Monday, September 04, 2006

Another tipping point?

In a recent New Yorker article entitled The Risk Pool, Malcolm Gladwell, the author of the Tipping Point, discusses one indicator of the health of a company's or country's pension system--the dependency ratio, the ratio of pensioners to workers. In short, he tries to argue that the as dependency ratios increase, companies and countries are more likely to fail. For examples, he points to the economic success of Ireland in the 1980s and 1990s. Once Ireland made contraception legal, the dependency ratio started falling and it's economic success started increasing. Similarly, G.M.'s dependency ratio is at an all time high of 3.2 to 1 while the company is in dire straits. He uses this as an explanation for why universal health care and pensions are the only way to go. Though this provides interesting food for thought (and there are certainly some merits to this argument), I found Gladwell's logic incomplete and hard to follow. For example, he argues that pensions require a company to worry about it's nonworker-to-worker ratio creating a perverse incentive for companies to hire more people when they should be downsizing to account for productivity increases. Is this really the case? It seems to me that they should be worried about their gross profits, not employment levels and that the problem stems from overly optimistic growth forecasts in an uncertain economic environments. Despite the flawed logic, the article is thought provoking and worth a read.


At 10:02 AM, Blogger Andrew said...

I thought it was great as well, though I agree (in general) when Gladwell takes his little theories from descriptive to proscriptive (or predictive) it's usually a bridge too far.


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