Figurines in wheelchair on pile of coins © Creativ Studio Heinemann, Westend61, Getty Images

It's clear that the next stage in the painfully slow recovery from the global financial crisis/Great Recession is a war between the young and old.

In the United States, for example, the sequester that forced automatic budget cutbacks has left payments to the older generation under Social Security and Medicare largely untouched even as it has led to a wave of cuts to Head Start across the country.

In Spain, unemployment among the population as a whole was 27% in the first quarter. But for Spaniards aged 16 to 24, it's above 50%.

It shouldn't be any surprise that the next stage in this crisis -- I'd characterize everything from the U.S. mortgage meltdown to the worsening recession in the eurozone as part of a single crisis -- is about demographics.

That’s because I think the roots of the crisis lie in demographics. Debt and demographics go together in really toxic ways, I'm afraid, and that interplay goes a long way to explaining the current mess.

I find this awfully depressing. If the global financial crisis, the Great Recession, the euro debt crisis and the very slow recovery in the United States are all caused by an aging world, the global economy is likely to show both slow growth and destructive volatility for a long time.

There's very little we can do about the aging of the world's population. And, on the record so far, we're handling the transition to an aging world really, really badly.

image: Jim Jubak

Jim Jubak

If our "solution" is to pit the old and young against each other, this crisis is going to be even worse than it needs be,. In a war like that, the old are almost certain to win; in relative terms, they have the power and the money. But that would mean starving the young -- the part of the global population that we need to be as productive as possible -- of the capital and intellectual resources that future productivity rests on.

Demographics isn't among the popular explanations for this crisis. And to be fair, there’s truth in most of the popular explanations, too.

  • Banks and Wall Street were too greedy and too arrogant, and they did financially engineer the world into a mortgage crisis that turned into a global financial crisis.
  • Governments did run up debt because of bad financial decisions made before the crisis (the shortfall in state pension plans in New Jersey and Illinois come to mind), and they haven't been very smart in their response to the Great Recession.
  • The continued wave of globalization has delivered a mountain of cheap goods, but it hasn't delivered the job growth that advocates of free trade promised.

The implications of these explanations are depressing enough. Globalization will continue, and it appears to be beyond the power of governments to control. Politicians will almost certainly continue to make bad financial decisions, driven by their desire to stay in office. We're unlikely to abolish greed and arrogance any time soon. In other words, there's very little to suggest that we won't do this again sometime soon.

Demographic shifts make problems worse

But I don't think these popular explanations really illuminate why we're getting this series of crises now. I think the explanation comes down to the way an aging world -- and especially the demographics of a rapidly aging developed world -- amplifies other economic problems.

Consider Italy, often held up as the worst example, outside of Japan, of out-of-control deficit spending. Government debt in Italy was actually on a trend downward before the financial crisis hit in 2007, with government debt falling every year in the previous decade. But the crisis cut government tax receipts (Italian gross domestic product, measured in real terms, has fallen every quarter for almost two years) as Rome increased government outlays to fight the Great Recession and to try to avert a collapse of the banking system.

It's tempting to see the crisis in Italy as just more fallout from the global financial crisis, which led to the euro debt crisis, which led to an extended recession across the eurozone. But I'd argue Italy was headed for crisis before any of this hit, despite the decline in its debt-to-GDP ratio. (Although I'd certainly agree that the financial crisis made Italy's crisis worse.)

Take a look at Italy’s demographics. In 1950, it was one of the world's 10 largest countries by population. Now it’s 23rd. In 1950, it had a larger population than both Egypt and Vietnam. Now, its 61 million people are far fewer than the 85 million in Egypt or the 92 million in Vietnam. Right now, Italy's population is barely growing -- the CIA World Factbook estimates growth of 0.34% in 2013. If not for immigration, Italy's population would be shrinking.

Consequently, Italy is aging -- quickly. The median age of Italy’s citizens is now 44. Compare that with 29 in Vietnam and 25 in Egypt, or even 37 in the United States. Italy isn't quite as old as Germany or Japan -- each of which has a median age of 46 -- but it's not far behind. And the country is clearly one of the oldest and fastest-aging in the world.

Facing the consequences

What are the consequences?

I can think of three that feed right into the current financial/economic crisis and lay the groundwork for a series of crises that stretches as far as the eye can see.

First, as populations age, they get less productive and more expensive. Even if workers work longer, they gradually do retire. So a country like Italy -- along with just about every other developed economy -- is seeing a rise in the ratio of retirees to active workers. Retirement payouts rise, and so do the costs of health care.

Second, as countries age, debt loads that were -- perhaps -- supportable when more of the population was in the active workforce and when retirement and health care costs were lower become a heavier weight on the country.

Older countries have trouble carrying as much debt as they did when their populations were younger. Such countries draw down savings rather than increasing them, for example, which means that gradually a country like Italy with a huge base of domestic savings will need to attract debt buyers from outside its borders.

That's a problem if other developed countries -- including the United States, which has a proportionally smaller pool of domestic savings -- need to attract global capital, too.

Third, countries in which governments at all levels, as well as businesses and individuals, in this position become exceedingly vulnerable to wishful thinking, pie-in-the-sky assumptions and schemes of dubious credibility.

  • In the U.S. mortgage crisis, sophisticated investors, including pension funds and insurance companies, were willing to believe that Wall Street could bundle mortgages to create products with higher yields and less risk.
  • National governments in Spain, Ireland and the United States, to name just three, were willing to believe that they could extend economic booms on a wave of credit even as incomes stagnated.
  • Pension programs at the national, local and corporate levels were willing to believe they could finance hefty payouts because returns would be 8% a year.
  • Individuals were willing to adopt a "What, me worry?" attitude about their future finances because rising asset prices would make up for slow growth or no growth in incomes.

The alternatives -- cutting benefits, raising taxes, using earnings to fund pension plans -- were much more painful than simply believing that the snake oil being peddled as medicine would work.

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