Authers’ Notes-“Great Demographic Reversal”: TOPLive Transcript


Below is a complete transcript of the live blog event “Authers’ Notes: The Great Demographic Reversal” in the order the entries were originally posted.

02/10 10:29 ET

Welcome to Authers’ Notes, TOPLive’s deep dive into notable books on business and economics. This week, global markets and investment columnist John Authers is joined by Manoj Pradhan, co-author of “The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival.”

Our panel also includes Blerina Uruci, senior U.S. economist at Barclays, and Stephanie Flanders, Bloomberg’s senior executive editor for economics.

Join them on Wednesday at 11 a.m. New York time (4 p.m. in London) for a lively discussion of the book. Readers are invited to send questions to .

All opinions expressed by Pradhan, Uruci, Flanders and Authers are their own.

Andrew Dunn TOPLive Editor

02/10 11:03 ET

Manoj Pradhan is the founder of Talking Heads Macroeconomics, an independent research firm. Manoj was most recently managing director at Morgan Stanley, where he led the Global Economics team. He joined Morgan Stanley in 2005 after serving on the faculty of George Washington University and the State University of New York.

Manoj works on thematic global macroeconomics, with a focus on emerging markets. He has a Ph.D. in economics from George Washington University and a masters in finance from the London Business School.

relates to Q&A: John Authers on the “Great Demographic Reversal”

Andrew Dunn TOPLive Editor

02/10 11:04 ET

Blerina Uruçi, senior U.S. economist, is a director in the U.S. Economics team at Barclays. She writes thematic research and presents the Barclays view on issues including inflation, the labor market and the housing outlook.

Before joining the U.S. Economics team, Blerina was acting chief U.K. economist for Barclays, based in London. Prior to joining Barclays in 2010, she held roles as European economist for Thomson Reuters in London, economist for the Government Economic Services of the U.K. and development economist in south east Africa.

Blerina completed her graduate studies at the London School of Economics.


Andrew Dunn TOPLive Editor

02/10 11:06 ET

Our thanks to everyone for taking part in this discussion, on a topic that’s central to the macro debate.

In the short term, there is a widespread expectation that we are in for something of an “inflation scare” in the next few months, thanks to some of the weird base effects caused by the pandemic, and by the sharp fall in the oil price last spring. Very few in the markets, however, see inflation coming untethered from the range around 2% where it has been for many years.

John Authers Senior Editor

02/10 11:07 ET

The critical point in the book Manoj wrote with Charles Goodhart is that we are in for a long-term secular uplift in inflation.

That fundamentally is because the total size of the working age population of the developed world, relative to the retired population, is about to start a long-term decline. With labor more scarce, they argue, workers will be able to negotiate for higher wages, and this will translate into inflation (and also into a decline in inequality).

That is the central thesis that Manoj will be discussing, but it includes many facets, including the rise of China, and the increasing costs of extended old age and dementia.

John Authers Senior Editor

02/10 11:09 ET

While it has attracted much interest, it also has been received with skepticism by many economists. We’re thankful to Blerina, who is one of the skeptics, for joining the discussion and helping us all put these ideas to the test.

Let’s hear from her.

John Authers Senior Editor

02/10 11:09 ET

The book takes too pessimistic a view on labor force participation and in doing so it misses the lessons learned from the last expansion. In the U.S., the unemployment rate fell steadily with no signs of accelerating inflation. This challenged the notion of a fixed natural rate of unemployment.

Instead, further improvements in the labor market kept bringing discouraged workers and the long-term unemployed into the labor market. As a result, wages did not push inflation higher. The possibility of further gains in female labor force participation is also a reason to be optimistic.

I want to note that during this time the demographics of an aging labor force were already working in the background.

Manoj, at what point in the next expansion do you think we will start to see the demographic effects dominate in labor force trajectory and push up wages?

Blerina Uruci Senior U.S. Economist, Barclays

02/10 11:12 ET

This is a good question, but needs to be seen in the broader context of the last expansion, and then the last 30 years.

Employment fell steadily because capex went nowhere. Firms saw labor as a substitute for capital in a world where growth and interest rates were low and labor was abundant. So they raised the return on capital through financial engineering rather than investment (even after a pro-cyclical tax cut in 2018 when the output gap had turned positive).

