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What are the key economic and financial challenges of the next 3o years?
Economist Milton Ezrati says they will come from demographics: an aging population in the developed world and a youthful one in the developing world. But, Ezrati says, demography need not be destiny. There are ways for the U.S. economy to age gracefully.
Ezrati looks at the reality of demographic change and the ways to thrive with it in his new book “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, And How We Will Live” (excerpt below).
Ezrati has more than 40 years of experience in finance. He’s a partner at the investment firm Lord Abbet, where he is responsible for research and strategy. He’s also a fellow at the center for the study of human capital and economic growth at SUNY Buffalo.
Ezrati joins Here & Now’s Jeremy Hobson from NPR’s studios in New York to discuss his new book.
On what the concerns are over an aging population
“We have a shortage of workers. We have had low birthrates for decades. There is a reduced flow of young people coming into the workforce; at the same time, the baby boomers beginning to retire. We have an overhang of, effectively, people who stopped producing. We will have a shortage of producing, tax-paying people. It’s gonna strain our finances as we try to meet the pension needs of the future, but it’s more than that. There is an economic burden that’s gonna be imposed, because we will have relatively fewer people of working age available to support what is, effectively, a huge overhang of dependent retirees going to come on stream in the next 20, 30 years.”
On how the U.S. can benefit from immigration
“I think immigration is a solution. It’s a partial solution, but it is a solution. Two things to say about immigration: one is it can’t answer the entire question because when you bring in that many foreign-born people, you create a lot of social tension. It’s very easy to say that it shouldn’t. It’s very easy to say that the native population has nothing to fear and the immigrant population has nothing to fear. But in fact, they do, and that social tension can undermine the economic benefit of the immigrants. The answer, then — the second phase of the immigration question, the answer, then, is to bring in immigrants so we get the most economic and financial bang per person. So we would probably, in the future — in fact, I’m confident we will — recognize this need and the United States will seek immigration reform, more in the direction of screening immigrants, than the current system.”
On how the U.S. stacks up against the rest of the world
“I found some countries that have things that we can learn from, and others that are doing things wrong. Immigration is a good example. We, the United States, is way ahead of the Europeans and certainly the Japanese, which face a huge cultural impediment when it comes to immigration in integrating people into the economy, not even the culture. But the Canadians have done a fabulous job at screening immigrants. They choose immigrants by how much of a contribution you can make to the economy, levels of education, language skills, all that counts. And once you are accepted, they actually connect you with advocacy groups in your ethnic or nationality. It’s a humane thing to do for the people entering the country, but from their point of view, it keeps the social tension down and shortens the time for new immigrants to find work. And so they are setting a model there. We are a model in some respects for Europe. The Europeans are doing a fine job, compared with us, on training workers outside the university level, which will become increasingly necessary across the developed world.”
Chapter 1: Growing Old Gracefully
The West and Japan are aging. Decades of declining birth rates have reduced the proportion
of young people in these populations, creating increasingly severe shortfalls in the number of new entrants into their labor markets. At the same time, increasing life expectancies have swollen the ranks of their dependent retired populations, redoubling the burdens on these limited labor resources. The change by itself will impose severe growth constraints on these economies and even threaten existing living standards. In stark contrast, the emerging economies — India, Brazil, and China prominent among them — enjoy the benefits of large, youthful, and eager workforces, and will do so for years to come. These differences will set the economic and financial tone for the next 30 years at least.
It would be hard to overestimate the economic and financial ramifications of these demographic trends. The developed economies, to avoid economic setbacks, will come to rely more and more on the product of the emerging economies to support their outsized retired populations. The focus of economic and financial power will shift accordingly. To survive in such an environment — to have something to exchange for these imports — these developed economies will need to increase their emphasis on research, innovation, training, and education. The process will force huge industrial adjustments, change attitudes toward work and retirement, raise levels of immigration, and greatly accelerate the pace of globalization. To sustain such essential adjustments, the leaderships of these countries will need to disarm a dangerous, protectionist backlash that would block their access to emerging economies. China, India, and other emerging economies will have to make their own fundamental adjustments, too. While much can occur naturally without overarching direction, the entire effort, nonetheless, will demand purposeful leadership within each economy and globally.
