Does the UK really need more immigrants to be able to cut debt?
Category: Thought for the day
And suddenly the press woke up. We have this demographics problem in the UK, suggested the Office Of Budget Responsibility (OBR) this week, and to fix it we need more immigrants. The media and the blogosphere were alive with indignation: “How dare the OBR says such things,” or more extreme: “What a bunch of idiots!” And yet, while you will never catch me writing ant-immigration prose in this column, I do think the OBR report is something of an irrelevance. And frankly it doesn’t really add up.
The first thing you need to bear in mind about the UK’s demographics crisis in the making is that we are not unique. In fact the UK, relative to much of the developed world, is sitting pretty.
I have often said that I reckon the real cause of Japan’s lost 20 years or so was demographics, and now the country is set to enter a new phase. It is no longer the case that a large percentage of Japan’s population is preparing to retire – they have now retired. And as people retire they stop saving and start to draw down from savings. We are seeing it in Japan already – the savings ratio has tumbled. And the ageing of Japan’s population did lead to government debt escalating, and more immigration would have alleviated the problem. So far then, the OBR diagnosis for the UK makes sense.
But ageing is an issue across much of Europe, both developed and emerging, including Russia and China. Indeed it is far more of a problem in many of these countries than it is in the UK. There is some irony here. While the UK media frets about an influx of immigrants from eastern Europe, the truth is that the demographics in these areas are far more serious than in the UK. Immigration from Poland will stop in a few years’ time for the simple reason the country will run out of people to emigrate to the rest of the world.
So it won’t just be the UK; it will be China, Japan, Russia, Germany, Italy and eastern Europe that need more migrant workers. In such circumstances, we might find that it is immaterial whether the UK needs more immigrants – in a decade or so we may find we can’t get them.
The second thing you need to bear in mind is that in some ways the demographic shift we are seeing across the developed world is a good thing. In 1798 Thomas Malthus published the first edition of his famous essay proposing that the increase in world’s population will always outstrip our ability to provide for it. This was perhaps the most depressing theory ever, and earned economics the moniker: the miserable science. The changes we are seeing across much of the developed world are proof that Malthus theory is wrong. This needs to be celebrated.
The OBR makes depressing predictions about the level of government debt in the second half of this century. But I will repeat a point I have made here before recently. We are over-obsessing about public debt. If we want to be able to fund the retirement of the baby boomers, we need to create less debt overall – that’s less household, corporate and public debt to GDP. George Osborne’s strategy seems to be to reduce government debt by trying to kick-start the economy via rising house prices via more mortgage lending, which creates more consumer confidence, meaning more consumer credit. In short, Mr Osborne’s method to cut government debt involves transferring public debt to households. Such a strategy will be self-defeating.
But there is another point. The OBR report looks 20, 30, 40 or even 50 years ahead and makes predictions based on the assumption that nothing else changes.
Keynes had it right when he said “The long run is a misleading guide to current affairs. In the long run we are all dead.” But Keynes is often misunderstood, In fact he went on to say: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”
Critics of Keynes say he didn’t care about the future. Some go even further, and have actually suggested that since Keynes was probably gay, and had no children so he was not qualified to make judgments about the long term. Aside from obvious homophobia displayed by such a theory, such arguments show how their exponents misunderstood Keynes. Economic theory builds upon the belief that in the long run markets move to equilibrium. In reality, this never happens. The real world is far more complex and unpredictable than economists like us to think. Trying to predict government debt in half a century’s time is a pointless task. There are too many variables. It is not the OBR’s fault; they are obliged to make these predictions.
The key to funding the retirement of the baby boomers and future generations, lies with gradually extending the retirement age, investing in technology to create higher productivity, and investing in energy so that in a decade or two’s time it is much cheaper.
And by the way, one way to help fund our ageing population is to invest more in renewables, because the more we invest in it, the cheaper it will get. This is something its critics don’t seem to appreciate.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees