On the demographic background behind the Ontario election tomorrow

Tomorrow, the Canadian province of Ontario will go through an election. The Liberal minority government failed to get the support of the left-wing NDP in passing its provincial budget, triggering an election. Right now, the parties seem tied; the election can go any way. (I myself intend to turn up at the polls in my riding, or electoral district, of Davenport and vote for the Liberal candidate; the NDP may have overplayed its cards in Davenport specifically and Toronto generally.)

As noted by Jason Kirby of MacLean's, the demographic background of Ontario is rather unpromising. The economic growth that all three parties count on may just not happen as the workforce ages.

[F]or all the thousands of kilometres the leaders travelled, for all the babies kissed, promises made and millions of pixels burned out by instant online analysis, it’s remarkable how little attention went to the only mathematical reality that matters as Ontario tries to get back on its feet. Its workers are getting old, fast, and that simple fact is the demographic hand grenade that threatens to blow an even bigger hole than already exists into Ontario’s economy.

The reality is Ontario’s creaking workforce is likely to upset everyone’s plans, no matter which party wins. That’s because underlying the various party platforms was a common assumption: that Ontario’s economic growth will kick into higher gear over the next few years, providing a boost to the provincial budget and doing much of the heavy lifting needed to haul Ontario out of its fiscal hole. The impetus for the growth might vary (Tory cuts, Liberal corporate welfare and taxes on the rich, NDP corporate taxes), but once past the nitty-gritty each party was in the same finger-crossing territory: our plan will boost the economy, and that growth will bring Ontario’s $11.3-billion deficit under control.

Partway through the campaign, Doug Porter, chief economist at BMO Nesbitt Burns, published a report entitled “Destiny dictated by demography” (PDF) that should have given all parties pause. In it, he sketched some of the ways Canada’s aging population will hit the economy over the next five to 15 years. Top of the list: “Average growth rates will be slower; get used to it.” For Ontario in particular, he estimated, that means an annualized rate of real GDP growth of just 1.7 per cent for 10 years. Yet the Liberal’s last budget before the election forecast growth of 2.5 per cent for each of the next two years, rising to 2.6 per cent by 2017—growth rates not out of step with what the other parties might expect.

To see how Ontario’s demographics could undermine the economy, consider the following. In the early 2000s, Ontario was a notch behind Alberta in terms of the pace of growth of its adult, working-age population. Today the two provinces aren’t even close. Ontarians are shuffling into retirement age far faster than new workers are coming along to replace them. Sure, the aging workforce is a nationwide phenomenon. But in Alberta, where the number of people turning 65 last year rose slightly more than five per cent, the working-age adult population also grew five times faster than in Ontario.

Ontario’s labour force participation rate is already deteriorating as a result. While it’s often said that a lower participation rate is a sign of workers giving up and leaving the job market, the real driver is demographics. As this chart shows the participation for most Ontario regions is below the national average, which is saying a lot when you consider the size of the province’s population.

For the curious, Ontario's official population projection to 2036 is here, and Douglas Porter's report mentioned in Kirby's article is here.

Secular Stagnation Part 1 - Paul Krugman's Bicycling Problem

"What’s really happening fast is the demographic transition, with Europe very quickly turning Japanese."
Paul Krugman - For Bonds, This Time is Different

Ever since Larry Summers gave his game-changing speech at last autumn's IMF research conference the back-and-forth flow of arguments about secular stagnation has been almost non-stop (indeed Larry himself now has a webpage dedicated to the topic). First to dive into the swimming pool after the sounding of the starting pistol was Paul Krugman, with a series of blogposts and NYT articles (here, here, here, here, here, here, and here).  These were followed/accompanied by a series of commentaries (both for and against), and then finally we got to one of the potential end points of the argument, the "negative natural interest rates for ever and ever" model produced by Gauti Eggertsson and Neil Mehrotra (here) - summarised by Krugman in his memorable "Stagnation Without End, Amen" post.   A fuller bibliography of major milestones in the secular stagnation issue can be found at the foot of this post, but I'm going to eat up most of the column space here looking at just one Krugmans arguments - the one contained in Demography and the Bicycle Effect - since in many ways in goes right to the nub of the issue.

The background to the argument (as originally, even if prematurely, explored by Alvin Hansen, Günar Myrdal and even John Maynard Keynes himself in the 1930s) is that the population dynamics set in motion by the industrial revolution of the late 18th century have reached a historic turning point. In the two centuries or so that have elapsed since what many term the modern growth era got going three related but distinct processes co-existed in time:

1/ positive trend population growth
2/ positive trend economic growth 
3/ steadily accelerating technical change

You could call these the "stylized facts" which characterize the modern growth era, but the secular tendency in two of them  is about to undergo a seismic shift. At some stage during the 21st century global population will peak, and then gradually start to decline, probably forever more. In fact in some countries (principally in Eastern Europe, but also Japan, Germany, Spain, Portugal, and Greece) population is already falling. All of Europe will likely head in this direction sometime in the 2020s, although there is considerable uncertainty still about the actual path dynamics of this process since in addition to birth rates immigration rates also play a part. At the present time some countries in Europe (the UK, Germany, Switzerland) are in receipt of large numbers of migrants annually, while others are losing working age population precisely to the aforementioned trio.

Hence the significance of the fact that Paul Krugman uses the expression "demographic transition" (for the first time to my knowledge) in the quote which opens this post. We are not talking here about some one-off problem (although often observers have spoken about Japan in just these terms), but a generalized phenomenon, a transition, something which eventually will affect all countries on the planet and our entire species. Previously people have tended to use the expression "demographic transition" to refer to the increase in the proportion of working age population and total population that accompanies the drop in fertility from high levels in less developed economies. The expression "demographic dividend" has often been used to describe the boost to economic activity this shift entails. Normally people assumed that this process would come to a halt around the 2.1tfr replacement level, but in one developed economy after another this hasn't happened, and those in which it has have been more the exception than the rule. So now reality pushes us towards a broadening in the definition of that transition towards acceptance of a later phase wherein populations age, and ultimately decline, a process which is greatly accelerated in those countries which have experienced long term very low fertility.

What Alvin Hansen and others started to think about in the 1930s was what the consequence would be for the second of the secular process which have characterized the modern growth era  (positive economic growth). What happens if populations (or better put working age populations) start to shrink? The kernel of their argument is summed up (here) by Paul Krugman as follows:

"To have more or less full employment, we need sufficient spending to make use of the economy’s potential. But one important component of spending, investment, is subject to the accelerator effect: the demand for new capital depends on the economy’s rate of growth, rather than the current level of output. So if growth slows due to a falloff in population growth, investment demand falls — potentially pushing the economy into a semi-permanent slump."

Pretty simple really, but isn't this just what Keynes says at the start of the General Theory, sometimes the simplest things are the hardest to see. Especially if our natural intellectual disposition leads us towards assuming the opposite. Apart from the theoretical simplicity, the idea is backed by plenty of empirical evidence. It has become clear in one country after another that there is a steady falling off of economic growth after the rate of working age population growth peaks and then starts to decline.

The Japan case (as shown above) is clear enough, but the start of this process is already observable in China, where working age population is currently peaking, and where growth rates have now fallen from the earlier double digit levels to ones in the 6%/7% range. People are even alarming themselves by saying we'd better get used to the idea of 5% growth, but in fact this easing in growth rates has little to do with a housing slowdown. Rather it is structural and long term, and Chinese growth rates will eventually fall to the level of Japanese ones (see my 2008 "Has China's Economic Growth Now Passed It's Peak"). Or does anyone seriously think China can keep going on the basis of attracting immigration?

What we are seeing then is that as working age population growth drops towards zero, so GDP growth weakens. The question is, as it turns negative will GDP growth (as opposed to GDP per capita growth) also turn negative. The answer is it depends. A simple approximation to a growth accounting model of the type used by IMF, OECD etc to calculate trend growth in an economy would be the following:

GDP growth = growth in working age population + TFP (total factor productivity) growth

Now, if working age population growth turns negative, then GDP growth can only be positive if productivity grows faster. One conclusion is very obvious here, handling the later stages of the demographic transition is all about managing the rate of working age population decline. This can be achieved to some extent via lengthening the working life, raising the participation rate, or having immigration. Even so, we may arrive at a point were GDP trend growth rates drop below zero. This situation is very near to being the case in Japan, Italy and Portugal, among others.

