Two new studies from the United States Federal Reserve and academic economists have calculated that demographic changes can account for all of the reduction in economic growth experienced in recent decades in the United States. Although the economy has improved since the recession seven years ago, the gains have been modest compared to previous recoveries.
While leaders debate tax plans, infrastructure, GDP growth, public spending programs and regulatory reform, they are less important than demography. Distinguished Professor and Extension Economist at North Carolina State University, Dr. Mike Walden, gives some reasons why which will be already familiar to our regular readers:
1) AGE – Age determines how we spend, save and invest. It is also a significant factor behind the size and experience of the workforce. The large “baby boom” generation is rapidly aging and moving into retirement. In 1960 only 9 percent of the U.S. population was age 65 or over. In 2010 this proportion had risen to 13 percent, and in 2050 it will be 21 percent.
2) THE BIRTH RATE – The second big demographic trend is a declining birthrate. The United States’ birthrate is 50 percent lower than it was in 1960, and numerous countries around the world, such as Japan and Italy, currently have birthrates below the replacement rate of 2.1 children per women.
3) SAVING RATHER THAN SPENDING – Older people tend to shift their focus away from spending now to saving for the future. Fewer young people also means fewer people in the ‘high spending’ years of their life, meaning less demand for goods and services and lower inflation. This also means less borrowing, which uses older people’s saving and puts it back into the economy. Less borrowing means sustained lower interest rates.
4) FEWER YOUNG PEOPLE ENTERING THE WORKFORCE – A lower birthrate means fewer young people are entering the economy and a smaller talent pool for businesses to choose from, which could contribute to lower productivity. It may also mean experienced, highly productive workers are retiring.
Walden writes that “all this could change if workers begin retiring much later and families suddenly increase their number of children. While possible, both demographers and economists think such shifts are not likely.” Thus “relatively slow economic growth, low inflation and low interest rates may very well be the “new normal”. If so, then you decide if this is a “normal” we want.” It turns out valuing the family is both socially and economically beneficial.