One of the things that the Fed rightly pointed out was that wage growth wasn’t strong with a tight labor market because productivity hadn’t risen (because capex hadn’t either). We didn’t get to see the finale play out, but I suspect that a labor market that kept tightening would have led to higher wage growth and inflation eventually — as it turned out, the pandemic struck just as the U.S. output gap was turning positive.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:14 ET

In fact, part of the reason that productivity in the advanced economies has been weak over the last few decades may just be because of the massive surge in labor supply. Why invest when falling real wage growth and steady demand are pushing up profits anyway? If you look at Cecchetti and Schoenholtz on VoxEu, who look at why private equity has prospered, they show that intangible capital has steadily increased while tangible capital growth has fallen — that is labor saving, not augmenting.

We are arguing for the reversal of this abundance of labor. Labor is still cheap in China but the ratio of U.S.-China real wages has come down from 35-times to 5-times over the last 20 years — that is incredible. With global labor supply growth turning south and the globalization in reverse, firms will invest more. That will push productivity higher, though not miraculously, and support higher wage growth.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:18 ET

What I have most problem with in the book is the assumption that labor bargaining power and wages will rise in line with the more favorable demand and supply dynamics, and inequality will fall.

Economists such as Richard Freeman at Harvard have shown clearly how rising supply of unskilled labor relative to demand was only part of the reason for long-term decline in unskilled wages. Institutional changes — not least the decline of trade unions and the rising share of service sector jobs (dispersed, hard to organize) seem like a much bigger factor.

To reverse that you not only have to see wholesale institutional change but also a reversal in the tendency for technological change and automation to further reduce labor bargaining power, even in countries where the working age population is already falling.

Stephanie Flanders Bloomberg Senior Executive Editor, Economics

02/10 11:20 ET

If you have a question for the panel, send it to .

Andrew Dunn TOPLive Editor

02/10 11:24 ET

I agree that wage growth has been in line with inflation expectations and productivity growth, that is a sign that the labor market is working as expected.

If Manoj expects productivity growth to improve further, then it follows that wage growth should also accelerate. Although this kind of wage growth would not be inflationary in itself because higher productivity would expand the supply side of the economy — i.e., we can produce more with the same set of labor and capital inputs.

Blerina Uruci Senior U.S. Economist, Barclays

02/10 11:27 ET

Dec Mullarkey, managing director of SLC Management in Boston, writes in to ask:

One of the book’s key conclusions is that a shrinking workforce will invigorate inflation. But there are some ready dials that could expand the labor force such as extending the retirement age and expanding women’s work force participation through better support.

Would increasing the retirement age by say 2-3 years and cutting the gender difference, in the labor participation rate, in half — significantly alter the conclusions?

And, I suppose, what are the political chances of such things happening? Would the AARP or other lobbies around the world let these things happen?

Andrew Dunn TOPLive Editor

02/10 11:29 ET

We have a substantial part of the book devoted to these issues.

The gap between life-expectancy and the effective age of retirement has been growing in a straight line for the last 20 years now. Raising the legal age of retirement, even a year or two, will have less effect because the effective retirement age has been rising.

And it’s politically incredibly difficult. Even President Putin, with his command over public opinion in Russia (it was in the 80s at the height of the Russian crisis), could not push through an increase in retirement age recently. In Greece, it took near-total annihilation to raise the retirement age.

Yes, increasing the participation of women could make a difference, but a lot of that has already happened — the participation rate in the advanced economies has increased significantly. If you look at the second chart below, it shows you the participation rates in the crucial “pre-retirement” cohort.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:31 ET

Take a look at Germany. It was coasting along in the mid-40s, secure in the pensions that retirees had. Then came the Rurup commission in 2003 and launched a whole series of reforms that reduces the burden of pensions on the states.

So workers decided they needed to earn and save more, and Germany’s pre-retirement participation went up into the high 60s.

Everywhere in the advanced economies, rising participation of women and the watering down of pension benefits has already pushed older workers into working for longer, and beyond their retirement age. That trend will sustain itself, but how much more blood is there to squeeze out of that stone?