So we could be moving to a world were eventually both population and GDP decline. What about technology? Well this will need to be the subject of a separate post, but it is highly likely that the rate of technical  change will continue to accelerate, so we could have the peculiar situation that while GDP notional falls, and keeps falling, materially we feel a lot better off.

Well, after this excursus, let's go back to Paul Krugman's bicycling issue. Basically Paul has started to run into a problem that Claus Vistessen and I ran into on our Demography Matters blog. If the world is overpopulated, and there is a constant pressure on natural resources, then why are you economist types worried about falling populations? Wouldn't it be a positive for the planet?

"whenever I raise these points, I get questions from people who ask why I don’t regard slowing population growth as a good thing. After all, it means less pressure on resources, less environmental damage, and so on".

Now naturally at the moment in the US we are talking about slower population growth, but in Japan and parts of Europe - and eventually as we have seen probably everywhere else - population and working age population are already falling. But still, if slowing population growth is going to be a problem for an economy, then sure as hell falling population could be.

"What’s important to realize, then, is that slower population growth indeed could and should be a good thing — but that what passes for sound economic policy is all too likely to turn this potentially good development into a major problem. Why? Because under the current rules of the game, there’s a strong bicycle aspect to our economies: unless they’re moving forward sufficiently rapidly, they tend to fall over."

So what's the issue here? What he calls the current rules of the game (is it in our power to change them?)? Or the bicycle effect, which implies that we are perpetually "condemned to grow", since as Paul says, if our economies don't move forward fast enough they tend to fall over. This is what I intend to examine in the posts which will follow.

To close this introduction to my series on Secular Stagnation I would like to cite the end of the Keynes speech I mention above (here):

"A too rapidly declining population  would obviously involve many severe problems, and there are strong reasons......why in that event, or in the threat of that event, measures ought to be taken to prevent it. But a stationary, or slowly declining population may, if we exercise the necessary strength and wisdom, enable us to raise the standard of life to what it should be, whilst retaining those parts of our traditional life which we value the more now we see what happens to those who lose them"

"In the final summing up, therefore....... I only wish to warn you, that the chaining up of one devil may, if we are careless, only serve to loose another still fiercer and more intractable."

Conclusion

In this introduction we have seen that population decline may now well be inevitable, as may a turning negative of economic growth. This need not make us poorer, depending on how we:

a) develop technology
b) manage the process

As Paul Krugman warns, the current economic and financial "set up" implies the bicycle needs to constantly move forward, something which may prove more and more difficult to achieve. We therefore need as Keynes said, to exercise the necessary strength and wisdom. That is to say we need to adapt the current rules of the game to the new reality, and learn to manage the process. Is simply blowing bubbles the best way to handle this sort of epochal change? That is the topic we will turn to next.

Bibliography

 E. Cary Brown: Alvin H. Hansen's Contributions To Business Cycle Analyisis, 1989 (here)

Willem H Buiter: The Simple Analytics of Helicopter Money, Why It Always Works, Cepr 2014 (here)
Willem H Buiter, Ebrahim Rahbari & Joe Seydl: Secular Stagnation: Only If We Ask For It, Citi Global Economics View January 2014

Gauti Eggertsson & Neil Mehrotra: A Model of Secular Stagnation, 2014 (here)

Alvin Hansen (1939), “Economic progress and declining population growth,” American Economic Review.

John Maynard Keynes: Some Economic Consequences of a Declining Population, Galton Lecture, 1937 (here)

Paul Krugman: Inflation Targets Reconsidered, Sintra May 2014 (here)

Paul Krugman: For Bonds, This Time is Different, NYT 2 June 2014 (here)
Paul Krugman: Demography and the Bicycle Effect, NYT 19 May 2014 (here)
Paul Krugman: Secular Stagnation in the Euro Area, NYT 17 May 2014 (here)
Paul Krugman: Stagnation Without End, Amen (Wonkish), NYT 9 April 2014 (here)
Paul Krugman: Monetary and Fiscal Implications of Secular Stagnation, NYT 19 November 2013 (here)
Paul Krugman: A Permanent Slump?, NYT 17 November 2013 (here)
Paul Krugman: Secular Stagnation, Coalmines, Bubbles, and Larry Summers, NYT 16 November 2013 (here)


