Peak Rent vs. Peak Growth

In a discussion of Social Security reform at Reason.com, MikeP asks, "Doesn't the massive increase in per capita GDP over the last 200 years blow your Peak Rent argument out of the water?" I'll expand here on my reply there.

Peak Rent is not a peak in output. It's the peaking of real entitlements to consume that people seeking rents can acquire. I'm not suggesting a peak in the total volume of rents either, only a peak in the rent that rent-seekers effectively can collect, per rent-seeker.

In a later post, I'll address more precisely my usage of "rent-seeker". Social Security beneficiaries are the quintessential example but certainly not the only example or even the most significant.

That workers are more productive doesn't make it easier for baby boomers to retire for the duration they expect with the consumption they expect, because baby boomers themselves are the more productive workers. Their own declining production as they retire is a big part the problem. I therefore expect them to retire less than they expect, to work longer, to earn more of the yield of their own labor and less of the rent they now hope to collect from others.

The figure at the top of this blog (currently) depicts the growth of the S&P 500 over the last few decades. The figure is a taken from a screenshot of a similar chart that readers may generate at money.cnn.com. The meteoric growth of this statistic in the eighties and nineties seems likely to subside in coming decades, but another figure better indicates the "peak" in Peak Rent.




This figure depicts the now declining payroll tax revenue added each year to the Social Security Trust Fund, the difference between Social Security taxes paid and Social Security benefits paid. This figure shows the expected surplus from 2009 forward. This surplus peaked this year, in 2008.

The thesis of this blog is simple. Similar peaks occur in many other financial balances around this time. While many analysts acknowledge the role of demographics in the peak of the payroll tax surplus, we hardly discuss the role of population aging in the S&P 500 peak, the housing market peak and other peaks.

MikeP continues, "Besides, in case you haven't noticed, developed aging countries are only now reaching huge pools of new labor in developing nations. Let's talk again in 50 years when every country in the world is where China will be 20 years from now."

I have noticed, but population aging is more widespread than we commonly realize.




This figure, like the figure in the blog's opening post below, illustrates aging of the populations of various nations, including the People's Republic of China. In China, statutory restraints on population growth, the One Child policy, have accelerated population aging. Over the next two decades, the number of workers per retiree (as defined below) in China falls from around eight to around four.

China's working aged population is currently much larger, compared with the population of older persons, but growth of the working population slows rapidly, and per capita GDP in China is now only fifteen percent of per capita GDP in the United States. Supporting China's rapidly aging population in coming decades thus will be very challenging.

The Chinese people, not surprisingly, seek rents keenly in the United States for this reason. We in the U.S. don't invest in China as much as the Chinese invest in us. Even if Chinese output continues expanding despite population aging, future Chinese productivity is not ours to claim. Rather, our productivity is theirs to claim.

So what can we expect in fifty years? I don't pretend to know, but credible demographers predict a peak in the human population worldwide by the middle of the twentieth century. Others predict a peak a bit later.

Conventional wisdom for decades celebrated lower birth rates and increased life expectancy, while we enjoyed the benefits of supporting fewer children, of eating our seed corn rather than planting it, but an aging population and ultimately a peak in population poses great challenges, even greater than a global peak in conventional oil production. Are we confronting these challenges or denying them?