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Gladwell on Dependecy Ratios

September 4, 2006
Malcolm Gladwell's article The Risk Pool in this week's New Yorker Magazine asks the question, "What's behind Ireland's economic miracle—and G.M.'s financial crisis?" The answer: dependency ratios -- that ratio of working adults to non-working dependents within a country. While Gladwell amasses an impressive set of statistical correlations in support of the view that dependency ratios are responsible for the wealth, or ill health, of nations, his analysis does not distinguish between correlation and causality. When two variables X and Y have a high correlation, there are several possibilities:
  • X is the cause of Y
  • Y is the cause of X
  • X and Y are both caused by some other factor, Z
  • random chance
Gladwell writes,Getting to a 1-to-2.5 ratio doesn't make economic success inevitable. But, given a reasonably functional economic and political infrastructure, it certainly makes it a lot easier.. But is it not possible that a "reasonably functional economic and political infrastructure" itself is a cause of changes in the dependency ratio? Very poor people in underdeveloped nations tend to have more children because children provide labor and economic security in old age. Higher infant mortality rates and a lack of available birth control might make it a rational choice to have more children. When people have a degree of prosperity and can plan for the future, along with better medical care, they tend to have fewer children. Also, is it not the case that the welfare state encourages people to have more dependents, to the extent that the cost of dependents is socialized? Gladwell discusses the impending bankruptcy of some large corporate pensions plans, in particular, that of GM. These corporations promised decades ago to provide income and pay the medical costs of their retirees, which they intended to fund out of a combination of reserves and current revenues. The costs have turned out to be much higher than forecasted, and in some cases the fortunes of these companies have taken a downward turn in subsequent decades. This has put them on the wrong side of the dependency ratio: a shrinking base of employees are responsible for generating the revenue to fund an expanding pool of dependents.
    Or consider the continuous round of discounts and rebates that General Motors—a company that lost $8.6 billion last year—has been offering to customers. If you bought a Chevy Tahoe this summer, G.M. would give you zero-per-cent financing, or six thousand dollars cash back. Surely, if you are losing money on every car you sell, as G.M. is, cutting car prices still further in order to boost sales doesn't make any sense. It's like the old Borsht-belt joke about the haberdasher who lost money on every hat he made but figured he'd make up the difference on volume. The economically rational thing for G.M. to do would be to restructure, and sell fewer cars at a higher profit margin—and that's what G.M. tried to do this summer, announcing plans to shutter plants and buy out the contracts of thirty-five thousand workers. But buyouts, which turn active workers into pensioners, only worsen the company's dependency ratio. Last year, G.M. covered the costs of its four hundred and fifty-three thousand retirees and their dependents with the revenue from 4.5 million cars and trucks. How is G.M. better off covering the costs of four hundred and eighty-eighty thousand dependents with the revenue from, say, 4.2 million cars and trucks? This is the impossible predicament facing the company's C.E.O., Rick Wagoner. Demographic logic requires him to sell more cars and hire more workers; financial logic requires him to sell fewer cars and hire fewer workers.
Gladwell uses examples of this sort to make the case for a governmental socialization of retirement pensions:
    Here, surely, is the absurdity of a system in which individual employers are responsible for providing their own employee benefits. It penalizes companies for doing what they ought to do....The current arrangement discourages employers from hiring or retaining older workers. But don't we want companies to retain older workers—to hire on the basis of ability and not age? In fact, a system in which companies shoulder their own benefits is ultimately a system that penalizes companies for offering any benefits at all. Many employers have simply decided to let their workers fend for themselves. Given what has so publicly and disastrously happened to companies like General Motors, can you blame them?


    ...one of the great mysteries of contemporary American politics is why Wagoner isn't the nation's leading proponent of universal health care and expanded social welfare. That's the only way out of G.M.'s dilemma.

    in other words, that when American corporations reached the point where they couldn't make their business more efficient without making it less profitable, when their dependency ratios soared to unimaginable heights, when they got tens of billions behind in their health-care obligations, when the cost of carrying thou-sands of retirees forced them to stare bankruptcy in the face, they would come around to the idea that the markets work best when the burdens of benefits are broadly shared. It has taken half a century, but the world may finally be catching up with Walter Reuther.
Gladwell also quotes buyout specialist Wilbur Ross:
    [Ross] "Every country against which we compete has universal health care," he said. "That means we probably face a fifteen-per-cent cost disadvantage versus foreigners for no other reason than historical accident. . . . The randomness of our system is just not going to work."
The problem with Gladwell's argument is that it assumes that socialization has not cost.

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