The Great Demographic Reversal- Manoj Pradhan

Dr. Manoj Pradhan is the founder of Talking Heads Macroeconomics, a London-based independent macroeconomic research firm. A former Managing Director at Morgan Stanley, he led global economics coverage and focused on central banking, global inflation, and demographics. Manoj holds a PhD in Economics from George Washington University and an MSc in Finance from the London Business School.

He is best known as the co-author, alongside Charles Goodhart, of the influential book The Great Demographic Reversal, which argues that ageing populations will reverse decades of disinflation and reshape global economic trends.

His work is widely respected among policymakers, investors, and academics for its clarity, depth, and prescience.

In this episode, we talk about why ageing societies will create a more inflationary global economic environment.

TIMESTAMPS:
00:00 Trailer
00:51 China's Economic Integration: A Historical Perspective
03:49 The Impact of China's Workforce on Global Economy
06:41 Inequality Dynamics: Global and Domestic Perspectives
11:01 The Great Demographic Reversal: Challenges Ahead
12:30 Cost of Aging
18:09 Aging in Advanced Economies
22:57 The Political Challenge Of Raising Taxes
25:30 Can Technology Enhance Growth?
33:14 Global Labor Dynamics: India and Africa's Role
37:40 Impact of Tariffs on Global Economy
44:31 Addressing Demographic Challenges
51:02 Innovative Solutions for Healthier Societies
56:36 Advice For Fresh Graduate Entering The Workforce

Keith 00:00:55

In the book you argued that China's integration into the global trading economy was the most important economic development for the past century. It's not globalisation, it's not containerisation, it's not digitalisation, but arguably their integration into the global economy. Why is that the case?

Manoj 00:01:08

Let's start with a different example. Very recently I was travelling across Latin America and one of the countries that we visited had a huge drop in the crime rate. That drop in the crime rate basically allowed restaurants that used to stay open till about 7:00 PM to suddenly stay open till 10:00 PM. It's almost as if a new restaurant and a new economy had opened up which suddenly didn't exist. You can imagine what that did to economic activity.

That's kind of what China was. Set aside in this one part of the world was a massive workforce which was very well trained, with a policy machine that could galvanise resources like almost no other on the planet. Suddenly through a series of changes, particularly in 2000 when it received most favoured nation status from the US, that huge massive workforce joined the global economy. It was impossible not to have an effect. It was almost as if someone opened the floodgates to a huge talented pool of workers who could use capital effectively. That led to almost the doubling of the global workforce.

I think we have never seen a positive labour supply shock of that magnitude anywhere in the global economy. In fact, even if you think of labour shocks of that magnitude, you'd have to go to a negative supply shock and the one we quoted in the book was the Black Death, in which almost a third of the population was wiped out. China's integration was much more fluid but the magnitude and the size was something we've never seen before in history. I don't think we ever will.

Keith 00:03:06

How did the integration of China into the global economy actually affect prices? What was it that was unique as it entered not just the World Trade Organisation but decades before when Deng Xiaoping opened up the Chinese markets to the world?

Manoj 00:03:19

There are at least two elements to it. There's one within China about the way China operated and used its policy options, and the second is the way it affected the US economy and the global economy.

Every economy that is an open economy has the challenge of what we call the impossible trinity - you can control only two of three things. You can either have a fully flexible or a fixed exchange rate, you can have a closed capital account, or you can have monetary policy control. You can't have all three.

What China did was they chose to have capital controls that were incredibly strict and that allowed China to peg the exchange rate at a level that made it competitive. Perhaps more importantly, it allowed it to separate domestic monetary policy from global interest rates.

The strategy was if foreign capital markets and multinational companies wanted to access China, they couldn't really compete through the normal trade channels because the exchange rate worked against them. It made sense for them to set up shore in what was an incredibly subsidised setup in the Pearl River Delta, which has grown dramatically because of the influx of such multinational corporations.

What allowed those subsidies and domestic state-owned enterprises to compete was keeping your interest rate at an extremely low level. You would be effectively transferring savings out of the household sector into the corporate sector where it could then be turned to capital. That capital would generate employment. The argument was whatever you took away from the household sector in terms of financial health, you gave them in the form of employment and real wage growth and productivity.

On the US side, there is a fantastic paper that we quote in the book by Pearson and others called "The Surprisingly Swift Decline in US Manufacturing Employment". What these researchers did was track products at the two-digit or three-digit level that were manufactured in the US before most favoured nation status was given. Once that status was given and the threat of tariffs receded, manufacturing for that set of products moved to China and then they tracked the same products coming back to the United States.

