Tom Saler: Sluggish growth the new normal.
Aging population having an effect
So you really want to make America great again? Three ways you might do that, according to findings implicit in a new working paper from researchers at the Federal Reserve Board, are to work longer, check out sooner and have more kids while you’re still around.
That’s probably not what you wanted to hear, which might explain why you haven’t heard it. What policy-makers realistically are capable of doing to directly confront the ripple effects from demographic change was hardly mentioned in the recent political campaign.
Demographics may not be destiny, but the harsh reality of aging populations and declining support ratios eventually will have to be addressed if the decadeslong trend of ever-slowing global economic growth is to be reversed.
The fiscal stimulus package from the incoming Trump administration could boost economic growth over the near term, with some potentially toxic side effects. The pro-growth agenda being contemplated already has pushed up mortgage rates, adding to the cost of floating- and new fixed-rate loans.
Some downside is to be expected. There are no problem-free solutions within reach. The low-hanging fruit has been picked.
But the palliative effects of more government spending are likely to be no match over the long haul for the unrelenting headwinds of demographic change.
Eventually, growth and incomes will get a boost from the 21st-century version of the Next Big Thing — whatever that turns out to be — but until that day arrives, the macroeconomic impact of an aging world suggests a long, tough slog ahead.
Reduced demand
Debate over why the U.S. economy has been stuck in low gear has focused on cyclical factors like paying down debt and enduring ones like an aging population.
The latter diagnosis, dubbed the “New Normal” by the economist Mohamed El-Erian and “secular stagnation” by former Treasury Secretary Lawrence Summers, describes a persistent economic environment of sluggish growth, subdued inflation and low real interest rates. Summers based part of his dour outlook on the existence of a global savings glut tied to demographic composition that reduces consumer demand for goods and services and creates a disincentive for businesses to add productive capacity.
Though business investment has climbed to 12.8% of gross domestic product from 11% in 2009, it remains well below cyclical peaks reached in 1981, 1999 and 2007. Many businesses instead have used their excess cash to buy back shares, a type of financial engineering that supports current stock prices at the likely cost of future growth.
It should be noted that the secular stagnation hypothesis is not universally embraced. By a nearly 4-to-1 margin, economists polled by Foreign Affairs magazine disagreed with the premise that developed nations are necessarily condemned to a prolonged period of slow growth.
The new Fed working paper, however, supports the gloomier long-term view, even to the point of appropriating El-Erian’s “new normal” tagline.
According to the researchers, “observed and projected changes in U.S. population growth, family composition, life expectancy and labor market activity” account for virtually all of the 1.25 percentage-point decline in annual inflationadjusted economic growth since 1980. The paper asserted that “the transition to the new normal has been especially rapid over the past decade or so because of demographic factors most directly associated with the post-war baby boom … and the passing effects of the information technology boom on productivity growth.”
It is easy to follow how this all played out.
People save more when they’re employed, which accounts for the glut of savings that piled up during the 78 million-member baby boom generation’s working years. Importantly, boomers also produced fewer offspring than did earlier generations, contributing to the troublesome drop in the size of the current workforce.
“In the case of real GDP,” the paper concluded, “the sharp drop in fertility rates in the 1960s and 1970s, which ultimately led to a slowing in the growth rate of the labor supply, is the predominant contributor to the decline since 1980.”
You might take some comfort in the fact that it isn’t necessary to actually die sooner to restore the nation’s economic luster. You just have to think you’ll die sooner so that you’ll spend what you’ve saved faster.
Hope that helps.