What we like to point out is that the scary dependency ratios that the UN Population Statistics provide us understate the problem. More of the labor force is going to be pulled into caring for the elderly, leaving a smaller number available for ‘economically productive’ activities. Bottom line, we need a lot more than greater participation of the elderly can deliver.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:33 ET

It amazes me that policy makers and investors have not engaged more with Goodhart and Pradhan’s analysis of the spending dynamics unleashed by not just aging but the rise of the very old.

It’s been a standard view of investors for years that spending across the economy will tend to fall when a higher share of consumption is done by older people, even if you will also get rising demand for certain goods (the favorite example being adult nappies) If we’re going to be looking at not shortages of aggregate demand but excess spending relative to supply on the services that 80- and 90+ year olds need, that really does turn the existing paradigm on its head, regardless of the view on future inflation.

Stephanie Flanders Bloomberg Senior Executive Editor, Economics

02/10 11:40 ET

A reader in Singapore notes:

Pre-crisis many people worked in jobs pushing for growth or chasing after sales that weren’t there. Many companies now realize that they can achieve 80% of sales with 20% of effort, and are rationalizing accordingly. And this cohort does not have the comfort of life-long inflation-adjusted defined benefit pensions.
Even if, as the authors suggest, these people will use the ballot box to be given inflation adjusted state-funded welfare payments, such payments are not high in absolute terms. This cohort will be spending carefully, and as such exert a moderately ‘deflationary’ counterweight.

Is this fair? What would counterbalance this?

John Authers Senior Editor

02/10 11:41 ET

The question is a good one, but it switches from agreeing that real variables (global labor supply) will lead to inflation to disagreeing that there is a monetary argument for inflation.

Structurally, our model for inflation is a real variables model, but we think there is a cyclical monetary path to inflation that has fast-tracked our conclusions.

Monetary aggregates in the U.S. are running at incredibly high levels of growth, even compared to the Great Financial Crisis. And the quality of the rise in those aggregates is totally different.

The GFC was about central banks protecting the financial sector, but banks find investing in bonds or loans a fungible strategy. Today, the injection is to households and firms whose objective function is to maximize utility/consumption and profits or market share.

There is a very clear path from central banks financing fiscal policy to spending, something that could not be achieved after the GFC until ‘funding for lending’ and negative interest rates were introduced as a carrot and stick.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:42 ET

An argument that bridges the two questions above, real and nominal sources of inflation, is debt. The CBO’s projection is quite typical of advanced economies. It shows that aging is going to lead to persistent deficits and ever-rising debt. Growth is hard to come by (because labor supply is falling, and productivity will rise, but not miraculously).

Retirement age is very difficult to raise politically, and raising taxes is equally hard. Inflation then becomes a necessary evil, as it reduces the real burden of debt without as much political damage.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:46 ET

When the book came out last summer no-one was giving inflation risks much credence. Now everyone’s talking about it – not least Bill Dudley today.

Is Manoj arguing that suppressed Covid spending will accelerate the long-term inflationary dynamic in the book, or merely give us a sneak preview?

Stephanie Flanders Bloomberg Senior Executive Editor, Economics

02/10 11:47 ET

We are certainly arguing for an acceleration of the long-term inflationary dynamic — there may be hiccups, but the trend will establish itself much faster because of the pandemic.

When we wrote the book in 2019, we weren’t sure whether these long-term trends would show up in inflation. The pandemic has accelerated the trend in at least three ways:

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:48 ET

First, the Fed is inviting more fiscal spending, welcoming inflation and taking on distributional objectives (Lael Brainard’s speech from January reminds us that maximum employment is now defined as “a broad-based and inclusive goal for which a wide range of indicators are relevant”) with only shortfalls to employment to be fought.

My best guess is that the dominant narrative of this expansion, when we look back upon it, is far more likely to be some form of yield curve control (like operation twist with a twist) to keep nominal yields from rising. Markets may already sense this — after all, the break-even inflation curve is higher than the nominal curve everywhere.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:49 ET

Second, the increase in debt is global in its breadth and the increase has been sizable. That should imply a desire across borders when it comes to policy-makers accepting inflation as the least-worst alternative. How many will encourage a fight against inflation when financial fiscal policy is the main priority?

