Handily, the next installment of the Bloomberg book club will be addressing the issue in a live blog on the terminal tomorrow at 4 p.m. London time/11 a.m. New York time. We will be discussing The Great Demographic Reversal by Charles Goodhart and Manoj Pradhan, which makes a long and persuasive argument that the market has it wrong, and inflation is due for a secular increase.
If you haven’t read it yet, you won’t have time to complete it, but it will still be worth following the discussion, which will involve Pradhan, along with me, my colleague Stephanie Flanders, and Barclays Plc’s chief U.S. economist Blerina Uruci. If you have time, try to pick up a copy and read just chapter five. That has the kernel of their argument that the current demographic shift, which is seeing the relative number of retirees and dependents increasing after several decades in which the world’s working age population steadily rose, will lead to higher inflation.
Their case is that with fewer workers, labor will have greater negotiating power. As the employed will have to pay more and more in taxes to look after the elderly, they will use that negotiating power to gain higher wages, which will lead to inflation.
The main reason others differ from the Goodhart and Pradhan thesis, I think, is that there is a belief that the retired won’t be allowed to become so expensive. Pension benefits will be trimmed back, the retirement age will rise, and the working generation will win a little back from the older generation, rather than having to take it from their employers through collective bargaining. If this happens, the effect of aging will be yet more disinflation, as the workforce continues to expand and everyone feels an even greater need to save.
Arguing against the Goodhart/Pradhan thesis is the intergenerational fury that is widespread at present, and obvious in the attempt by the Redditors who took part in the short squeeze of GameStop Corp. to get back at “boomers.” With good reason, millennials feel a simmering sense of injustice when they look at the luck of the baby boomers. This could lead to higher retirement ages and so on.
Arguing in favor of Goodhart and Pradhan is the extreme difficulty countries around the world have found when they have tried to reduce pension benefits. The recent sudden breakdown of social order in Chile was largely triggered by anger over inadequate pensions, for example. Last year, Emmanuel Macron in France tried and failed to raise retirement ages, giving up in the face of widespread protests.
Here is perhaps the crucial passage in the book:
If we are right in our political economy assumption that the social safety net will remain in place, then the age profile of consumption will continue to be flat or even upward sloping. The elderly will depend on (and vote for) government support and continue to save too little for the longer life they have inherited. The ineluctable conclusion is that tax rates on workers will have to rise markedly in order to generate transfers from workers to the elderly.
Workers, however, would not be helpless bystanders. Labour scarcity… will put them in a stronger bargaining position, reversing decades of stagnation… They will use that position to bargain for higher wages. This is a recipe for recrudescence of inflationary pressures.
The world is still not ready to think about the inflation that is likely to rise structurally. Central banks will, soon enough, have to revert to their normal behavior. The zero lower bound is largely consequences of a combination of a China effect, an unprecedented demographic backdrop and the deepest cyclical shocks since the Great Depression, once during the financial crisis and more recently during the pandemic.
Are they right? To follow as Pradhan defends this thesis, go to TLIV on the terminal on Wednesday. Send any questions beforehand or during the live blog by email to [email protected].