Clearly once the threat of tariffs was gone, China was a much more effective low-cost producer. That low-cost production led to a persistent disinflationary process. You can see that in the PCE data. If you look at core PCE and split it into goods and services over the '90s and before the financial crisis, you see very clearly that services inflation, which is domestically generated in the US, was almost a rock steady 3%. But goods inflation, which you would get from China, had fallen from about 2.5% at the beginning of the '90s to minus 2% by the time the great financial crisis hit. It was a huge gigantic move.

Keith 00:06:39

It reduced inequality across nations in a sense that there was a massive increase in the standard of living, but at the same time there was a lot more intra-inequality happening as you've pointed out with the de-industrialisation of the US. Could you help me further understand what were the dynamics at play that caused such massive inequality to manifest itself in the advanced or western economies following China's integration?

Manoj 00:07:14

There's a backdrop to it. There was a concept that was delivered decades ago called the convergence thesis. The argument behind the convergence thesis was in emerging markets where there is less capital relative to labour, the rate of return on capital is higher. If the rate of return on capital is higher, capital should flow to those economies. Flowing to those economies, capital would then galvanise growth, raise their growth rate relative to the US economy, and everything would be fantastic.

The reason that did not work is because the US has always been fantastic at generating ideas and diffusing them through the entire production system. The knowledge-based capital stock in the US always grew. Emerging markets had fits and starts where they would add capital when global interest rates were low or when they had a growth spurt.

What China did was when multinationals moved across into China, not only did they absorb the knowledge that was embedded within the transfer of capital, but they also improved upon it aggressively. The way they were able to galvanise resources and join forces with that inflow of capital and knowledge really allowed them to diffuse that capital into their own capital stock. The rate and the quantum of investment was so huge that it lifted up the entire emerging market complex.

Emerging markets fit into China in one of three ways: either they were producers of inputs into the China manufacturing process, or they were providers of commodities into the China manufacturing process, or they rode a wave that China was projecting. The capital inflows into economies that were not even connected to China was tremendous because suddenly people could see that technology could be pushed into these economies in a far more aggressive way.

When it came to within-country inequality in the advanced economies, that was because there was a challenge to the manufacturing system in a way that they had not seen before. There was a really interesting chart that was presented at Jackson Hole in a discussion of a paper by Mian, Straub, and Sufi on inequality and interest rates. They showed very clearly that the inequality in the United States was not created by the top 10% or the top 20% becoming richer very quickly, which is what we would believe if we read Piketty.

What it showed was that the poor, the lower 50% of the US economy, showed stuttering wage growth. If you think about where China's manufacturing process would create a challenge for the US economy, it would be in that very segment of the labour market - the lower end of skills or education which would be part of a more mechanical production process. Those were the ones that were affected. You had a very clear channel through which China became a competitor, and the parts that it was competing with - low wage with a high labour supply of high quality - most advanced economies felt that as a very difficult shock to deal with.

Keith 00:11:00

As China ages, it has created literally a reversal of that demographic dividend that they've yielded in a sense that what was once cheap is now going to become much more expensive, and countries have to deal with that challenge. Could you help me understand what is exactly the great demographic reversal?

Manoj 00:11:24

There are really challenges that I think we don't see even if we talk about it right now. The simplest way to see how demography has changed in the last 30, 40, 50 years is to simply consider a population pyramid. The population pyramid is typically the name that was given to it because at the time that people started looking at these demographic profiles, there were a lot of young people and very few old people. Really, if you had age at the bottom going older above, the bottom of that structure would be very big and the top of the structure would be very narrow, and it looked like a pyramid.

Ironically, we still call it a pyramid, but it's no longer a pyramid - it's a barrel. That barrel is becoming more and more lopsided, like perhaps even a martini glass. That reversal of the shape is in a nutshell the great demographic reversal.

One of the problems I think we do not anticipate is that with ageing comes a very significant change in the way the population takes care of itself. When you're young, typically the biggest problem most people tend to have is that they cannot work for a month maybe or two months if they've got a severe affliction. That proportion changes quite a lot as you get older.

The diseases of the old are very serious. Medical professions have learned to deal with the ones that we were most worried about - heart disease and cancer are getting a lot of attention - but the ones that persist are the neurodegenerative ones. The older the population gets and the larger the proportion of really old people within the economy becomes, the more important these issues are. These afflictions need a lot of care and attention.

Not only is the labour force shrinking, but a large part of that labour force will then go towards the caring sector, towards what would be called socially productive activities but not economically productive activities. The elderly who are consuming them don't produce anything. The service that they consume is a one-time service that is produced on that day, consumed on that day, and never used for anything else again.

