Currency games or cheap labor?
The Economist uses a somewhat whimsical Big Mac Index to demonstrate differences in currencies around the world. However, when I look at the index I see a chart of (relatively) expensive and cheap labor as well.
Not surprisingly the countries at the top of most country's "the reason we have a trade deficit" list are at the bottom (cheapest) end of this chart.
Just as interestingly, Japan, which used to be at the top of our list (but no longer is) is now "above the fold" as it were. As I ventured a few years ago the same labor costs that plague us will eventually plague nations like Japan (and to a lesser extent Korea, Taiwan, etc.) as they get into a similar demographic position. (Aging population with large, unfunded retirement obligations.)
There are a lot reasons why labor costs (and currency valuations) vary. One of the easiest things for companies (and countries) to do when they have a young workforce is promise them lavish benefits in retirement in lieu of (lavish) wages today. While these benefits should be accounted for at the time they are incurred both companies and countries put off funding these obligations under the delusion that there will always be more future customers (and taxpayers) to fund them down the road and by the way we (the current leaders) will be long gone by then anyway.
What usually happens is that companies (and countries) simply increase the price of labor (or rates of taxation) in order to fund these liabilities when they come due. The problem is that while these newer workers and taxpayers are funding older worker and taxpayer obligations they are also building new obligations of their own but with far fewer people to fund them.
Companies thus seek areas of relatively lower wage costs in order to keep the eventual price of their products as low as possible. Countries, lacking this option, often revert to keeping the "price" of their currencies artificially low to attract foreign capital in a similar fashion and boost markets for export of their (relatively) cheap goods. The problem with doing that, however, is that an artificially low (priced) currency is essentially a tax on your own populace.
Population demographics tend to move in "waves" where a "boom" of young people eventually becomes a "bulge" of older (retired) people. The former are largely net producers and taxpayers while the latter are usually net consumers and limited taxpayers. So in a mere 30 years or so China will have the same problems that we currently do while our own older (retired) workers will be "off the books". So...what do to in the mean time?
There are ways to mitigation such demographics waves. Increased immigration of young(er) workers will help mitigate the effects of an aging population. It also helps to remove obstacles to older people working and/or stopping "double dipping" where "retired" people continue to work (and even fund a second retirement fund). You can also, of course, actually fund future obligation. (Good luck getting that approved.) Finally there is the nuclear option of finance: declare bankruptcy and refuse to pay promised obligations. Easy for companies (hello, GM!) but not so easy for countries.
Unfortunately politicians do not think the same way that taxpayers do. Individual politicians will sometimes push for higher taxes knowing that the voters rarely hold individual politicians responsible for them (except perhaps the President). Instead "government" in general is blamed while individuals continue to get reelected. It takes a really nasty combination of things to get a lot of people removed from Congress. (At least in the United States.)
Politicians also love the idea of more tax revenues because they provide an opportunity to spend other peoples money...and not just on the intended recipient(s). What that means is higher taxes are often at the forefront of any political attempt to ease the burden of an aging population.
Businesses love to promise future benefits because it removes obstacles to pay issues in the current time frame. As a result a lot of companies offer (or agree to) higher future benefits to achieve short-term savings on labor. In this sense they are penny-wise to the customer but pound-foolish to the investor.
So...what to do?
First of all, we should not look at the consequences of an aging population and attempt to use the issue to create scapegoats for this (or any other) issue. For example, NAFTA/free trade.
Immigration (the legal kind) of younger (under 30) workers is a good solution for our current situation. It increases the tax base without increasing the tax rate and improves the worker to retiree ratio. Another tactic is to reduce the taxation on (having) children by increasing the tax breaks for dependents. However this is more of a long-range tool (you have to wait for children to grow up and become workers) and you run the risk of encouraging irresponsible baby production (*cough*octamom*cough*) especially if you have a negative tax rate for dependents.
Ideally we should have increased legal immigration a decade ago but it's never too late to start. We should also implement a flexible tax policy for dependents which for our current populace allows for subsidies of the first one or two children; a neutral tax position for a third child and no tax breaks for additional dependents. This can change, of course, if demographics change.