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:50 ET

Third, a big retreat from globalization (look at the spats over PPE and vaccines) and the renewed focus on climate change are both likely to be inflationary.

De-globalization may force a bit more capex and push domestic productivity higher, but it is a step away from a global optimization of cost and hence must mean inflation.

Environmental protection is a big social plus, but that too requires more investment and a constrained optimization of profits and utility. Almost by definition, the outcome must be more inflationary than an unconstrained optimization.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:50 ET

Both markets and the Fed (and other central banks that have the luxury of welcoming inflation) will love inflation for the first year or two. It is if we are right, and inflation doesn’t come back politely, that both will really have to earn their keep. Thus far, finance ministers and central bankers have been the best of friends. That’s going to change going forward.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 11:57 ET

Clearly, Covid-19 isn’t deadly enough to have demographic effects in its own right. It’s not like the Black Death, for example, which had a major impact on economic history.

But it plainly has had a big impact on economic behavior. Could it be the catalyst for a pickup in long-term inflation, or merely for a cyclical bump as things get back to normal (we hope) later in the year? Does it affect the Goodhart/Pradhan hypothesis?

John Authers Senior Editor

02/10 11:58 ET

My view is that the pandemic has already led to significant changes in consumer expenditure patterns and in inflation trends. To name but one is the shift toward stronger demand and inflation on goods, as the services side of the economy remains severely restricted.

But I think that many of these behavioral changes will be transitory and I would expect “normal” spending and inflationary patterns to return once the virus is under control through a combination of population immunity and better treatment options. The issues will be how much of the supply capacity of the economy would have been destroyed in the meantime.

Blerina Uruci Senior U.S. Economist, Barclays

02/10 12:01 ET

The more lasting the damage to businesses and the more labor market scarring, the worse the supply side of the economy once we emerge from this recession.

That could lead to higher inflation if demand far outpaces production. And I think it also underscores the importance of stimulus right now to preserve the productive capacity of the economy.

Blerina Uruci Senior U.S. Economist, Barclays

02/10 12:04 ET

It really is impossible not to address. And yes, it does have an effect on our hypothesis. It works mostly in favor of our arguments, but also throws up some less-severe roadblocks.

How does it help our hypothesis? Inflation will materialize much faster than we had expected, as I indicated in my reply to Stephanie’s question. Government debt has jumped higher, and central banks have switched to quasi-fiscal QE (to adopt Selgin’s terminology).

Having invited more fiscal intervention, it will be much harder for central banks to switch off the taps to fight the fiscal impact on the economy. It is the first clear sign that central banks will be on the back foot, with fiscal policy dominating the economic landscape in the future.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:05 ET

I think what is argued less frequently is that the political power of the elderly has been clearly shown here. Every government has the responsibility of protecting its citizens, regardless of age.

The revealed preference, if we can steal that term for politics, has been to shut down the economy despite lower risks to the young from the pandemic, in order to protect the old. It is ethically the right thing to do without a shadow of a doubt in my mind, but it should also serve to illustrate the power that the elderly wield.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:06 ET

Where does the pandemic dent our thesis? We don’t quite know how far two trends will go.

First, we don’t know if working from home becomes the norm — we doubt it, but we cannot be absolutely sure. If that is the case, then the spending patterns in the global economy could be upended and difficult to predict. They may yet work in our favor if the search for rural housing goes very far, but that remains to be seen.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:07 ET

Second, we don’t know if the pattern of fatalities from the pandemic will affect saving patterns in the immediate future. Most fatalities have occurred for those over 75, and that means a much smaller cohort of the very old for the next few years (if we assume that life expectancy is around 80 in the western economies).

Again, there is an offset in the exceptionally high “forced” personal savings created by the pandemic that will normalize, but it is difficult to see how the effect from the elderly could play out.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:08 ET

One huge topic we haven’t covered yet is China (which gets the second chapter of the book all to itself).

Virtually everyone would agree that the arrival of China and its massive labor force in the global trading system helped to keep inflation in the developed economies under control, and pushed down on the negotiating power of labor. But what exactly are the arguments that the changing demographics in China will now lead us into an inflationary cycle?