If we look at the labour force, it's actually shrinking faster than the statistics suggest. At the same time, we're not prepared for looking after the elderly, which means the workers who exist will have to pay a bit more of a tax to help look after the elderly. We saw that during the pandemic, and I think it's a serious problem for public finances. When there is something that is a problem for public finances, we all pay the price through higher interest rates, through higher inflation, through not only fiscal but also monetary policy challenges.

Keith 00:14:42

A huge part of the picture you have painted previously was that the disinflationary environment that we've enjoyed in the past 40 to 50 years is hugely due to the fact that we had this glut of labour that was from China which was relatively cheap. Now as they age, that cost of labour will increase substantially and that will naturally push the world into a more inflationary environment. Could you help us understand the extent of China's ageing challenge?

Manoj 00:15:12

China's ageing creates a challenge for China and outside China. China's policymakers understand that getting growth to a level where the economy looks after itself is going to be quite difficult. Rather than pushing into the credit channels or pushing into very easy ways of generating growth over a six-month or 12-month horizon, they've chosen over the last four or five years to really reduce some of the substantial imbalances that have occurred in the Chinese economy, most notably with the three red lines policy.

It's the leverage that exists within the housing sector that has always been a problem, particularly for the central bank. Their philosophy seems to be: let's make sure that this is not a problem for the Chinese economy because we need to move our resources into far more productive activities. In China, the policy machine has taken it to mean not so much housing, not really putting social pressure on the population, but rather getting it into areas that will allow China to compete in the next century, maybe even the next two centuries.

Their problem is even rich economies like Japan, who have been prepared for demography, are not really prepared for it. When it comes to looking after the population, the actual task when it becomes difficult is very hard for the medical industry to handle, very hard for the caring sector to handle. You do as a worker end up paying a significant tax to help look after the elderly.

If the Chinese economy proceeds along the path it has, not only will wages have to go up to help look after the workers that are in there, but the workers themselves will end up paying a tax to look after the elderly. Which means you'll have to allocate resources far more effectively to productive sectors.

The challenge before China now is that you've got a more expensive workforce, so becoming aggressively the dominant force in the global manufacturing system is that much harder. You've got a rapidly ageing population which means the caring sector needs a lot of resources allocated to it. Your old machine of growth, which was housing but clearly unproductive, policymakers correctly no longer want to use that as a crutch. So you have to find a new model of growth.

Every time a new model of growth comes up, there are going to be global constraints, local constraints, and you have to really find an economy-wide solution. It's a difficult task, and I think they're moving slowly towards it, but I don't think substantial progress has been made.

Keith 00:18:12

What about the other advanced economies? It's not just China that's ageing - the US, Germany, Japan are all ageing quite rapidly. Singapore is getting super-aged. I think the data was that in 29 years we went from an ageing society where it was less than 9% or 10% of our population above 65 to about 25% by 2030. This is a huge problem here in Singapore as well. How are their demographics also rapidly changing?

Manoj 00:18:45

The demographics are changing incredibly quickly and in ways that you can already begin to see. For example, one of the times I had visited a friend of mine over in southern Italy, the little village that his father had a house in - he still goes there for the summer - the population of that village has gone down dramatically from a peak of about 25,000 people to just about a thousand people left.

Part of the reason is that with only older people left over there, the younger people found no work so they've moved to the cities. The medical facilities over there are not good enough, so older people can't really live there by themselves and expect high-quality care. They have to move into more crowded urban areas where help is on hand and maybe their families are.

Very few countries really understand the public finances problem that is going to hit them hard. The one exception which I want to talk about in a more positive light has been New Zealand. The New Zealand government has embarked upon a policy of fiscal austerity that is quite severe. They're running quite a large deficit, but by 2027 they want to run a primary surplus. The objective behind that is because they understand that in a few decades, the needs of an ageing population are going to drive the fiscal stance into such a difficult position that they can't afford to run an irresponsible and unsustainable fiscal position right now.

What other economies are doing is running unsustainable fiscal policies, particularly in the United States, at a time when they really should be getting ready for an ageing population. Advanced economies have a significant ageing problem. They have a pay-as-you-go ecosystem in most places. They don't have fully funded pensions, and in those economies, their responsibility towards looking after the elderly is quite severe.

Let me give you a simple example that worries me more than anything else: the social security system in the US. It's very widely known that the social security system in the US is now paying much more to its people than it's bringing in the form of taxes. Its taxes come primarily from payrolls, from employment. As the labour force becomes smaller and the number of older people in the economy rises, that mismatch is only going to get worse.

For the moment and up to about 2033, they are able to sustain spending more than their incomings because of a trust fund. But that trust fund draws down by 2033, after which by law you will be forced to reduce spending to the tune of maybe something like $15,000 per eligible household. I don't know a single administration that is going to show up in the United States at that time that will allow this to happen. Which means you're going to have to roll that debt over in order to keep the social security payments at least close to where they are.