Promoting legal immigration also provides political benefits. It removes the line of attack from opponents that opposing illegal immigration stems from racism while putting the spotlight on anyone who wishes to increase taxes instead.
Not surprisingly the countries at the top of most country's "the reason we have a trade deficit" list are at the bottom (cheapest) end of this chart.
Just as interestingly, Japan, which used to be at the top of our list (but no longer is) is now "above the fold" as it were. As I ventured a few years ago the same labor costs that plague us will eventually plague nations like Japan (and to a lesser extent Korea, Taiwan, etc.) as they get into a similar demographic position. (Aging population with large, unfunded retirement obligations.)
There are a lot reasons why labor costs (and currency valuations) vary. One of the easiest things for companies (and countries) to do when they have a young workforce is promise them lavish benefits in retirement in lieu of (lavish) wages today. While these benefits should be accounted for at the time they are incurred both companies and countries put off funding these obligations under the delusion that there will always be more future customers (and taxpayers) to fund them down the road and by the way we (the current leaders) will be long gone by then anyway.
What usually happens is that companies (and countries) simply increase the price of labor (or rates of taxation) in order to fund these liabilities when they come due. The problem is that while these newer workers and taxpayers are funding older worker and taxpayer obligations they are also building new obligations of their own but with far fewer people to fund them.
Companies thus seek areas of relatively lower wage costs in order to keep the eventual price of their products as low as possible. Countries, lacking this option, often revert to keeping the "price" of their currencies artificially low to attract foreign capital in a similar fashion and boost markets for export of their (relatively) cheap goods. The problem with doing that, however, is that an artificially low (priced) currency is essentially a tax on your own populace.
Population demographics tend to move in "waves" where a "boom" of young people eventually becomes a "bulge" of older (retired) people. The former are largely net producers and taxpayers while the latter are usually net consumers and limited taxpayers. So in a mere 30 years or so China will have the same problems that we currently do while our own older (retired) workers will be "off the books". So...what do to in the mean time?
There are ways to mitigation such demographics waves. Increased immigration of young(er) workers will help mitigate the effects of an aging population. It also helps to remove obstacles to older people working and/or stopping "double dipping" where "retired" people continue to work (and even fund a second retirement fund). You can also, of course, actually fund future obligation. (Good luck getting that approved.) Finally there is the nuclear option of finance: declare bankruptcy and refuse to pay promised obligations. Easy for companies (hello, GM!) but not so easy for countries.
Unfortunately politicians do not think the same way that taxpayers do. Individual politicians will sometimes push for higher taxes knowing that the voters rarely hold individual politicians responsible for them (except perhaps the President). Instead "government" in general is blamed while individuals continue to get reelected. It takes a really nasty combination of things to get a lot of people removed from Congress. (At least in the United States.)
Politicians also love the idea of more tax revenues because they provide an opportunity to spend other peoples money...and not just on the intended recipient(s). What that means is higher taxes are often at the forefront of any political attempt to ease the burden of an aging population.
Businesses love to promise future benefits because it removes obstacles to pay issues in the current time frame. As a result a lot of companies offer (or agree to) higher future benefits to achieve short-term savings on labor. In this sense they are penny-wise to the customer but pound-foolish to the investor.
So...what to do?
First of all, we should not look at the consequences of an aging population and attempt to use the issue to create scapegoats for this (or any other) issue. For example, NAFTA/free trade.
Immigration (the legal kind) of younger (under 30) workers is a good solution for our current situation. It increases the tax base without increasing the tax rate and improves the worker to retiree ratio. Another tactic is to reduce the taxation on (having) children by increasing the tax breaks for dependents. However this is more of a long-range tool (you have to wait for children to grow up and become workers) and you run the risk of encouraging irresponsible baby production (*cough*octamom*cough*) especially if you have a negative tax rate for dependents.
Ideally we should have increased legal immigration a decade ago but it's never too late to start. We should also implement a flexible tax policy for dependents which for our current populace allows for subsidies of the first one or two children; a neutral tax position for a third child and no tax breaks for additional dependents. This can change, of course, if demographics change.
Promoting legal immigration also provides political benefits. It removes the line of attack from opponents that opposing illegal immigration stems from racism while putting the spotlight on anyone who wishes to increase taxes instead.