Organisation of households: Aging, secular stagnation and population policies

Organisation of households: Aging, secular stagnation and population policies

Phuah Eng Chye (31 March 2018)

The hypothesis that changes in household structures increase labour market frictions[1] and weaken household and business formation[2] is consistent with secular stagnation theories on how aging dampens consumption, employment, productivity and production and exerts long-term downward pressure on economic growth and interest rates.

The secular stagnation theory was initially popularised by Alvin Hansen in his 1938 address on “economic progress and declining population growth”, where he argued declining population growth and the absence of new industries caused a deficiency in investment and would result in stagnation.[3] But his theory was overshadowed by the post-World War economic boom on the back of a recovery in US fertility rates and new inventions.

In 2013, Lawrence H. Summers revived this theory with his new secular stagnation hypothesis to explain the dismal pace of economic recovery. His hypothesis focused on the combination of economic events creating a situation whereby “no attainable interest rate will permit the balancing of saving and investment at full employment”. He has defended his hypothesis, pointing to persistent anaemic economic growth and low and negative interest rates despite aggressive monetary stimulus and rising government debt-to-GDP ratios as evidence of its validity.

The relationship between demographics and secular stagnation is important because most of the world’s economies are aging. The effects from changing demographic trends are structural and their influence will be persistent and likely to grow over time. However, it is difficult to isolate the effects of aging from the counteractive effects of fiscal and monetary stimulus. Empirical studies on the relationship between aging and economic growth have offered differing conclusions.

John G. Fernald suggests “because of the aging (and retirements) of baby boomers, employment will rise more slowly than population…This wedge implies that GDP per capita will rise more slowly than GDP per worker, or GDP per hour.” Etienne Gagnon, Benjamin K. Johannsen and David Lopez-Salido estimate “changes in U.S. population, family composition, life expectancy, and labor market activity…accounts for a 1¼–percentage-point decline in both real GDP growth and the equilibrium real interest rate…Our results further suggest that real GDP growth and real interest rates will remain low in coming decades, consistent with the U.S. economy having reached a new normal…of low growth and low interest rates.”

Similarly, Callum Jones found “between 1990 and 2015, changes in the composition of the workforce caused by the aging of the population explain a decline of around 2 percentage points in the labor force participation rate, with a further decline of 4 percentage points expected by 2035.” He estimated “demographic changes alone can explain about 4 percentage points of the 12% gap in log output per capita in 2015, relative to its long-run linear trend. Furthermore, demographic changes are responsible for about a 1 percentage point decline in real interest rates and about a 2 percentage point decline in the nominal interest rate between 1990 and 2015. Demographic trends, therefore, reproduce well the long-run trends observed in the US economy.”

In contrast, Daron Acemoglu and Pascual Restrepo found “no negative relationship between population aging and slower growth of GDP per capita.” “If anything, countries experiencing more rapid aging have grown more in recent decades…when capital is sufficiently abundant, a shortage of younger and middle-aged workers can trigger so much more adoption of new automation technologies that the negative effects of labour scarcity could be completely neutralized or even reversed.”

Supporting this, Peter St. Onge argues “falling population on a country level is certainly no catastrophe and, indeed, may be positive.” He points out a declining population means the “same resources divided by fewer people” and while there are “fewer working-adults to pay out pensions, but it also means even fewer kids. Who are very expensive…the lower number of children means worker burdens actually decline.” Hence, “rising health expectancy implies there will actually be fewer dependents in 2100 Germany, while economic growth implies German workers will be 4 times richer, just on growth alone. The demographic burden plunges by 80% or more.”

These inconsistent findings underline the challenge of achieving policy coherence in an aging economy. Another example of inconsistency is that an aging economy suffers from excess savings[4] but yet there are policy recommendations to increase savings to ensure individuals have adequate replacement income for their old age rather than to consider measures to reduce the savings overhang.