Raising debt today through larger deficits is incredible. Last year the US economy ran nearly 7.5% fiscal deficit - half of that was due to spending and half of that was interest payments on past debt. You can't keep that up.

Keith 00:23:00

There is something weird about the political economy when it comes to dealing with the ageing population problem. In Singapore, when the government raised the goods and services tax from 7% to 9%, hugely to anticipate the coming increase in healthcare spending, that created a lot of political backlash because people felt like there was never a right time to raise the GST. What is preventing or why what makes it so wicked, the problem of trying to tackle an ageing population head-on within electoral democracies?

Manoj 00:23:34

I think the issue really is that it's difficult to envisage the problems of the future unless they're in front of us. It's a bit like my health profile - maybe I know I should be reducing weight and increasing activity, but it wasn't until I got really badly hit with COVID in 2020 that I really changed my lifestyle. The phrase from one of the best-known economists in the '60s was "What has posterity ever done for us?" You tend to think of your time as being the most important time, and next year or the year after that you'll start saving.

There is also an intergenerational friction. The goods and services taxes are probably affecting younger generations much more, and the older generations are getting a lot of their spending, which typically tends to be on healthcare or housing services or caring services, paid for by the government. People tend to see that as unfair - that they are paying a tax for someone or a part of the population that really should have saved for themselves.

It's a difficult task, but the problem is it doesn't matter whether it's a fair or an unfair story that the elderly haven't saved. It doesn't matter whether it's fair or unfair that the government for the last 30 years hasn't done anything. You're in this problem right now and you have to deal with it.

Any tax is going to be unpopular simply because it reduces disposable income, reduces people's ability to consume, and no one likes that. The issue is to try and make them see without a crisis that if they don't do this today, the hit to their future consumption is going to be substantially greater. I haven't seen anyone convince an entire population that this was true without really being authoritarian.

Keith 00:25:34

Maybe now is a good time to put out the counter arguments against your book, which is that there have been some that would say it's not necessarily demographics that will dictate destiny if you have more technology. The argument for the ones who are more optimistic about the use of technology would say that now you have artificial intelligence, robots, the rise of robotics - it's possible to make manufacturing much cheaper than it was before as opposed to relying on labour. Is there some merit to their argument? Could that cushion the inflationary effects of ageing population, or do you think that its effects will probably be too exaggerated?

Manoj 00:26:16

There are so many facets to the technology argument. Absolutely it has potential - there's no doubt about it. For the second book that Charles and I are writing, a large part of the editorial process has been made much easier because we tried to use cloud AI to get the editorial process done. It really picked up a lot of things that even proofreading may not have done. It was able to provide very intelligent editorial suggestions.

The change in technology you can see in the different versions of ChatGPT that come about just get incredibly more fluent in answering queries. At this point in time, it feels to me more like what Excel did to revolutionise simple computing. It's moved away from just basic automation and robotics to helping services. We don't know how far that will go - we have absolutely no idea.

There are two extremes to the argument: one is on our side saying we're going to run out of workers, and there's a technology argument that says we're not going to need workers. The answer is clearly going to lie somewhere in between. We just don't know how much and how quickly. Sometimes technology advances are complementary to humans and sometimes they're substitutes.

Let me give you an example. Let's say both of us are working in the same organisation and that organisation has a huge change in the way it uses technology. They say that my services are no longer required. You remain in the company and work with the new technology. Your wages will go up substantially for two reasons: number one, I have left, and presumably I have left because the technology can do my job along with your help to a much greater degree without hurting the company's profits. Which means that your share of the company's profits will have gone up.

I'm a displaced worker. What do I do? I could retool myself, I could try and find another job at my level or in a completely different profession. What typically tends to happen over a period of time is that I'll find a job. From an economy's point of view, as long as my real income and your real income together in the new world that we find ourselves in is not lower than it was before the technology was adopted, the whole economy is better off.

What we need to find out is what's happening to displaced workers. In the past, displaced workers had gone on to find jobs in sectors that nearly did not exist. One of my favourite labour economists, David Autor, has pointed out that since 1960, about 70% of the jobs that exist today, not just in title but in actual function, simply did not exist before that. The change in technology also creates a change in the economy.

Banks are not stupid - they know this. They know your income has gone up. Will it be a surprise to you after your income goes up that your credit card limit has suddenly gone through the roof and you're able to buy far better things? What comes along with that technology change over a period of time is also credit expansion, which means the demand side of the economy also exists.

