One of the big issues heard in this election year was slow economic growth. Although the economy has improved since the depths of the recession seven years ago, the gains have been modest compared to previous recoveries. For example, growth in the nation’s aggregate production of goods and services, termed “gross domestic product, or GDP, has been the weakest among all post-World War II economic recoveries.
The presidential candidates announced plans for spurring economic growth. But some researchers say the answer to slow economic growth may not be in government programs and plans. Indeed, some researchers say there is no answer, because the reason for slow economic growth is not in economics but in demographics.
Demographics is the field studying characteristics and trends in the population. Demographics is extremely important for the economy. Age is a big determinant of the amount and kinds of spending we do as well as how we save and invest. Age is also a significant factor behind the size and experience of the workforce.
Two distinct demographic trends have been occurring in the nation and much of the world. The first is aging. The large “baby boom” generation, which has dominated our country for the last six decades, is rapidly aging and moving into retirement. In 1960, only 9 percent of the population was age 65 or over. In 2010, this proportion had risen to 13 percent, and in 2050, it will be 21 percent.
The second big demographic trend has been a declining birthrate. Today’s birthrate is 50 percent lower than it was in 1960 and is close to the rate needed simply to replace deaths. Already, several countries – Japan and Italy are two – currently have birthrates below replacement levels, and there are forecasts that many others – China is one – are headed in that direction.
So our country’s demographic profile is expanding at older ages and contracting at younger ages, and economists say this may be the biggest reason why economic growth has slowed. Here’s why: Older people tend to shift their focus away from spending now and to preservation of their resources for the future. A major concern of folks 65 and over is running out of money over their lifetime. So downsizing lifestyles, avoiding debt and being cautious with spending are paths followed by those – like me – with lots of gray hair.
Retirement from working also increases with aging. This means experienced workers who know the ins and outs of their occupations are being replaced by new young hires lacking the background and knowledge base of those they have replaced. The result: Productivity in the workplace suffers, and economic growth sputters.
A lower birthrate means fewer young people are entering the economy, and this also has implications for spending and working. Once they finish school and enter the workforce, young people generate an enormous amount of spending – on places to live, furniture and appliances to use, vehicles to buy or lease and all the other products and services that go with setting up a new household. Much of this spending is fueled from borrowing, which has the effect of deploying the savings of older households back into the economy. So if fewer young people are entering the economy, spending that generates jobs and economic expansion takes a hit.
Fewer young workers also mean a smaller talent base available to businesses, which can impede business plans for expansion and growth.
Two new studies from the Federal Reserve and academic economists have calculated that these demographic changes can account for all the reduction in economic growth experienced in recent decades. The studies also see slower economic growth in the future as the demographic trends continue.
There are some other byproducts of these demographic shifts. One is for price inflation. With a larger older population controlling their spending and a smaller younger population not driving an expansion of spending, purchasing of products and services is weaker. Weaker sales of products and services results in more-modest price increases.
There is a similar impact on interest rates. With businesses facing subdued buying and relatively fewer young households purchasing big-ticket items, businesses aren’t borrowing as much to build factories and install equipment, and households aren’t borrowing as much to equip and furnish their homes. Less borrowing translates into lower interest rates.
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 unlikely.
If the demographic explanation of slow economic growth is accurate, then the debates about tax plans, public-spending programs and regulatory reform – while interesting and important – are sideshows to the real forces setting the pace of economic growth. Relatively slow economic growth, low inflation and low interest rates might very well be the “new normal.” If so, then you decide if this is a “normal” we want.
Walden is a professor and Extension economist in the Department of Agricultural and Resource Economics at N.C. University. He teaches and writes on personal finance, economic outlook and public policy.