Paul Krugman: Monetary Policy In A Liquidity Trap NYT 11 April 2013 (here)
Paul Krugman: The Japan Story, NYT 5 Feb 2013 (here)
Paul Krugman: Japanese Relative Performance, NYT 9 February 2013 (here)

Paul Krugman: Japan: What Went Wrong? June 1998 (available in Japan section here)
Paul Krugman: Further Notes On Japan's Liquidity Trap, June 1998 (available in Japan section here)
Paul Krugman: It's Baaack: Japan's Slump and the Return of the Liquidity Trap, Brookings Papers on Economic Activity, 2:1998 (here)

Gunnar Myrdal: The Effects of Population Decline. Godkin Lectures, Lecture VI, 1938 (here)


Masaaki Shirakawa (2014):Is inflation (or deflation) “always and everywhere” a monetary phenomenon?, BIS (here)
Masaaki Shirakawa (2012): Demographic Changes and Macroeconomic Performance, Bank of Japan  (here)

Larry Summers (2014):On secular stagnation (here).

Timothy Taylor: Secular Stagnation: Back To Alvin Hansen, 2013 (here)

On how gutting national statistics bureaus harms countries, e.g. Canada 2014

One of the tags used here at Demography Matters is "census". I've made the most use of this tag, I think, in my ongoing coverage of the way that Statistics Canada--Canada's official national statistical service--has been gutted by the incumbent government. Most recently, in October 2012 I noted how the removal of the long-form census made statistics on language use in Canada problematic.

Worse, much worse, has come. As journalist wrote today in the Toronto Star, bad data has undergirded much national policy in the past few years, and a good reason that bad data was allowed to persist is that critical Statistics Canada programs have been defunded or simply never launched.

For the past year, Canadians have laboured under the misapprehension that thousands of jobs go begging because no one in this country has the skills to fill them. It turned out the government was using faulty online data.

For two years, people struggled to figure out how Ottawa could close prisons while ordering judges to impose more jail sentences. The auditor general solved that riddle last week: it couldn’t. Canada’s prisons are dangerously overcrowded. “There is no link between the rate of violence and double-bunking,” Public Safety Minister Steven Blaney now says.

For eight years, the government has been cracking down on lawlessness, despite a steady drop in the crime rate. Former cabinet minister Stockwell Day insisted “unreported crime” was rising.

Through three federal elections, Stephen Harper has campaigned as the prime minister who brought fiscal discipline to the nation’s capital. In fact, federal spending ballooned on his watch. He burned his way through the $13-billion surplus left by the previous government, leaving no rainy-day fund when the 2008 recession hit. That meant he had to run the largest deficit in Canadian history. Only since 2012 have the Tories practised government-wide restraint.

Two things are noteworthy about this pattern of disinformation.

One is that it has lasted so long. Until recently there was no systematic questioning of the “facts” dispensed by Harper and his associates.

The other is that it is locked in. The Tories have downsized Statistics Canada, the country’s chief information gathering agency, so severely that future governments will have to rely on blunt — and sometimes unreliable — tools to monitor socio-economic developments.

Half of the agency’s workforce is gone. Hundreds of its programs have been dropped. The mandatory long-form census has given way to a voluntary household survey. It would cost tens of millions of dollars to reverse these changes — and any government that tried would face resistance from taxpayers conditioned to regard number-crunchers as a needless public expense.

Goar's Toronto Star column of the 13th of May takes a special look at claims that the Canadian labour market was characterized by a skills shortage, with many jobs going wanting for skilled Canadians to take them up. This data, it turns out, was based on information provided by Kijiji, an eBay affiliate.

One journalist in particular, Bill Curry of the Globe and Mail, was determined to find out where the government was getting its information. The only hint he had was a cryptic reference to “Wanted Analytics” in former finance minister Jim Flaherty’s 2013 budget.