Changing America’s Self-Image
Though America finds itself under less intense demographic pressure than Japan or Europe, it will in many respects have the greatest trouble adjusting. Unlike Europe and Japan, America has always seen itself as a youthful society and has long claimed the virtues of youth: energy, opti- mism, physical strength, impulsiveness, perhaps even insouciance. It has left to other societies the virtues of age: prudence, patience, sensibility, composure, and care. But as America’s reality becomes less and less youthful, certainly compared with China, India, and other emerging economies, it will have to abandon these attitudes. Its prosperity, in fact, will depend on its ability to seize the advantages of age. Though in some ways the work of change has already begun, the adjustment will not proceed eas- ily. Nor will it proceed easily in aging Japan and Europe, even though these countries have relied less on a cult of youth.
Until recently America’s identification with youth had a basis in reality. The nation was in fact young. Large families and huge waves of eager immigrants kept the average age of the nation’s population low. The physical structure of the economy was also young and ripe with development opportunities. From the eighteenth century to the middle of the twentieth, this young and growing workforce earned huge commercial dividends as it turned this New World’s vast tracts of wilderness into farmland and interconnected it with new roads, canals, railroads, and eventually air links. And, as the existence of this infrastructure facilitated industrial development around previously untouched natural resources, the economy significantly increased those returns.
Of course Europe during this time also enjoyed great economic leaps. Strides occurred especially in technology, transportation, communication, construction, and production. But there was a fundamental difference between Europe and America. Europe’s economies had already established themselves around older technologies. As they applied the new, they were not so much developing as redeveloping, modifying and refining, improving something that had already existed. Industry focused on efficiency, quality, sometimes variety. America, building new, oriented itself toward things more basic: size, volume, raw power. Its continental-sized national market reinforced the difference from a more economically Balkanized Europe.
Especially in the early stages of industrial development, these differences impelled Europe to lead in knowledge-based products. It invented mechanized spinning and the mechanized loom, the steam engine, the railroad, and the locomotive. America applied itself chiefly to the challenges of vast distances and mass production. The United States had its inventions, of course. It pioneered standardized parts and invented the cotton gin as well as the reaper. Not surprisingly, even America’s inventions aimed at volume. It was not until much later in the nineteenth century, when much of America’s de novo development was complete, that its inventors began to refocus innovative energies along lines that Europe had followed for years.
Still, these different emphases persisted right up through the Second World War and even into the second half of the twentieth century. Of course America, as it became ever more completely developed, could rely less and less on opening new areas and did begin to feel the Old World’s need to find its commercial returns in replacement, rebuilding, and refinement. But in the popular imagination, the old distinctions remain stark. America even laid its victory in the Second World War at the feet of its youthful, overwhelming force. The German Tiger tank, it was said, outclassed America’s Sherman tank, but the United States won the war anyway by producing its tank in overwhelming numbers. As one German tank commander noted, just one of his more sophisticated and better armored tanks could take out eight or nine of its American counterparts, but the Americans always sent 10 or more against him. In the air, too, against both Germany and Japan, the message of victory came in America’s ability to build more planes and throw more weight. Qual- ity was claimed but was less obvious. Even America’s great wartime invention, the atomic bomb, spoke to overwhelming force and certainly not to refinement.
It was not until the Cold War that the relative reality, if not quite the imagery, began to change. America’s competition — economic, military, and diplomatic — had by then shifted east, to a still larger and less developed continental power. The Soviet Union was doing more de novo construction than America, certainly of industrial facilities, and tapping resources across a much wider range. The emphasis on mass production fit better there, and when the Soviet leader Nikita Khrushchev, in 1956, assured the world’s diplomats that Soviet Russia would “bury” the West, presumably in production, if not literally, it was believable. The difference showed vividly in the great competition of the time: space exploration. The Soviets emphasized force. Their bigger, more powerful rockets could lift more weight out of the atmosphere than the American rockets. The United States could meet the challenge only, it seemed, by taking a page out of old Europe’s book. Deploying greater refinement, America concentrated more on sophisticated electronics, more precise and careful guidance, and miniaturization to do more with less weight.
Now demographics will draw America still further from its historically youthful image and all that that means. Ancient as the cultures of China and India are, these countries, not America, hold the great, unexploited continental reaches ripe for development. They can take American, European, and Japanese innovations and apply them to regions that, if not virgin territory, are nonetheless barely touched by modern development. They have youthful, eager populations with which to do it. China’s working-age population of 965 million is almost five times that of the United States. Though China’s median age of 35 years is only slightly lower than America’s 37, the gap will widen. India’s median age today is a youthful 26 years, and its working-age population of 744 million is more than three and a half times that of the United States. Brazil,to round out the picture, has a smaller working-age population than America but a much younger population, with a median age of only 29 years.