I think people aren't wrong about what they think technology can do for them. Where they are wrong is to see it only as a supply-side change. Go back to China for a second - when China happened, is it that the workers remained equally poor and China remained poor and they just pushed inflation lower? No. Their prosperity went up, credit booms went through the roof, China's cities look far more advanced than many western cities at this point in time.

I think there's always a balance between supply and demand. There will be some periods in which supply outstrips demand, but that demand expansion will also be around. I think it's a mistake to think of it as a massive deflationary force. I think it's a disinflationary force which raises productivity growth, which raises incomes, and those increases in incomes typically lead to demand side equalling the supply side over a period of time.

Keith 00:30:51

Could you make the case that it would also stimulate economic growth or that maybe counteracts the effect of ageing on economic growth?

Manoj 00:30:57

I think it definitely does. To the extent that it is successfully implemented, I think you will see economic growth proper. But here's the issue - and I'm glad you asked the follow-up question because it's a point I wanted to get to earlier.

In one of our first few questions, we talked about the fact that the caring of an ageing population means that the labour supply that we have today is going to get split in two ways. There'll be people who carry out what we call economically productive activities - thinking about ways to improve ideas, what we're doing on this podcast, which is sharing those ideas, how to run a manufacturing process. All of those things are economically productive activities.

A larger and larger number will be required to look after the elderly. Keep in mind the labour force itself is shrinking, and we're then splitting that shrinking labour force into two strands. Whatever we can do to replace services or replace manufacturing on the economically productive side of the economy will then allow enough workers to be diverted towards looking after the elderly.

I don't just mean helping them walk about - it means the entire caring sector. It's going to become a huge sector. It typically tends to be very labour-intensive. Some people try to call it unproductive - I'm not a huge fan of that. The reason is even if I and someone else in 20 years have the same medical problems, our needs are going to be different. It's difficult to know whether robotics or a mix of robotics and AI can cater to that need as effectively as a human being who's empathetic, who can anticipate problems and can react really quickly to different people.

I think the caring needs of an ageing population are such that the rate at which technology evolves will actually be a blessing in disguise. Destroying some jobs that really can be automated, and those destroyed jobs then can allow a much fairer and equitable distribution of labour in society. I think that's something that's actually required going forward if we are to have better standards of life for everyone.

Keith 00:33:14

There is also another threat, which is that China's historic mobilisation of labour could now be perhaps not duplicated but manifested in the mobilisation of labour in Africa and India. Critics might say this is a counter-argument to your point - that although China's ageing, there's still India and there's still Africa who still have a huge demographic dividend that hasn't been tapped. What's your response to that thinking?

Manoj 00:33:54

It's a very good argument for those economies. I think there are reasons to be optimistic for any part of the global economy that has not yet reaped its demographic dividend in full, has the administrative resources to at least mobilise capital, and really reap the rewards of that demographic change. I think it's a good period of time to be a young economy.

The question that we are asking though of them is a much bigger one. We're trying to say that there's a huge bunch of economies that capture more than three-quarters of global GDP at the moment that are ageing. Can you, as two parts of the world - Africa as a continent of many different countries and India, a massive economy which has a huge amount of labour - counteract that ageing process in a way that we don't really feel too much of the pain?

The answer is quite difficult for two reasons. The first reason is what China had was an ability to mobilise resources at a pace which I think anyone will find difficult to do. India's legal system, the fragmented political system, sometimes makes national-level decisions harder. It has become a bit better because under the rule of the BJP, a lot of states that are aligning with the central party now tend to adopt similar policies and they can fast-track investment processes. But whether it gets done at a pace that's required is very hard.

Africa is about 50 countries with a population in total the size of India, and getting them to coordinate policies is equally hard. In fact, it might be much harder because they have national priorities and not just state-level priorities.

The more difficult story I feel is the backdrop. When China went through its assimilation into the global economy, the mood was one of globalisation. The mood was one of allowing access to markets in a more aggressive fashion. If labour could not move in large enough numbers, let's move some capital elsewhere and let's try and get the best out of our global resources rather than think of the local economy.

Now that India and Africa are perhaps being considered as solutions to the global economy, the mood couldn't be more different. All that the advanced economies want to hear of is only the kind of labour that helps them immediately rather than having very open borders for labour. The export of capital is being seen in a very poor light. Most economies that are struggling with growth want their companies to manufacture onshore.

This seems like a great idea because locally you're trying to raise the capital-to-labour ratio, which economics 101 will tell us is the right thing to do to raise productivity. Unfortunately, from a multinational standpoint, you are asking them politically to make a second-best choice. You can see right away that even from the advanced economy standpoint, this is not an optimal strategy.