Social challenges may be even more daunting. Diversity and the shrinking size of families undermines the traditional role of the family unit at the centre of social order. The effectiveness of the family unit as a protective buffer against employment uncertainty and health risks diminishes. But instead of adding pressure on governments to expand welfare support, the loss of social cohesion and rising polarisation leads to fiscal conservatism and economic insularity.

Carlo A. Favero and Vincenzo Galasso assessed the relationship between age structure and long-term growth and the impact of age structure on reforms in the labour and product market. They found an aging population was associated with “a lower reform effort” and “middle aged and elderly individuals have a more negative view of reforms, competitiveness and globalization than young…the implementation of product and labour market reforms will not be facilitated.”

Similarly, Neil Howe and Richard Jackson suggest older societies are inclined to “lock in current public spending commitments at the expense of new priorities and shun decisive confrontations in favour of ad hoc settlements…the rapid growth in ethnic and religious minority populations, due to ongoing immigration and higher-than-average minority fertility, could strain civic cohesion and foster a new diaspora politics.”

They note “with the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anti-competitive changes in the economy. We may see growing cartel behaviour to protect market share and more restrictive rules on hiring and firing to protect jobs. We may also see increasing pressure on governments to block foreign competition.” In addition, as governments reach the “limits of fiscal and economic affordability…Faced with the choice between economically ruinous tax hikes and politically impossible benefit cuts, many governments will choose a third option: cannibalizing other spending on everything from education and the environment to foreign assistance and national defence.”

One interesting question is whether population policies should be used to mitigate the effects of demographic aging. In this context, it is interesting to note the ambivalence on population policies with 37 per cent of countries having policies to lower the rate of population growth whereas 20 per cent had policies to raise it in 2013.[5]

Generally, there is in-built abhorrence against contraction as our mindset has been conditioned to favour expansion and growth. Hence, countries experiencing aging such as Japan are criticised for their reluctance in opening up their homogeneous society and embracing the benefits of large-scale immigration and diversity.

Recent events suggest another twist to this debate. There is now a populist backlash against pro-immigration countries due to its perceived threats on job and income opportunities, on security, on cultural and religious harmony and on social cohesion. The backlash is prompting a rethink on whether large-scale immigration is the right policy for economies with shrinking domestic populations.

Perhaps large-scale immigration is appropriate under certain circumstances and at certain times. Small-population countries/cities such as Singapore and Dubai have leveraged on large-scale immigration to blossom as international financial centres. They have the advantage of being able to offer low-tax and competitive policies because the local population is small. The high proportion of immigrants to locals means that even a low tax rate can raise fiscal revenue (from expatriates and immigrants) that exceed local needs. It should be noted these countries do not offer welfare. This argument can also be extended to cosmopolitan cities that are international financial centres to some extent. But the same logic can’t be applied to large-population economies; where tax cuts will reduce fiscal revenues while a rise in the low-income immigration population would increase welfare payments.

Large-scale immigration can also play a role in assisting industrialisation by expanding the scale of the labour force and consumer market as it did decades ago in some now advanced economies. Large-scale immigration has also been used by some emerging economies to keep their manufacturing labour costs competitive to overcome the constraint from domestic labour supply shortages. By doing so, these emerging economies defer hollowing out and the transition from manufacturing to services.

But when economies have large populations and have hollowed out their manufacturing sector, different types of policies may be required. Though the economy is aging, there is already a critical mass in population. In this regard, immigrants will likely congregate in the cities. Their additional numbers will worsen the pressure on traffic congestion, accommodation and infrastructure. The Productivity Commission (PC) of Australia[6] noted “mass immigration-fueled population growth is straining Australia’s infrastructure, but the cost of expanding infrastructure has become prohibitive due to diseconomies of scale, such as land buybacks and tunnelling.”

