in other markets in their area of expertise. thus, we have seen them expanding directly into overseas markets in transport, packaging, building supplies, shopping malls, property services, etc., mainly activities that cannot be serviced via exports, but require direct investment. i think this trend is to be applauded, and is a sign of the success of australian business rather than its inadequacy. although we are nowhere near as far down this path as, say, the netherlands or switzerland, their success shows that it is not only the major countries that can create viable international companies. so far, i have not mentioned the other catchphrase - the “ branch economy ” - the belief that the companies in the peripheral countries will be swallowed up by larger companies centred mainly in the united states ( and, to a lesser extent, europe ), leaving only branch operations behind. this is a more difficult concept to pin down, although i do not wish to dismiss it as a concern. there certainly are powerful forces towards centralisation that operate within economies, and between economies. these centripetal forces are primarily the result of improved technology, particularly in communications, media and transport. they are best analysed within the framework of “ winner - take - all markets ” rather than in the more conventional discussion on globalisation. if this is our concern, i. e. our best companies are falling into foreign hands, the thing we should mainly worry about would be a big rise in inward direct investment, but we have not seen this - we have seen r. h. frank and p. j. cook, “ the winner take - all society ”, the free press, n. y., 1995. a reasonably steady trend over recent years. again, if this is our concern, we should applaud the success of australian companies operating abroad, as shown by the recent strength of outward direct investment - although there will inevitably be tensions about where these companies will be listed and headquartered. it will take a long time before we can put these issues into perspective. we are still too heavily influenced by the events of recent years whereby everyone seemed to be comparing themselves unfavourably against the us economy, and finding that they were losing out in the investment community ’ s esteem. that situation is changing and, when the dust settles, i suppose some of the more extreme views about the magnetic pull of investment to the united states will recede. as explained, we have already seen this happening

to get a sense of the magnitudes involved, suppose that we tried to finance projected entitlement spending entirely by revenue increases. in that case, the taxes collected by the federal government would have to rise from about 18 percent of gdp today to about 24 percent of gdp in 2030, an increase of one - third in the tax burden over the next twenty - five years, with more increases to follow. ( this calculation ignores the possible effects of higher tax rates on economic activity, an issue to which i will return later. ) alternatively, financing the projected increase in entitlement spending entirely by reducing outlays in other areas would require that spending for programs other than medicare and social security be cut by about half, relative to gdp, from its current value of 12 percent of gdp today to about 6 percent of gdp by 2030. in today ’ s terms, this action would be equivalent to a budget cut of approximately $ 700 billion in non - entitlement spending. besides tax increases, spending cuts, or reform of the major entitlement programs, the fourth possible fiscal response to population aging is to accommodate a portion of rising entitlement obligations through increases in the federal budget deficit. the economic costs and risks posed by large deficits have been frequently discussed and i will not repeat those points today. instead, i will only observe that, among the possible effects, increases in the deficit ( and, as a result, in the national debt ) would shift the burden of paying for government spending from the present to the future. consequently, the choices that fiscal policy makers make with respect to these programs will be a crucial determinant of the way the economic burden of an aging population is distributed between the current generation and the generations that will follow. a broader economic and generational perspective indeed, framing the issue in generational terms highlights the fact that the economic implications of the coming demographic transition go well beyond standard considerations of fiscal policy and government finance, important as those are. for reasons that i will explain in a moment, the aging of the population is likely to lead to lower average living standards than those that would have been experienced without this demographic change. how that burden of lower living standards is divided between the present and the future has important implications for both intergenerational fairness and economic efficiency. why will the coming demographic transition carry a cost in terms of long - run living standards? assuming it unfolds as expected, the projected aging of the population implies a decline over time