In this week’s New Yorker, Malcolm Gladwell offers an interesting, if perhaps not entirely scientific, analysis of the pension mess in which many big American corporations currently find themselves.
The “conversation,” as media critic Jeff Jarvis might say, continues on Gladwell’s personal blog, where he summarizes his piece as “an argument against the peculiarly American notion of tying retiree benefits to individual companies, which, as the current plight of General Motors shows us, is a recipe for disaster.”
Gladwell notes in his story that General Motors currently finds itself between “forty and fifty billion dollars behind in the money it needs to fulfill its health-care and pension promises,” because the company has so many retired workers collecting pensions, and a reduced workforce that pays into the system. He introduces the concept of the “dependency ratio,” which is the number of working people in a company or nation, compared to the number of retired or unemployed people requiring health care and pensions.
To illustrate the importance of the ratio, he points to the remarkable success of Ireland, which over the past two decades has posted economic growth double that of Europe as a whole. The reason? Gladwell writes that “Last year, Ireland’s dependency ratio hit an all-time low: for every ten dependents, it had twenty-two people of working age. That change coincides precisely with the country’s extraordinary economic surge.”
Not everybody agrees with Gladwell’s reasoning. Blogger Jane Galt entered the fray yesterday, arguing that Gladwell “utterly ignores a more parsimonious explanation, which is that Ireland slashed its marginal tax rates in 1987, including a cut in the corporate income tax to 10%, which turned it into Europe’s first outsourcing destination.”
More to the point, Gladwell makes a mistake that is all too common in the world of journalism: he gloms on to one economic indicator without reference to the many other factors that affect growth. The dependency ratio is no doubt important — so much so, that it is a bit of a shock that it is rarely mentioned in the media — but economies are complex creatures and should be treated as such.
Galt is certainly right that Ireland’s success is tied in part to its lower marginal and corporate tax rates, though liberals and conservatives may debate whether this has entailed unacceptable cuts in social welfare programs. By the same token, only partisan grandstanders think tax cuts are economic cure-alls, or even essential to strong growth.
While Gladwell deserves thanks for entering dependency ratios into the business media’s rather limited lexicon, the dangers of his narrow focus become all too apparent when he writes that “People have talked endlessly of Africa’s political and social and economic shortcomings and simultaneously of some magical cultural ingredient possessed by South Korea and Japan and Taiwan that has brought them success. But the truth is that sub-Saharan Africa has been mired in a debilitating 1-to-1 ratio for decades, and that proportion of dependency would frustrate and complicate economic development anywhere. Asia, meanwhile, has seen its demographic load lighten overwhelmingly in the past thirty years. 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.”
That might be true, but has Gladwell actually considered this in light of all the other possible explanations? Africa is a continent that doesn’t expend large sums on any sort of pensions or health care, so it is hard to imagine dependency ratios as the primary agent of African malaise. In other words, the “functional economic and political infrastructure” to which Gladwell refers is by no means “given” in many African countries, and there are many non-demographic reasons why this is so.