In such circumstances, the United States can no longer use its old, youthful approach as a guide. Energy and opportunity combined with overwhelming volume and force will lie increasingly with the emerging economies. America must adapt, as it did in the Space Race with the Soviets, by meeting the challenge of China, India, and other emerging economies much as Europe once met America’s challenge. It must recognize that its advantages increasingly will come from refinement and innovation rather than through mass production — not in every case but generally. There is an urban myth from the 1920s that wonderfully captures the difference. As the story goes, right after the First World War American industrialists, though bigger, richer, and more powerful than their European rivals, chafed at their reputation for volume over refinement. A Connecticut copper mill challenged its British rival by sending over a length of tubing with the dare to produce something with a diameter as narrow and as consistent. When the response arrived in Connecticut, the Americans at first could find only their original tube. It took a while for them to realize that the British producers had threaded inside it their much finer piece of tubing.
Excerpted from the book THIRTY TOMORROWS by Milton Ezrati. Copyright © 2014 by Milton Ezrati. Reprinted with permission of Thomas Dunne Books.
JEREMY HOBSON, HOST:
Well, here in this country, the Treasury Secretary Jacob Lew is warning that the U.S. could face a permanent slowdown in economic growth. Lew pointed to growth expectations around 2 percent a year compared with about three and a half percent on average between World War II and 2007. He's calling on more business investment, better job training, and better infrastructure.
But economist Milton Ezrati would add something else to that list - younger workers. Ezrati has more than 40 years of experience in finance. He's a partner at the investment firm Lord Abbet and a fellow at the Center for the Study of Human Capital Economic Growth in SUNY Buffalo. And he's just written a book called “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, And How We Will Live.” And he finds that an aging population won't just cause problems for Social Security and Medicare. Milton Ezrati, welcome.
MILTON EZRATI: It is a pleasure to be here.
HOBSON: Well, what are the big areas that you think we need to be concerned about when it comes to an aging population here in this country?
EZRATI: Well, we have a shortage of workers. We have had low birth rates for decades. There was a reduced flow of young people coming into the workforce, at the same time the baby boomers beginning to retire. We have an overhang of effectively people who stopped producing.
We will have a shortage of producing, tax paying, pension contributing people. It's going to strain our finances as we try to meet the pension needs of the future. But it's more than that. There is an economic burden that's going to be imposed because we will have relatively fewer people of working age available to support what is effectively a huge overhang of dependent retirees going to come on stream in the next 20 or 30 years.
HOBSON: But so will many other countries.
EZRATI: A lot of countries are in worse shape than we are. Most of Europe is in worse shape than we are, and Japan is the most extreme situation. They are - they are worse now than we will be in 2030. So they are sort of leading the charge in terms of these burdens and challenges.
HOBSON: Does it help if it it's a level playing field in that way - that a lot of countries are dealing with the same problems?
EZRATI: It doesn't really help each of us because the problem is that we're all looking for producing, taxpaying, pension contributing workers and we don't have them. The real competition and the balancing act in this is the emerging economies, which have a large part young, eager populations and they are effectively a mirror image of us in this respect.
HOBSON: And they are countries that, as you write, every developed economy wants to invest in.
EZRATI: Well, they are the ones that are growing. And the demographic challenge we face will, unless we do something about it - and I think there is much we can do. But unless we do something about it, that will slow our growth rate and strain our finances. So we're going to have to look increasingly to these emerging economies for some kind of supplement for what we lack in our own economy.
HOBSON: Well, I want to get to the solutions that you lay out. But first let's talk about the problem. Why do we have this declining birthrate, not just in the U.S., but across the West and even in parts of Asia?
EZRATI: The Chinese have a declining birthrate because of a policy of saying only one child per family. But with us, it's been a cultural shift. And the answer, I think, lies in psychology and sociology more than in economics. But the economic result is definite.
We have had a falling birthrate since the 1960s in this country, even longer in Europe and Japan. At the same time, we have this baby boom - this post-World War II baby boom, which was throughout the developed world beginning to retire. So we have a mismatch between consumers and producers going to confront us increasingly over the next 20, 30 years.