Certainly from a global standpoint, especially if you want India and Africa to become the leading points of a charge against ageing on a global scale, it's certainly not helping. They may be able to make a dent in it, but when the whole world is ageing, can these economies without the help of globalisation really step up in the way China did? I think it's difficult.

Keith 00:37:41

We see greater fragmentation in the global economy, best manifested by President Donald Trump's slew of tariffs that he's imposing on everyone. Does this actually accelerate the problem of inflation in this changing demographic, and how does it affect the advanced economies and the way they will grow in the coming years?

Manoj 00:38:02

Incredibly complex question. I'll try and give a pithy answer given we don't really know what the path of tariffs is going to be, what the strategy of the administration in implementing these tariffs is, or what the outcomes and the reaction of other economies is going to be.

Let's say that some level of tariffs or substantial level of tariffs remains in place for the foreseeable future - 5 to 10% for most economies, 30 to 40% for China. It's a very different backdrop to what we had seen before.

Whether there's an inflationary story depends on the horizon that you're looking at. As you and I speak, the latest data points that we're getting out of Los Angeles and out of container shipments is that as the first set of shipments that reach the United States are applicable for tariffs, the volume of shipping into the US is likely to drop very sharply. We're already getting warnings of empty shelves for some products because a lot of products that are coming out of China into the United States are subject to 145% tariffs, others to only 20% tariffs, some to 25% tariffs.

A 20 or 25% tariff is a tax. A 145% tariff is a blockade - nothing is profitable at that point in time. The growth in both economies is going to take a hit initially.

In the United States, if there are shortages, shortages drive up prices. They've already come out with a pretty significant inflation problem after the pandemic. This is going to add to that in the short term. When that adds to the inflation problem, people stop spending, and when they stop spending, growth falls. Over time, that falling growth should bring inflation down for goods and services, but beyond that you haven't changed the structure of the economy.

The bigger problem is likely to show up in the summer when we find out what the fiscal position of this administration is. After taking a large hit on tariffs to growth, are you still going to remain steadfast to a commitment that deficits are going to be brought down to 3% by 2028? Because if the Republican party says this is not the time for fiscal consolidation, we need to now bolster growth and the deficits become larger, then that problem is simply a difficult one to deal with.

In China, the problem is obviously going to be very different because they're not seeing such a stagflationary shock - they're seeing an outright aggregate demand curve shifting leftward because a huge source of their global demand is going to be shifting across to the left. That's a disinflationary problem outright.

There are concerns that China will flood the rest of the global market with the products that they have. This isn't oil - if it was oil you were selling, most people would welcome a lower price of oil flooding into your economies. Countries are extremely worried about Chinese electric vehicles or electronics that are cheap enough to wipe out their own domestic manufacturing economies coming in huge quantities to their backyard.

You should be expecting tertiary or third-party effects of US tariffs showing up in which a lot of China's products will be very heavily managed going into other economies. That means China has to deal with its own problems at home either through fiscal incentives or to try and promote more productive industries.

The backdrop of growth on both sides of these two massive economies is plunging into an abyss of uncertainty. We don't know how far growth will go, but uncertainty certainly is moving up sharply.

Keith 00:42:47

It seems like it will only worsen the problem of the economic impacts of your demographic reversal - it just worsens the growth prospects. In your view, as US-China relations continue to deteriorate, it's going to be bad for growth?

Manoj 00:43:01

It's going to be bad for inflation - it just depends on the horizon you're looking at. The story with inflation is if growth slows down and you go into a recession, of course inflation is going to fall. But think of it this way: we spent a majority of this discussion before we got to the topic on tariffs talking about what happens to demography, what happens to fiscal policy, what happens to productivity.

Just think of these same three things after a year of the tariff war. Do we change demography? I don't think the answer is yes. Do we change fiscal policy? I think the deficits probably get worse if growth at home because of tariffs is worse. Do we change productivity? Well, not if we are replacing global productive supply chains with local unproductive supply chains.

Over the medium period, I think the problem probably gets worse because of what we're seeing. If this is a permanent change, or if it's only a bargaining policy and things change over 12 months or 18 months and we're back to the world we were in before, that could be a completely different story. Or it might change when a new administration takes over in the United States and reverses some or most of these policies.

Our ability to look that far into the future is far more limited. On what we can see today, the short-term problem for growth is definitely worse. Inflation might get better, but the medium-term problems for both actually do look a bit worse because of what we're seeing in the global economy right now.

Keith 00:44:34

What are some of the solutions that governments should be looking at? Maybe it would be useful to reemphasise how serious the problem is and then help me understand what policy options governments should be actively considering.

