Fri | Jun 18, 2021

When generations collide

Published:Monday | April 2, 2012 | 12:00 AM

by John Rapley

GLOBALLY, THE human race's demographic profile provides a fairly random distribution. The median human is an employed 28-year-old male, earning somewhere around US$13,000.

However, when it comes to the geographic distribution, the sample gets highly skewed. As we know, the rich are highly concentrated in a few dozen developed countries. But within those countries, until recently, the distribution managed to remain somewhat random.

However, in the last few decades, that too has changed. First off, income distribution has polarised. The rich have gotten richer and the poor, poorer. Take the United States. In 1981, the average American firm manager earned about 35 times what one of his employees did. By the turn of the century, that ratio had rocketed to nearly 300.

The financial crisis has only worsened this distribution. To rescue the financial sector, governments borrowed heavily. This preserved the asset values of shareholders, who were mostly rich. The bill is now getting passed to taxpayers, who will now have to pay more for less.

New demographic gap

But as the austerity hatchet begins falling, another demographic divide is emerging. That is the gap between young and old. For the population of the West is much older than the global average. And the population of the developing world, where most of the future growth in economic activity will emerge, is younger than average.

To support an aging population, the developed countries will have to do one of three things: produce more babies, import more workers, or accept a slow decline. Because of the challenges involved in assimilating migrants who are culturally, linguistically or ethnically different, some societies, like Japan, have more or less resigned themselves to a graceful decline. Others, like Italy, are declining as a result of inertia, and are doing it with perhaps less grace.

To produce babies, though, these societies must give young people realistic prospects that they can provide their children with a decent life. And this is where the clash between young and old is getting nasty. The large, retiring populations of Western countries, who vote more regularly than young people do, don't want to give up the generous social benefits to which they've grown accustomed. They want a declining labour force to keep them in the style to which they've grown accustomed.

To accommodate this, governments have been raising taxes on employed people, and cutting back services that disproportionately benefit the young. So, for example, pensions are being preserved, but university tuition fees are rising. In the United Kingdom, where government cutbacks are sparing pensioners, youth unemployment has now risen above 20 per cent. The result is that young people are starting to pay more in taxes, than they can ever expect to get in benefits.

Difficult situation

This situation will be difficult to sustain. Academic literature on 'tax morale' shows that when there is a large discrepancy between what people pay in taxes, and what they get in return, the incentive to evade rises. Arguably, countries like Greece and Italy have already crossed this threshold. There, government expenditure coddles a relatively privileged state-employed minority, and most everyone else finds clever ways to avoid their taxes. The result is a need to borrow heavily, which brought on the current crisis.

Where government cutbacks have fallen especially heavily on young people, one surprising new coping technique has been emigration. In the last couple of years, for example, young Portuguese have been leaving their homeland not only for the tradition destination of Brazil, but even for Portuguese-speaking countries off the traditionally beaten path, like Angola and Mozambique. Should this trend continue, the support base will get pulled out from under Portugal's web of social programmes for the elderly.

The truth is, the West's baby boomers lived in a golden age. Nobody ever had it so good. Nor can they, any longer. Either they will have to adjust to a new lifestyle in their old age, or the whole system will gradually erode. Young people may not rise up in rebellion. Instead, they will just rise up and leave.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com