The Quebec-based company describes itself as the leading source of real-time business intelligence for the talent marketplace. It offers clients data pulled together from online job postings, government statistics, reports of hiring intentions by individual businesses and trade associations, and its own soundings. The government said the firm’s methodology was protected by commercial confidentiality. Curry was temporarily stymied.

But one of Wanted Analytics’ other clients – the Conference Board of Canada – had developed its own suspicions. It reported them to the Parliamentary Budget Officer, who launched an investigation.

Jean-Denis Fréchette and his staff examined each of the company’s inputs and pinpointed the culprit: Kijiji, an online classified ad service operated by eBay. It allowed employers to post the same vacancy under several headings – jobs, services, community – creating double and sometimes triple counting.There was no immediate response from the government, but in the days that followed Kenney ratcheted down his rhetoric, referring to isolated shortages in specific regions. This month, the skill shortage that the Tories had been trumpeting for more than a year quietly disappeared from the government’s job vacancy survey.

The aforementioned Bill Curry, meanwhile, observed that on account of budget cuts, Statistics Canada is incapable of producing fine-grained data sets, looking at employment in specific metropolitan areas within a province, for instance. This, in a physically vast country where many provinces have the populations of mid-sized European countries, is a major failing.

Auditor-General Michael Ferguson reported this week that the existing data from Statscan leave many users wanting more detailed information. While Statscan reports national monthly job vacancy numbers broken down by province, the information does not reveal which regions of a province are experiencing shortages or which specific skills are in demand.

What that missing data might show is central to the heated debate over the federal government’s reforms of the temporary foreign worker program and employment insurance, which have been changed in response to perceived labour shortages.

“I know a lot of people are talking about wanting very detailed occupation [data] for very small levels of geography,” said Ms. Hale. “From my experience, those are the expensive surveys.”

Because of that high cost, she said there are no current plans to produce that missing information.

“We recognize there’s a gap. People would be interested in having detailed job vacancy information, but currently, within the program that we have funding for, the information that we have out now is what we can produce,” she said.

Via MacLean's earlier this month, I came across Lucas Kawa's article in Business in Canada, "Yet Another Chapter Added To The Canadian Data Disaster Story". All this aggravated existing weaknesses in Statistics Canada's data collection methods.

While Statistics Canada is often the scapegoat for all of Canada’s data-related ills, Alex Usher, President of Higher Education Strategy Associates, reminds us not to blame everything on just one agency.

“Part of the issue here is that we defer to StatsCan for everything,” he told Business in Canada. “In other countries, much richer data sets are produced by line departments.” For instance, there isn’t a StatsCan equivalent in the United States – a number of government agencies (like the Bureau of Labour Statistics and the Department of Education) produce data in a less centralized, more narrowly focused manner. Compared to other nations, “We expect less from our government agencies in terms of data collection,” Mr. Usher said. In addition, he noted that Statistics Canada is not without its strong suits, pointing out that its agricultural statistics are top-notch.

With regards to the availability of data pertaining to higher education, Mr. Usher indicated that “policymakers have less of a gap than policy analysts do.” By this, he means that independent policy analysts tend to focus on national data, and there isn’t a plethora of that. On the provincial level, Mr. Usher said policymakers have access to the information they need to make prudent decisions, singling out British Columbia for its strength in data collection. Mr. Usher did, however, also acknowledge that the data aren’t as extensive as they could be. “We don’t have stable funding for a suite of information products that makes sense,” he said, adding that this is not Statistics Canada’s fault.

I've written in the past about how hindering national statistical agencies by preventing them from collecting data harms countries. If it protects individual freedoms, I've seen no evidence of this. (The hundreds of complainants raised by one parliamentarian remain unheard.) If anything, making it difficult to collect data on national trends and to provide accurate information causes significant harm, by allowing poorly-thought policies to be enacted, whether based on bad data or based on no data at all. Weakening statistics bureaus ultimately causes great harm, diminishing the ability of governments and individuals to respond to trends. The skills shortage debate mentioned by Goar is a good example. It's one thing if there are no takers for certain jobs in a country, and quite another thing if there are takers who can't take these jobs for whatever reasons (the costs of relocation, the wages offered, et cetera).

We need good statistics. It's as simple as that.