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October 20, 2005

Demographic Math: Why Your Standard of Living Will Fall

-- by Thomas Leavitt

GeoHive is a web site that aggregates and charts geopolitical data and statistics (primarily population and economic factors). I used the information there to construct this spreadsheet (Excel format), that attempts to model what the world would look like if the standard of living of China and India's populations were equalized with those of the industrialized world in a semi-reasonable fashion (modeled as the former's per capita GDP set to 50% of that of the latter's, and the latter's halved - note: the result requires a 20% increase in world GDP) - and adjusted to recognize that we are already overshooting a sustainable level of resource extraction (I use GDP as a proxy for resource consumption).

The results match what my intuition has told me all along:

a) more or less, the standard of living for the folks in China and India is at or near a sustainable level already (with China's possibly even exceeding it, worst case scenario) - when I mentioned that the $3/hr Chinese Delphi employee is never going to earn $27/hr., I wasn't kidding. He or she will be lucky to earn twice what they are now

b) our standard of living is going to have to drop - depending on whether you think a sustainable level of resource extraction approximates 60% of today's resource consumption, or 40%, you're looking at Americans and Canadians living on 1/5th or 1/8th of what we do today (a per capita income of ~$7100 or ~$4700, vs ~$40,000 today) - so today's $27/hr Delphi workers can look forward to having thair $10-12/hr wages slashed in half (or close to it)

Pretty frightening, eh? And we're talking less than a generation before this happens. Yet, this is totally off the radar of today's political discussion (outside of the Green Party, that is). Our children are going to confront a radically changed world (and so are we), and we are doing nothing as a society to prepare them for this. The result is going to be tragic, if we don't wake up and collectively smell the coffee ASAP.

Note: China and India (in terms of population and economic growth potential) and the world's industrialized nations (in terms of economic output) more or less render the rest of the world statistically irrelevant, which is why I limit the numbers this way.

Another note: the resulting figures are using today's population numbers, not 2030's (which anticipate 200 million more Chinese and 400 million more Indians and 60 million more Americans).

Caveats: yes, economics is not a zero sum game, GDP is only a very gross approximation of resource consumption, substitution effects are real, the economy is shifting so that non-resource intensive elements of the economy are more prominent, etc. Nevertheless, as China's current resource demands demonstrate: it still takes tangible raw materials to drive an economy.

Folks - let me be blunt: this is NOT "gloom and doom", this is inescapable reality - the world's resources are finite - while economics and growth are not a zero-sum game, resource constraints are. There is only so much arable land, so many pounds of fish that can be taken out of the ocean, so many tons of ore that can be extracted, so much oil that can be drilled, etc. The 2.5 billion Chinese and Indians entering the world economy are not going to willingly forgo the benefits of economic growth - nor can we prevent them from doing so. When Billy Joe Chinese person goes to buy a car, he's competing against Billy Joe European and Billy Joe American and Billy Joe Indian - the resources used to construct that car are going to go to the highest bidder (whether that be in cash, or in willingness to work for wages).

This isn't just an issue for the industrialized world, either - 2.5 billion Chinese and Indians are in for a major disappointment when their expectations for an increased standard of living wind up not being met.

Here's the positive side: if we act now, the adjustments don't have to be so wrenching. Modern industrial society is incredibly wasteful (bad economic design that doesn't properly take into account externalities or depletion of natural capital). Look at your trash can: can you visualize over 80% not being there? If so, you're on your way towards adjusting to tomorrow's reality.

Posted by Thomas Leavitt at October 20, 2005 11:04 AM

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Comments

Nonsequitor to the post, but I just wanted to say I like your new banner art.

Very fetching and appropriate.

You may want to see if you can't have the blog title over the graphic, so it's a little more visible, but on the whole I approve.

Posted by: Lis Riba [TypeKey Profile Page] at October 20, 2005 4:59 PM

You miss a couple points which work in opposite directions. If you use purchasing power parity to estimate China's GDP, it's much higher than you are using. Also, much of their GDP is devoted to export to the US so it's unclear they can remap that production for domestic consumption. I think you also underestimate that productivity increases will continue so that relative standards of living may change, but absolute standards may increase for everyone. Technology really can help solve today's problems. Finally, demographic projections vary by a lot.

Posted by: elliottg at October 21, 2005 2:08 AM

You've got to keep in mind, too, that the high salaries here are largely the result of inflation, and the cost of living is correspondingly high. In NYC anyone with an income of $60,000 -- are you ready for this -- is considered WORKING POOR!

Of course teachers, firemen, policemen, nurses, etc. etc. don't earn anywhere near that much.

Posted by: MJ at October 21, 2005 7:10 AM

which is why cuts to mdicaid medicare and public transport and education are simply not very wise. we have a large country and little to no public transport. we have structured our physical reality for an economy that does not now and will not exist. but no one wants to say it. the entire country is floating on de Nile.

Posted by: anon at October 21, 2005 9:48 AM

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