A Benign Conundrum
When I returned from my stint in Gulag Toronto, the assignment I was given in 1990 as punishment for presiding over a commodities merchant banking unit (I had been specifically asked to keep charge of it as I tried to wrestle the burgeoning global derivatives business to the mat during its adolescence) when it took a large loss on a supposedly secured cotton merchant loan. It turned out that the bonded warehouse was in cahoots with the cotton merchant and there was no cotton in the warehouse like there was supposed to be. Bummer. Many people would have been sacrificially fired for the problem, but I was asked to stay and take a significant demotion as a somewhat symbolic move to show people that even senior people suffer for mistakes, even mistakes that just happen on their watch. I don’t know why I stayed, but I did, and my two years of exile in Toronto (as CEO of our bank in Canada) were not so horrible as it turned out. When I was asked to go back to New York, someone described it as a “Good Bolshevik” move where they dusted off my old uniform and gave me a ticket back to Moscow from Siberia. They even put my picture back on the wall, as they say, because they were “proud” that I had taken my punishment without complaint and had rehabilitated myself in their eyes. I am not exaggerating the Kabuki of all of this, they actually gave me my choice of four different jobs upon my return, so there was an unusual amount of feel-good attached to the return of the native son. You have to capitalism.
The job I chose was running the Retirement Services Department, which was a large operating division of the bank with 4,000 employees and hundred of billions of dollars of assets under administration. We were, at the time, the largest Defined Contribution (401-k) administrator and one of the three largest Defined Benefit Pension Plan administrators in the country, which meant, in the world. The Retirement business really intrigued me for many reasons. At the heart of all finance is the power of compounding and as any student of finance knows, nothing matters more in compounding than the passage of time. The time value of money is literally what its all about. There is also no timeframe longer in mankind than the retirement timeframe. That always fascinated me by itself, but then you layer on the law of large numbers and demographics and you have the makings of a mighty powerful combination of factors that lend great impact to the topic of retirement.
In 2007 when I started teaching at Cornell business school, my head was already well into the whole pension and retirement arena. Pension finance is very different from normal finance and it is really a sub-specialty. Cornell had a gap in that place, so I decided to teach a pension course. I got so smitten by the overwhelming demographic trends in pension finance, that eventually, in 2013, I wrote a book titled Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap. It was well-received and sold well at the time because it quite clearly explained in understandable terms what is a very complex and arcane set of statistics that are barreling down on humankind in a way that the gloomiest of futurists call a recipe for “Game Over” economic thinking. The book has been cited somewhat in other academic work and, most importantly, no one else seems ready to attack the demographic problem it presents in a more current or better approach. In other words, what was true ten years ago is still more or less true today and we still have a big problem looming.
An interesting factoid about the book is that besides English, it was only translated into one other language, and that was Mandarin Chinese. It seemed that there was a fairly big call for the book in China for an interesting reason. The famous One-Child Policy did such an effective job of curtailing Chinese population growth that it created an unintended problem for the country that its economists were suddenly waking up to. You see, without population growth, as any economist worth his or her salt will tell you, you cannot have meaningful economic growth. For a country drunk on 9%+ annual growth, that was a serious wake-up call. In fact, the warning shot was not at all wrong. GDP growth in China has, in the past decade, fallen from 9% to a modest 3.2%, pretty much on a par with what we and the rest of the developed Western World enjoy. To say that China is suffering growing pains would be an understatement. The country is absolutely the growth phenomenon of the past seventy years. However much the United States has prospered and grown in the past 70 years, China has grown by 7X that amount (it is almost too big of a difference to meaningfully compare it). In that same time population in China has grown by 2.6X versus the U.S. where it has grown by 2.2X. China now has over 1.4 billion souls, more than four times what we have here in the U.S. This year, China, which has now abandoned the One-Child Policy has a birth rate of 1.7 births per woman versus the U.S. (with its declining fertility rate) of 1.64 births per woman.
I think we all understand that since the days of Richard Nixon’s visit to Beijing in 1972, China has been chasing the American Dream (or whatever name you want to call it) harder than any other country on earth…perhaps harder than Americans themselves have chased that dream. The basic tenets of capitalism in this era have been a combination of globalization and free markets and China has eagerly embraced both. What comes with capitalism in our minds as Americans is democracy, but there is a raging debate in the arena of political economics as to whether these two constructs are co-dependent. The history of the past thirty years favors the notion that capitalism can exist under any political rubric, often giving China, Russia and Turkey as prime examples of capitalism that thrives under authoritarianism. The common warning is that capitalism under authoritarian rule is a rather direct and fast path to extreme corruption, which leads to God knows what thereafter.
We now have a fascinating conundrum that has developed. What has been iron-fisted rule in China for decades has suddenly shown its first meaningful cracks. From the days of Tiananmen Square over thirty years ago when 50 days of youthful protest ended in several thousand student deaths and one famous picture of a lone student (a.k.a. Tank Man) standing up against the might of a Chinese tank column, the Chinese have cowered in the face of the Chinese Communist Party might. But that seems to have suddenly come to an end. The protests all across China, spurred on by the COVID lockdowns and led once again by the youth, have taken hold. These are not anti-COVID protests alone. The cries extend against Premier Xi, against the entire Communist Party and against authoritarian rule. Strangely enough, prompted by a desire for the economic freedom of capitalism, the cry sounds like a familiar cry for an American brand of democracy. The cry was literally, “Give me liberty or give me death!”
Beijing insists that the common good is best served by a lockdown that saves old, infirmed and unvaccinated. The protestors insist that the common good is better served by life, liberty and the pursuit of happiness as they choose to define it. Therein lies the conundrum. In an 8 billion person world or a 1.4 billion person country, the choices are never easy. Benign dictatorship is still dictatorship. And benign is in the eye of the man or woman in the arena, as Teddy Roosevelt might say.