HOBSON: And some people may say well, here's a solution - just bring in the labor, bring in more immigrants, increase immigration. What about that?
EZRATI: Well, I think immigration is a solution. It's a partial solution, but it is a solution. Two things to say about immigration. One is it can't answer the entire question because when you bring in that many foreign-born people, you create a lot of social tension. It's very easy to say that it shouldn't - it's very easy to say that the native population has nothing to fear and the immigrant population has nothing to fear, but in fact they do.
And that social tension can undermine the economic benefit of the immigrants. The answer, then -the second phase of the immigration question - the answer then is to bring in immigrants so that we get the most economic and financial bang per person. So we would probably in the future - in fact, I'm confident we will recognize this need in the United States - will seek immigration reform more in the direction of screening immigrants than the current system.
HOBSON: You know, we often think of the U.S. as a country that outsources a lot of its labor, while we have a lot of people in this country who would love to have jobs. First of all, do you think that some of those people who are out of work right now can help solve this problem?
EZRATI: Well, I think some of them can. And we have effectively an army of unemployed. It's really more of a cyclical problem. We've seen the unemployment rate fall in the last year, and it will probably fall going forward.
So it's not going to be in reserve when we get to 2020 or 2025 when the problem gets particularly acute, or certainly not 2030. The other problem with the existing workforce in the United States is they don't have, or many of them do not have, the right skills for this economy - the modern economy. And so they really compound the problem. They're not really employable the way we need people to be employed.
HOBSON: Couldn't they be retrained?
EZRATI: They could, and in fact I spend a great deal of time in "Thirty Tomorrows" talking about training. For two reason - one is to retrain the existing unemployed so that they can make a contribution, earn a living and contribute to the nation's prosperity. But also increasingly we're going to have to export our labor-intensive industries - those that need a lot of labor, particularly the simpler things - to these emerging economies where they have a surplus of young people. And then, to make our economy effective and to relieve the strain on those areas that have lost those industries, we're going to have to retrain people on a level that we have never done before.
HOBSON: Which is not an easy thing to do. We're speaking with Milton Ezrati, whose new book is called "Thirty Tomorrows." Stay with us, this is HERE AND NOW.
HOBSON: This is HERE AND NOW. And if you're just joining us, we're speaking about some of the demographic challenges ahead for the U.S. as the population here ages and economic challenges. Milton Ezrati is a partner at the investment firm Lord Abbot. He's author of the new book called “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, And How We Will Live.”
And Milton Ezrati, we think of ourselves as a country that outsources a lot of work to other countries. You point out that actually many of these countries are outsourcing a lot of work to us, in some cases more than we are to them.
EZRATI: Yes, in fact, it's remarkable when you look at the data because I was very easy when I first started this research - looking at the casual media items. And they say, you know, we're outsourcing to India or to China. But what I discovered in both the Indian and Chinese economies is that all sophisticated services they continue to outsource to us.
They look to us for high-level call centers even. We think of them as the Indians doing all the call centers, and they do for a lot of retail and simple in ordering things. But when it comes to the real support for high level technology, that's done in the United States and Europe to a lesser extent. So they are outsourcing back to us.
One of the other things when you look at China, which is a manufacturing giant, is you realize that China's tremendous export machine has to import a tremendous amount of sophisticated equipment and parts from the United States and elsewhere from the developed world - in particular Japan - in order to maintain their export machine. So they are actually outsourcing the parts to us even as they produce the finished product. A good example is the iPad. Apple has them all assembled in China, but all the parts are made in the United States and sent to China for the assembly.
HOBSON: And you see that kind of thing continuing?
EZRATI: That will continue. In fact I think it's going to become more extreme as we face this demographic challenge. As we export more of the labor-intensive activities to China, India, and other emerging economies, and upgrade our economy, increasingly they're going to look for us for the sophisticated products where we will focus our economy. And we will look to them for the labor-intensive products, which we formerly made for ourselves.
HOBSON: What then do you make of the effort to restart American manufacturing in places like Detroit?
EZRATI: Well, I think that we can restart American manufacturing, but not in the model that is the stuff of legends. We are going to have to upgrade which means that the kinds of workers we'll be looking for will be much better educated, much better trained, much more sophisticated people. Not people standing on an assembly line, which of course is the popular image of Detroit and manufacturing in general. So we can do that. And I think we will. In fact we are.