Manoj 00:44:46

The problem is very easy to define in one metric: debt to GDP. Look at long-term debt-to-GDP prospects. The Congressional Budget Office in the United States, where demography is not as big a problem as Germany, Japan, China, Korea, Portugal - in that economy, debt to GDP over the next 30 years on policies that do not consider what will happen in the summer with fiscal positions are projected to give debt to GDP a level of about 156% of GDP. That's an incredibly high level.

For the next 30 years, deficits related to healthcare will remain permanently negative because of that. With a steady interest rate level, the amount of interest expenses that the government will pay on past debt and financing future deficits will rise over a period of time so that overall deficits become 7 to 8% of GDP. That's your problem in a nutshell.

Can financial markets deal with it? No. Have we seen evidence of that? Yes. We've seen that in the second half of 2023 in the United States. We've seen that every time there has been a fiscal crisis in the advanced economies when debt and deficits begin to look unsustainable, the private sector demands higher interest rates. If they do that in the United States, the whole world pays for it.

Fixing the demographic problem either through productivity, either through allocating resources to caring, maybe being a little less generous to the elderly in terms of that social security problem that I had mentioned earlier where we are making sure that the elderly part of the population who vote are looked after adequately and feel no pain - maybe all of those attitudes need to change. Maybe the way we look at taxation needs to change, not just necessarily changing goods and sales taxes but to change taxes in a way that address intergenerational frictions.

I think there's a lot of change that needs to come about, but the one simple metric that is going to get us there is going to be deficits and debt. The more we allocate to healthcare and spending which is very closely related to demography, the more trouble we're going to get ourselves into, and we need to get out of it.

Keith 00:47:09

In Singapore, the government has been very active in trying to promote Healthier SG. The way they see it is they want to make 75 the new 55 - increase retirement age, try to prevent the onset of chronic diseases as much as you can. Previously, if you're 80 and you're getting a lot of heart problems, we're trying to push that down the line so we're trying to make the population feel younger, be it through lifestyle intervention or much more preventative screening. There's huge investment in preventive healthcare. The idea is that you can maybe make your labour more productive for longer. What's your view on that? Is there actually a possible way to ameliorate the effects of an ageing population?

Manoj 00:47:53

I really hope it works. It sounds like a solution that everyone could at least try. I wouldn't even worry whether the labour force gets augmented over a longer period of time if you can try and imbue into your society a healthy culture.

The World Alzheimer Society tells you very clearly that neurodegenerative diseases are caused by poor lifestyles. If you can improve your lifestyle, if you can stay healthy, if you can stay active physically and mentally over a longer period of time, you reduce the incidence of not only the diseases we know but also diseases of the mind.

If that happens, you will reduce the need for people to look after you. That by itself would be huge. It would allow you to lead a healthier lifestyle rather than just a longer lifestyle. It will allow you to remain productive in a social capacity if not an economic capacity. But most importantly, it will reduce the need for others and for society to look after you. That by itself would be huge.

We don't need them to work in their 70s and their 80s. As long as we can try and get a population that doesn't require others to look after you, that's a massive win.

Keith 00:49:19

Do you see any other governments trying to push for that as much in your work?

Manoj 00:49:27

I think there are processes underway. Generally speaking, the Scandinavian economies are more well up because their connection with their societies are significantly stronger. They tend to pass messages, they tend to have far greater communication in the form of small voting routines for almost every decision that they make. Switzerland, for example, has a referendum on many issues, so they're very closely in touch with their societies and they are trying to promote a healthier lifestyle.

But it's very difficult to do that as a dictum. Just to bring a personal example, I feel simple things changing like pickleball in the US - that's making a difference because people in their 60s, 70s, and perhaps even their 80s are playing. You can do simple things like that to encourage sports. You don't need to go out there and sound like a nanny state and tell people you need to get out there and work. That's not what works in many societies. I doubt it'll work in Singapore, I doubt it'll work anywhere else, because people don't like to be told "you don't know what you're doing, let me educate you."

But if you can give them an incentive through activities that capture their attention, that help them to socialise, I think those are far more productive ways in which to get health much higher up the priority, and those might actually work. I think there is a chance out there. I just don't think enough attention is being paid to it from a demographic perspective. If it was the case, you would see public resources going into that. I just don't see that yet. Hopefully that'll change.

Keith 00:51:06

How do we get more policymakers to be more urgent about it?

Manoj 00:51:12

I think the first thing they need to do is the simplest thing they can do to help themselves - try and get your fiscal stories in order. The concept of the Department of Government Efficiency was really something that we can all take on board. The way it was executed probably could not have been worse, but the concept behind trying to get efficiency, try and figure out which departments can be merged into one, more importantly which expenses out of the non-discretionary part, out of the ones that are compulsory, are really necessary given the changing structure of society - I think that could be a first start.

