Mar 18

McGraw Hill Financial | The age composition of the U.S. population may curb its growth. But by how much?


The recent report by Standard & Poor’s Ratings’ U.S. economists Beth Ann Bovino and Satyam Panday could be read with some degree of pessimism. It’s right in the title: “U.S. Demographic Shifts Will Curb Economic Growth—At Least Until Millennials Get Up to Speed.”

“The share of the population past prime income age is growing as baby boomers age, and the next large pool–the Millennial generation (born largely between 1980 and 2000)–is still beginning careers,” the report states in its Overivew. “The population’s changing age composition could hurt economic growth in the longer run.”

But Panday’s outlook is more optimistic than that title and summary statement might suggest. We spoke with him about the report.

Overall, did you finish this report with an optimistic or pessimistic view for the U.S. economy?

I didn’t say this in the paper, but maybe just the optimist in me talking, it doesn’t take any great stretch of imagination to see that the trend of falling wages may be about to go into reverse. And with it, the trend of rising inequality and lower productivity may be about to go into reverse by the end of this decade and perhaps ramp up as the millennials mature in their careers. That said, the pessimist in me tempers this proposition. There is uncertainty created by the global factor. That’s because size of the “global” labor force also matters, thanks to relative ease of outsourcing/offshoring.

That said, we finish the paper on a cautious note. We are optimistic about the delayed contribution by Millennials adding to growth moving forward, but also temper the overall growth effects because of the aging trend in place today. Yes, growth could very well pick up, but do not look for—or promise, if you’re a politician–growth rates that we had back in 1994-2004 period when it more than 3.6%.

The problems that could occur from the trends are slow to develop yet have a big impact. Is the general population aware that these shifting demographics contain the seeds of impacting financial growth?

The changes in the age structure of the population occur so slowly that the general population does not consider their impact in a direct sense—be it on the market, the economy or the society at large. It is generally considered a long-run phenomenon, and as Keynes said: In the long run we are all dead.

When we compare the US situation to the other advanced economies, the U.S. has seen higher net flows of immigrants of all kinds, and the expectation is for these flows to continue. Working age population should still grow 10% by 2050 and this may be masking the fact that, still, we face a situation in which a decreasing share of producers by age has to support increasing share of consumers, both 65-plus and under 19.

One could even argue that the worsening income inequality, slow growth in wages, falling equilibrium interest rate are rooted in world-wide demography. These issues have been on the forefront of political, social, academic conversations for a while now. The burden from these are being felt one way or the other already.

Is immigration the only way the U.S. can stay ahead of some of the negative impacts of changing demographics? Or are there other keys to success?

Immigration helps.  But ultimately, it’s about productivity. Older workers tend to see their productivity decline, so a shrinking portion of the working age population in the prime of their working years—20’s, 30’s—can be a drag on the economy. Folks working for a few more years past the conventional retirement age (as we know it) helps to secure their channel of demand in the future. But above all, productivity is going to be key. At the end of the day, the drag from demographic dynamics has to be more than offset by productivity increases in order to see the relatively high growth rates of previous expansions. Today’s investment in capital drives tomorrow’s productivity, so it is preferable that today’s savings are employed towards productive investment, rather than merely rent seeking.

Japan, the poster case for a country that has faced enormous demographic headwinds for some time now, has been able to fend off demographic headwinds with productivity growth. Japan has seen a stronger growth per working age population–a measure that takes into account the effect of aging on economic performance–than the U.S. due to higher productivity growth. Cumulative per working age capita GDP growth in the period 2000-13 exceeded 20% in Japan, compared with roughly 11% in the US. That difference doesn’t change even when the impacts of the financial crisis is excluded. And Japan is supposed to be the sick economy? Not so in terms of rise in standard of living for the population.

The mix of declining participation of baby boomers in the work force, replaced by a Millennials generation that is much smaller in size than the baby boomers, seems to augur well for the bargaining power of workers.

At least in theory, the fall in the share of working-age populations should help driving up wage growth, largely because the market response to labor scarcity will be to compensate workers better and invest in capital to make them more productive. In the long run, it is the growth in “real” wages (wages adjusted for inflation) that matter, and productivity growth is what drives that. And productivity is where the great uncertainty lies in terms of GDP growth projections.

A simple quantification of the reduced contribution of demographics to overall growth will be much needed in capturing the broader aspects and impact of the ebb and flow in the youth bulge. This sort of low 2-ish growth pace that we project needs to be incorporated in the longer-term cost/benefit analysis, revenue flows calculations by the government at either federal, state or local levels, businesses, and financial market participants. And also in the political debates, where we have seen the rhetoric taking the GDP growth promises to as high as above 5%. That is why the demographic decomposition of GDP growth using a modified version of growth accounting is so powerful. To be sure, these numbers should be digested only with the uncertainties that come with it, especially in terms of productivity growth, global pressures, and short term demand cyclicality. A projection, after all, is just that.

Source: McGraw Hill Financial | The age composition of the U.S. population may curb its growth. But by how much?

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