The main thesis of this book is appealingly simple and has attracted a good deal of attention.  It is that in coming decades the recent demographic trends of a rapidly increasing global labour force (largely due to China and Eastern Europe) will move into reverse as the ageing populations in many economies becomes the dominant trend.   A key argument is that the expansion of the global labour force was the driving force behind the decline in global inflation since the early 1990s (rather than the wisdom of independent central banks).    As the dependency ratio rises, the bargaining power of labour will increase and inflation will revive.  Slow labour supply increase will also dampen economic growth.  

There are other important trends which the authors consider will affect the coming decades – including the pressure on human resources and public finances in many countries from the need to care for increasing numbers of dementia sufferers. This leads into a discussion about how weak government finances, given the health pressures, will make it hard for economies to emerge from the present public debt trap (it will be hard for central banks to raise interest rates because of the consequent pressure on government finances from debt interest).  The potential for future conflict between the fiscal authorities and central banks may prove damaging to central bank independence (although since the authors are unconvinced about the effectiveness of independent central banks, perhaps they should not care very much about this).  

It is argued that one consequence of the pressure from demographic change in advanced economies will be the need for a higher tax take in order to pay the costs of ageing in poor health.  A wide range of possible tax changes is proposed, including: more effective taxation of corporate activity where is takes place; levelling corporate taxation between debt and equity; a land tax; a carbon tax.  All of these have economic arguments in their favour – the question rather is how the politics would play out between a smaller labour force facing higher taxes and the elderly in need of care.  

In terms of the economic imbalances across the different sectors of the economy, this would imply a household sector moving back into deficit and a corporate sector moving into deficit but with tax incentives more aligned towards investment.  This would provide the scope for the public sector to move towards surplus (since this analysis is general among the advanced economies the trade sector could be seen as overall balanced).  

The great strength of this book is the focus on the big long-term forces which, often imperceptibly, drive economic developments.  It is a welcome change from the quotidian debate about short-term trends.  But it is certainly possible to be somewhat unconvinced by its conclusions.    

On the whole, I agree that the period running up to 2008 was relatively easy and favourable for inflation-targeting central banks.  Global growth was generally robust, and against the background of good productivity increase it was relatively straightforward to deliver rising real incomes and controlled inflation (‘good luck’ rather than ‘good policy’).  But it is less clear that the impact of a strong supply of global labour was the main factor reducing inflation.  China’s export price inflation was actually quite strong from the late 1990s and so once imports had switched towards China the effect on UK inflation tended to be upward. In addition, China’s rapid expansion put upward pressure on commodity prices.* 

It is true that in the advanced economies labour faced competition from the newly-industrialised, but it is also likely that the political atmosphere was more favourable to voters as consumers than as producers.  And large private sector unionised workforces were in decline.  If the future will bring large proportions of elderly, non-working voters it is not clear how far this political wind will shift, despite the increasing signs of concern at present over inequality.    

The Great Demographic Reversal is a stimulating read and draws together much interesting data. (It would have been an easier read, at least in my copy, with wider ‘gutters’ in the early chapters).  The coming decades are indeed set to see rising dependency ratios (though more of this may be offset by rising female participation than the authors expect) and, perhaps especially post-Covid, a slower pace of globalisation (or even a reversal).   But there are other major factors which will drive economic development – technological advance and a falling labour supply may simply alter capital/labour ratios, not push up inflation and the Natural Rate of Unemployment.  How all these influences play out, and how far populism comes to influence fiscal and monetary policies, remains highly uncertain.  

We may be about to enter a period of more volatile inflation in the next few years, and around a higher average rate than the past decade.  But that will be due to the sectoral shifts post-Covid , and possibly the benefits from achieving a lower real value for government debt, rather than the start of the demographic reversal.

* Wheeler, T Has trade with Chine affected UK inflation?  External MPC Unit Discussion Paper No 22, Bank of England 2008