A second way to deal with it might be something that you suggested, which is to try and see whether any of the resources you save today can be used in a way that people can see the benefits of. Instead of taxing goods through a GST tax, can we try and allocate some of those revenues for activities which incentivise people to participate? I'm speaking from a very narrow perspective - monetary incentives for activities.

Very simple: if you can somehow talk populations into monitoring their own physical activity - we've got all kinds of wearable devices right now which monitor data - if you are paid to participate in certain programs of that nature which allow you to track it and you get monetary benefits through either lower insurance costs or a tax subsidy, those are the things that work. If the government was to campaign on that instead of pushing up the GST right now as a demographic tax, I think you might even see popularity going up.

There are ways to deal with it, there are ways to incentivise these programs. It's just that it needs a lot of innovation on the one hand, but it also needs saving on programs on the other hand, which governments are reluctant to do.

Keith 00:53:02

In Singapore they also have a national health challenge where you essentially have a form of a nationwide program where if you achieve certain milestones for your fitness or health journeys, you get points which then can be converted into vouchers. It's something that I think they're trying to encourage as well because like what you said, you can't tell people to be healthier - you have to create a culture that encourages people to be healthy.

What will cause you to change your mind on your thesis?

Manoj 00:53:26

I think there are a few things. Number one, as we've just been discussing, if governments really start tackling this problem in a proactive and a socially acceptable way rather than just pushing either taxes or sanctimonious advice down people's throats, I think that would be a gigantic step towards a better allocation of resources towards demographic problems.

Second, technology. If technology turns out to handsomely outstrip all expectations and starts showing up in the statistics, starts showing up in sectors that are evolving, and starts showing up in a way that really reduces inefficiency and raises productivity, you'd have to start paying attention to it. We don't know what the future path is going to be, but I always think back to how electric vehicles and driverless cars were already supposed to be on this planet - that's what they told us five or 10 years ago. I haven't been in a driverless taxi yet. Many others have, but hopefully things will change faster than that with AI.

The last thing would be just healthcare. The programs that you describe in Singapore sound eminently sensible to me. I'd love to track back, look at the Singapore economy within a year, within two years, to see how much of a change those programs have brought about, how much participation is being elicited out of the population, and if some of those programs can be adopted somewhere else, maybe even improved upon, maybe changed for particular geographical characteristics. That would be something that is encouraging, along with medical advances in looking after people with neurodegenerative diseases, because that is the critical part of an ageing population.

When a population ages and the oldest part of that population can no longer look after themselves, that's when you will see vibrant workers being diverted from economically productive activities to look after the elderly. If we can get that part of the story sorted out, a huge chunk of this demographic story becomes far more palatable.

Keith 00:55:39

It seems to me that the price or the cost of caring for neurodegenerative or neurological decline is extremely underpriced in today's modern politics and policymaking.

Manoj 00:55:52

I think that's right. One of the chapters that we were proudest of in that book is that chapter on healthcare. Even in our upcoming book, we've tried to discuss that in greater detail, and we make exactly the same point that you do - that while we are seeing more and more at least discussion or attention to demography, if not concrete policy action, we're not really seeing much of that about the issues that a really old segment of the population will cause for the macroeconomy, which is not only care in general but neurodegenerative diseases in specific. Those are debilitating - you cannot perform the same activity that you did five minutes ago because you don't remember it, and that requires care. I think you're absolutely right.

Keith 00:56:38

My final question to every guest is a piece of advice to give to a fresh graduate entering the workforce.

Manoj 00:56:45

I think the best bit of advice I can give you is any graduate coming into the workforce today has a chance to innovate in a way that no generation before this, maybe for the last 30 or 40 years, has had before. That innovation was possible because a whole lot of things hadn't been invented. Right now we've gone very far along that path of spreading innovation across different sectors, but what AI and robotics and just the integration of ideas across the world gives you access to is something that has never really existed in history.

Take every advantage of that. Don't let your job define you. Don't try and completely redefine your job. Try and find a very happy medium in between, and then you can take a next step to redefine the economic landscape. That's what's needed - we need innovation, we need new sectors to come up.

Remember that example I gave you from David Autor, which said most of the new jobs that we have today weren't in existence before. We need much more of that, and people today have an ability to innovate and they're using it on an everyday basis on their social media. If that translates into economic activity, it'll be a huge service. You've got an opportunity like almost no generation for the last three or four decades - use it.

Keith 00:58:01

On the optimistic note, Manoj, thank you for coming on.

Manoj 00:58:07

A pleasure. Thanks for having me.