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Tag: social security

Making Macro Manageable

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On the advice of one of the members of the little investment club I am a part of, I picked up David Moss’s book A Concise Guide to Macroeconomics. I wasn’t expecting much, having taken a few introductory economics courses in college and being a casual economics aficionado, but I gave it a shot.

And, I think that the subtitle “What Managers, Executives, and Students Need to Know” is simultaneously very appropriate and a dramatic underselling of the book. Moss’s writing style and his very direct, conclusion-oriented (as opposed to “scholarly”) overview of basic macroeconomics makes the book not only accessible to people who need a working understanding of economics but not the extra academic theory, but also a great reference.

Now, if you’re an economic genius, or have even just taken basic economics, then you’re not going to learn anything earthshattering from the book, but what you may get out of it which could be just as valuable is a different way of thinking through or of explaining macroeconomic concepts.

Case in point: I had never thought of “the job of a pension system is to divide national output between active workers and retirees.” While this is a simple and obviously true statement, Moss uses that underlying “framework” to explain why moving existing Social Security/pension plans to an IRA (stock-based) retirement system is unlikely to fundamentally solve anything:

Although all of us are accustomed to thinking that we can sell our financial assets for cash at a moment’s notice and then use the cash to buy goods and services, this obviously wouldn’t work if everyone tried to do it at once. If a large number of senior citizens liquidated their financial assets at the same time, in order to buy needed goods and services, they would soon find that the proceeds were much smaller than they had expected. Simply giving the elderly more pieces of paper – more stocks and bonds – does not guarantee that there will be more output for them to consume in the future …

The key question from a macroeconomic standpoint, therefore, is not whether the senior citizens of tomorrow have IRAs or traditional Social Security benefits, but whether they (or others) reduced their consumption to prepare for their eventual retirement. Unless savings are increased today, the division of output between active workers and retirees will be no less onerous tomorrow, regardless of whether we have a fully funded pension system based on individual accounts or a traditional pay-as-you-go system based on payroll taxes …

The amount of output a country produces is its ultimate budget constraint, regardless of how many stocks or bonds or Social Security cards may be floating around. Unless its output grows, a country cannot give more to its retirees without giving less to its workers.

Maybe you didn’t hear anything new there – and if so, pat yourself on the back as you are far smarter than I am – but I was blown away by the simplicity of Moss’s explanation of what is a very complicated problem. Mind you, he doesn’t have an answer to out-of-control entitlement programs like the one the US has, but being able to break this down only pages after explaining the different things that make up and affect GDP (national economic output) was impressive to me. And the cool thing is that Moss does this several times, explaining, for instance, why boosting monetary supply (i.e. when the Federal Reserve cuts interest rates) may have a certain effect on the exchange rate in the short-term but a different one in the long-term and how an “unsustainable current account deficit” (i.e. huge trade deficits) might look like a “high degree of investor confidence” at first.

If you’re interested in macroeconomics casually or as a business-person who needs a better grasp of it in his or her job, I’d highly recommend the book.

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Graying

Businesses need to see the trends that will affect their performance, whether they be technical trends, business model trends, or economic trends. One trend which I haven’t seen as many companies factor in (although you see many governments talking about it) is age demographics.

Here is a very cool graph on how US population demographics will evolve over time as taken from the Calculated Risk blog (HT: Jeff L). In particular, I find the “Baby Boom” bulge (the wave of youngsters that came of age beginning from 1950-1970) moving towards the right to be very illuminating:

population

It highlights a trend which Japan is only beginning to grapple with – the “graying” of the American population that comes with the Baby Boomers becoming older. If Japan is any indication, that means the US will see a few things:

  • Rise in pension/Social Security costs and payments for care for the elderly
  • Decline in average wages as fewer lower-paid and younger workers replace more retiring higher-paid workers
  • Socio-economic changes that come from a smaller working-class population which needs to support a larger elderly population
  • Change in the political system as a balance will be sought between a growing importance in the elderly vote and the need for governments/companies to change the pension/healthcare payment balance and the ability of medical science to extend the workable years for elderly individuals
  • Change in business world as the elderly become more tech-savvy and become a more significant piece of the consumer population

If I were a business-owner looking at the long-term, I’d be looking long and hard at this list, and making investments into understanding how to convert these broad social/economic/political trends into insights which I can use to create a competitive advantage. For instance, if I were working in corporate strategy at Facebook, I’d be thinking of:

  • ways to make the site more attractive for the new generation of tech-savvy elderly
  • how to make my social network asset more valuable for elderly users (e.g. ways to make it easier to connect with old friends or family, ways to create mentoring relationships between older, more experience users and younger, less experienced ones, etc)
  • how to get useful ads that the elderly are more likely to pay attention to

Any other ideas on how things will change because of the demographic shift, and how businesses might adapt to them?

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