At some point, the costs of supporting large immigrant families will overwhelm benefits. An increase in the inflow of immigrants and foreign house buyers into crowded cities will increase the displacement of local residents. Local residents will be pressured to re-locate by rising costs and deteriorating living conditions. The population patterns of crowding and housing unaffordability on one side and rural depopulation on the other, coupled with worsening inequalities and polarisation, will increase the flashpoints for societal tensions.

Demographic aging is usually cited as one of the main causes of secular stagnation. But it tends to be conveniently bypassed as it offers no convenient “fix-it” remedies. Therefore, the policy discussion shifts to the use of fiscal or monetary policy tools to counter the effects of stagnation. But can secular stagnation caused by aging be “fixed” by stimulus.

Maybe, secular stagnation reflects that expansionary policies are incompatible with the transition to an information society. In the context of population, large-scale immigration policies have serious side effects in an information society. Immigrants tend to belong to large families and come from more physical, low-information environments. An information society is simply a less physical economy that does not need an expanding population (or expanding output either). Hence, immigrants can have the effect of perpetuating low-income and low-information jobs, deferring the introduction of automation to replace their work and increase the pressure on infrastructure and welfare costs.

Aging and secular stagnation may be symptoms of the transition to an information society. It is important to diagnose this correctly because the misapplication of policies, such as aggressive and sustained monetary and fiscal stimulus, could result in the misallocation of resources in fighting the wrong battles and do more long-term harm than good. We need a new policy paradigm to free us from the circular logic of population-output-consumption growth and that is suited to an economy with shrinking domestic populations.


Callum Jones (March 2018) “Aging, secular stagnation and the business cycle”. IMF Working Paper. file:///C:/Users/user/Downloads/wp1867.pdf

Carlo A. Favero, Vincenzo Galasso (October 2015) “Demographics and the secular stagnation hypothesis in Europe”. Discussion Paper No. 10887, Centre for Economic Policy Research.

Daron Acemoglu, Pascual Restrepo (12 January 2017) “Secular stagnation? The effect of aging on economic growth in the age of automation”.

Etienne Gagnon, Benjamin K. Johannsen, David Lopez-Salido (2016) “Understanding the new normal: the role of demographics,” Finance and Economics Discussion Series 2016-080. Washington: Board of Governors of the Federal Reserve System.

John G. Fernald (2016) “Reassessing longer-run U.S. growth: How low?” Federal Reserve Bank of San Francisco. Working Paper 2016-18.

Lawrence H. Summers (15 August 2014) “Reflections on the new secular stagnation hypothesis”. Secular stagnation: Facts, causes, and cures edited by Coen Teulings, Richard Baldwin. Voxeu.

Lawrence H. Summers (15 February 2016) “The age of secular stagnation: What it is and what to do about it”. Foreign Affairs.

Leith van Onselen (25 October 2017) “PC fails to address the population elephant crushing Australia’s cities”.

Maurizio Bussolo, Johannes Koettl, Emily Sinnott (2015) “Golden aging: Prospects for healthy, active, and prosperous aging in Europe and Central Asia” Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.

Neil Howe, Richard Jackson (4 Jan 2011) “Global aging and the crisis of the 2020s”. Center for Strategic and International Studies – Global aging initiative.



Phuah Eng Chye (24 March 2018) “Organisation of households: Household and business formation”.

Peter St. Onge (4 October 2017) “Population decline actually might not be all that bad for a country”. Mises Institute.

Roger E. Backhouse, Mauro Boianovsky (2016) “Secular stagnation: The history of a macroeconomic heresy”. The European Journal of the History of Economic Thought.

United Nations (2013) ‘World population policies 2013”.

[1] Phuah Eng Chye “Organisation of households: Shrinking households, labour market frictions and societal cultures”.

[2] Phuah Eng Chye “Organisation of households: Household and business formation”.

[3] Roger E. Backhouse, Mauro Boianovsky

[4] Which is identified as a major cause of secular stagnation and low interest rates

[5] United Nations

[6] Sourced from Leith van Onselen

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