John Authers Senior Editor

02/10 12:12 ET

There are at least two ways in which China pushes inflation higher in the future.

First, the direct impact on global labor supply and hence on the global dependency ratio. Everything about China is huge and our first chapter in the book spends a considerable amount of time arguing that China was crucial — the integration of its labor force with the global supply chain was a big part of global disinflation.

If that is right, then the shrinking of the Chinese labor force is big enough to push global labor supply lower pretty sharply. Add to that the change in China’s and the world’s dependency ratio as China ages, and suddenly you have a much smaller global labor force producing, and a much larger proportion of the world’s population consuming. Both lead to inflation.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:13 ET

Second, an indirect effect through the changing composition of China’s growth. China’s internal migration has hit the Lewis point, its investment model is clearly transitioning from SOE-led massive production to far more specialized and preferably higher-end production, and its growth model is moving from investment to consumption.

In the meantime, the massive gap in real wages that existed between workers in the U.S. and China has moved in favor of China by a factor of seven in the last 20 years.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:14 ET

I’m not a buyer of consumption-led growth in China — that will only happen mathematically because investment growth is playing such a small role.

In absolute terms, consumption will grow at only 2%-3%, which is not what most have in mind for consumption-led growth in China. You can see this transformation in China’s current account and the massive migration of labor from its factories to take up jobs in the gig economy in the cities.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:14 ET

Nevertheless, the move from investment to consumption switches China’s role from producer to consumer. That’s a big change from being a disinflationary driver to a (somewhat) inflationary force.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:15 ET

I have a slightly different angle on the future role of China for global inflation. The wage gap differential between China and many advanced economies has been narrowing steadily and it is well documented. I think this can reverse some of the weakness in imported inflation and core goods inflation that was characteristic of the hyper-globalization years. On net it should lead to slightly better inflationary outcomes than we have been used to.

However, this alone will not be enough. We need strength in domestic services inflation, which is by far the largest driver of inflation, in order to get price pressures higher on a sustained basis. These in turn are much more connected to domestic labor markets and events in China can only have a limited effect.

Blerina Uruci Senior U.S. Economist, Barclays

02/10 12:17 ET

And what risks are there from the fraught geopolitical situation? The U.S.-Chinese relationship is in flux, and it’s still possible to imagine anything from a two-pole “Cold War II” scenario with two economic blocs to a global order that is not that different from what we have now.

So, how important is China’s role in the global economy to the overall hypothesis in the book? What scenarios might change your predictions?

John Authers Senior Editor

02/10 12:17 ET

The U.S.-China spat isn’t just that any more. It has morphed into more a China+Russia in one corner and most of the rest of the world in the other. I think the clear risk here is that China’s administration now tries to assert itself against a new administration in the U.S.

A Democratic president should have very little interest in ‘‘letting China off the hook,” so to speak. And Biden has had much of this laid on a silver platter for him by Trump — he is likely to keep those restraints in place, which will rankle within China’s administration.

I think a tense period for the next year is the bare minimum we should expect.

Manoj Pradhan Co-Author, The Great Demographic Reversal

02/10 12:18 ET

We had a taste of the economic and financial market consequences of the clash between the two superpowers during the U.S.-China tariff war in recent years. The worst was averted then.

In my view the global supply chains and production have become so intertwined that it is in everyone’s interest to avoid significant disruptions to doing business.

In fewer words, everyone’s incentives are aligned to have a long-term constructive economic relationship. But that is not to say that the world’s economic giants will stop colliding on issues that are important to their future growth. I think that can continue to be a source of friction and uncertainty at times.

Blerina Uruci Senior U.S. Economist, Barclays

02/10 12:20 ET

Comng back to Manoj’s point from earlier about the power of the elderly that has been demonstrated during the pandemic: I certainly agree that in terms of outcomes, western societies have generally changed their behavior in a way that helps the elderly. That’s very important and mustn’t be forgotten. And protests over pensions (which led to a breakdown in order and a constitutional crisis in Chile in 2018, for example) tend to be about making sure that the elderly have more in retirement, not less.

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