THE GENIUS OF GENERAL MARSHALL:

Maybe the war to end all wars -- at least in Europe -- has already been fought: a review of WHERE HAVE ALL THE SOLDIERS GONE?: The Transformation of Modern Europe By James J. Sheehan (Jonathan Yardley, January 13, 2008, Washington Post)

A strong case can be made that the salient fact about Western Europe today is not that it has overcome centuries of bitter animosity to reach near-unification or that it is moving steadily toward bringing Eastern Europe into its embrace, but that for more than six decades it has been at peace. In the first half of the 20th century it was torn nearly to extinction by the two most calamitous wars the world has known; in the second half of that century, and seven years into this one, it has known no major wars at all. Even Eastern Europe, where uprisings in client states were brutally suppressed by the Soviet Union and where the Balkans remain a source of tension and violence, is in a state of tranquility that seems likely to be extended as the legacy of Soviet rule gradually fades away and as ethnic rivalries are brought under control.

This is nothing less than extraordinary. The whole history of Europe up to 1945 is one of perennial warfare interrupted sporadically by periods of uneasy peace. Between 1914 and 1918, Europe fought what millions of people devoutly prayed would be the war to end all wars, yet the peace settlement was so badly bungled that two decades later Europe was at it again, in a second world conflict that far surpassed the horrors of the first. When one considers the condition of Europe in 1945 -- much of the continent reduced to rubble, Germany despised, distrusted and divided, tensions in the Cold War inexorably rising -- the one safe prediction at the time would seem to have been that more wars lay on the horizon.

Not merely did no new wars take place, but in the view of James J. Sheehan none is likely to take place in the future.

The Population Implosion: How will global aging change our future? (Phillip Longman, 2/01/04, New America Foundation)

[P]opulation growth is a major source of economic growth. More people create more demand for the products capitalists sell, and more supply of the labor capitalists buy. Economists may be able to construct models of how economies could grow amidst a shrinking population, but in the real world it has never happened.

New businesses flock to areas where the population is increasing, such as the Sun Belt, and avoid or leave areas where population is falling. Across the Great Plains of the United States, for example, where fewer people now live than in the 1920s, thousands of small towns are caught in a vicious cycle of depopulation, as younger workers and local business flee in search of economic opportunity, leaving behind shuttered storefronts, empty schools, and understaffed nursing homes. Drought and falling commodity prices may in this instance have set the cycle in motion, but once depopulation begins, new investment soon vanishes. Indeed, capitalism has never flourished except when accompanied by population growth, and is now languishing in those parts of the world (Japan, Europe, the Great Plains of the United States), where population has become stagnant.

A nation's gross domestic product (GDP) is literally the sum of its labor force times average output per worker. Thus, a decline in the number of workers implies a decline in an economy's growth potential. When the size of the workforce is falling, economic growth occurs, if at all, only through compensating increases in productivity. The European Commission, for example, projects that Europe's potential economic growth rate over the next 50 years will fall by 40 percent due to the shrinking size of the European work force. Italy expects its working-age populations to plunge by 41 percent by 2050, meaning that output per worker will have to increase by at least that amount just to keep Italy's rate of economic growth from falling below zero. With a shrinking labor supply, Europe's future economic growth will depend entirely on getting more out of each remaining worker (many of them unskilled, recently arrived immigrants) even as it has to tax workers at higher and higher rates to pay for old age pensions and health care.

Meanwhile, abundant evidence also suggests that these very population trends work to depress the rate of technological and organizational innovation. Cross-country comparisons imply, for example, that after the proportion of elders increases in a society beyond a certain point, the level of entrepreneurship and inventiveness decreases. In 2002, Babson College and the London School of Business released their latest index of entrepreneurial activity by country. It shows that there is a distinct correlation between countries with a high ratio of workers-to-retirees and countries with a high degree of entrepreneurship, and that conversely, in countries in which a large share of the population is retired, the amount of new business formation is low. So, for example, among the most entrepreneurial countries on earth are India and China, where (at least for now) there are roughly five people of working age for every person of retirement age. Meanwhile, Japan and France are among the least entrepreneurial countries on earth and have among the lowest ratio of workers-to-retirees.

There are many possible reasons for this correlation. One, of course, may be that aging workers and investors tend to be less flexible and more risk averse. Both common sense and a vast literature in finance and psychology support the claim that as we approach retirement age, we become more reluctant to take risks with our careers and nest eggs. It is not surprising, therefore, that aging countries such as Japan, Italy, and France are marked by exceptionally low rates of job turnover, and by exceptionally conservative use of capital.

Because prudence required that older investors take less risks with their investments, we can also expect that as populations age, investor preference will shift toward safe bonds and bank deposits and away from speculative stocks and venture funds. As populations age further, we can expect an ever-higher share of citizens to be cashing out their investments and spending down their savings. Neither of these trends is consistent with a future marked by high levels of high-risk investment in new technology. Instead, many observers believe that population aging will eventually cause steep and destabilizing drops in stock and real estate prices.

Also to be considered are the huge public deficits projected to be run by major industrialized countries over the next several decades. Because of the mounting costs of pensions and health care, government-financed research and development expenditures as well as educational spending will likely be under increasing budgetary pressure. Moreover, massive government borrowing could easily crowd out financial capital that would otherwise be available to the private sector for investment in new technology. Even after assuming a rebound in fertility rate levels, a massive increase in the percentage of women in the labor force, and large cuts in future pension benefits, the European Commission recently calculated that population aging in Europe will lead to an increase in public spending of between 3 and 7 percentage points of GDP in most member states by 2050. To finance the cost of aging, Germany would have to increase its public indebtedness by as much as 384 percent while the French national debt would rise to more than three times the country's entire annual economic output. Population aging gives Japan an even gloomier long-term financial outlook.

From an objective viewpoint, it is apparent that American post-War policy was premised on getting the Europeans to commit suicide rather than murder each other and force us to intervene periodically.

Posted by Orrin Judd at January 14, 2008 12:00 AM