS

The other question is whether there is any policy that could have prevented these harms to the middle class short of attempts to keep the developing world undeveloped.  Even if the answer to that is no, this does not mean that there will not be a counter productive political attempts to reverse recent trends.

3. Resource constraints

Peak oil is the main resource constraint that comes to mind, but there are many long term issues with resources that are not being adequately addressed. Peak oil generally raises the cost of substitutable goods, making other forms of energy more expensive. This bleeds into other assets such as raising the cost aluminum, which is produced in an energy intensive fashion.  Water constraints are another important resource limitation on growth.  Other resources like rare earth elements or industrial metals may be more expensive due to short term supply and demand imbalances driven in part by the developing world. What makes peak oil more interesting than other basic resource problems is that the daily oil supply is running up against geologic constraints while other resource shortages generally last only as long as it takes for new mines to be built and brought online.

4. The entitlement mindset

A lot of people feel like they are owed a lot of things by society. They also believe that the average person shouldn’t be paying for these things. This is a trend that cannot continue.  Also relevant to this theme is the long term performance of countries with lots of foreign aid compared to countries that are less dependent on foreign aid.

5. Status driven trends

As the developed world gets richer, more and more money is spent on status and signaling related behavior. This has many unfortunate side effects.

6. Demographic issues

Source: UN Medium Variant Projections: The 2008 Revision

Charts like the one above are very common when discussing upcoming demographic problems.  The developed world is aging, and long term demographic trends are important beyond the basic “How are we going to pay for all of these old people?” questions.