HOBSON: The things that you talk about in this book are big changes that are going to take a long time. People don't tend to like changes this big, do they? It's going to be very difficult.
EZRATI: Oh, I think it will and I'm glad you brought that up. One of the things that struck me as I went through this book - I constantly got questions about the demographics. I saw what was on offer in the bookstores and magazines, and it was all gloom and doom. I just couldn't accept that.
And when I started looking at what we can do to answer this need - whether it's more women in the workforce or longer careers - all of this will require a tremendous change in the focus of our economy and in the nature of the workplace. In some respects, it's very exciting, but it is going to cause a wrenching change for a lot of people in this country and elsewhere in the world as they adjust to this.
It's one of the reasons why I spent so much time on the training. They are going to need a bridge to get from where they are to where they are going to have to be, where this economy is going to have to be.
HOBSON: Can you envision at this point we're going to have to be - what a workday looks like in 2030?
EZRATI: That's an interesting question. It would depend on where you are. I think that, for instance, in order to get more people, older workers, to stay in the workforce we are going to have to make allowances for people to work part-time, short-time because people, after they are 60 or 65, do not want to work at the intensity they did when they were younger. And so workplaces are going to have much more flexible pay schedules and time schedules.
To get more women into the workforce, we're going to have to do that, but also since women shoulder most of the burden of childcare, we're going to have to make allowances for childcare. And I was amazed when I did the research on this that there many firms already doing this - large firms where thousands of people gather, actually have on-site childcare to lure good workers and keep good workers. Some firms have actually started charter schools so that workers can bring their children to close to where they work, instead of where they live.
And we're going to see a lot more of this. And that is going to be a major change in the workplace for those of us who have come of age in a different world. As far as the refocus of our economy is concerned, the workplace is going to become one of less labor and of more machines doing the labor and people running the machines, instead of producing masses of standardized products - more customized products.
So firms will reorient themselves toward much more sophisticated individuals who can deal in quality control, planning, and client communication, communication with suppliers. These are things that have taken a backseat until very recently and they will increasingly rise. And this will change the nature of the workplace, change the hierarchy in the workplace. Trained sophisticated workers are not interested in a top down, command-and-control approach which is the business model we still largely use in the United States and elsewhere in the world.
HOBSON: As you are doing the research for this book, did you find a country that is doing everything right to prepare for the future?
EZRATI: No. I found some countries that have things that we can learn from. And others that are doing things wrong. Immigration is a good example. We, the United States, is way ahead of the Europeans and certainly the Japanese, which face a huge cultural impediment when it comes to immigration in integrating people into the economy, not even the culture.
But the Canadians have done a fabulous job of screening immigrants. They choose immigrants by how much of a contribution you can make to the economy, levels of education, language skills, all that counts. And once you are accepted, they actually connect you with advocacy groups in your ethnic or national nationality - it's a humane thing to do for the people entering the country. But from their point of view, it keeps the social tension down and shortens the time for new immigrants to find work. And so they are setting a model there.
We are a model in some respects for Europe. The Europeans are doing a fine job, compared with us, on training workers outside the university level, which will become increasingly necessary across the developed world.
HOBSON: One more thing, Milton Ezrati. As I was reading this, it seemed like something I would be reading that an academic had done - that there was a lot of research, a lot of numbers, and a lot of thought about what this was going to be for the future. You're a finance guy.
EZRATI: Well, I am. And I did this because most of our clients of all stripes and all degrees of sophistication asked this question about the demographics. I looked into it. I was dissatisfied with what was around. What I wanted to do was recommend a book for them. And I couldn't find a book that I thought did an adequate job and effectively got sucked into this.
HOBSON: So you had to write it yourself.
EZRATI: And I had to write it myself, and I'm very happy to say the reviews say readable.
HOBSON: It is very readable indeed. Milton Ezrati - the new book is called “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, And How We Will Live.” Milton Ezrati, thanks for joining us.
EZRATI: It's been a pleasure. Thank you.
HOBSON: And we've got an excerpt of the book at our website hereandnow.org. We would also love to hear thoughts. If you go to hereandnow.org, what should the U.S. be doing to deal with an aging population? Let us know. HERE AND NOW. Transcript provided by NPR, Copyright NPR.
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