How the US Economy Can Counter Its Demographic Headwind


The excellent 2016 book The Rise and Fall of American Growth by Northwestern University economist Robert Gordon — a book I frequently write about — is often portrayed as a work of technological pessimism. But Gordon doesn’t see it that way. Tech progress and innovation, as eventually reflected in productivity growth, isn’t going to slow in his view. It will pretty much continue as it has for decades — just no acceleration to the boomy 1920-1970 productivity pace due to advances in AI or robots or medical miracles. The demise of rapid economic growth is due to various “headwinds,” he argues, not technology. Not only will those factors slow per capita GDP growth, but much of that growth will be captured by wealthier households. Indeed, inequality is one of Gordon’s headwinds.

Another growth constraint, according to the economist, is demographics. This is uncontroversial. All those baby boomers are heading into retirement, and Americans are having fewer kids. Labor-force growth used to be so rapid — especially with women entering the job market as never before — that overall economic growth stayed fast even as productivity growth weakened. A San Francisco Fed analysis in 2018 noted the following:

In the 1970s, labor force growth alone contributed 2.7 percentage points to GDP growth, meaning that even if productivity growth had been zero, the economy would have expanded at 2.7%, slightly faster than the pace of our current expansion. Since that peak, labor force growth has come down substantially. As the forecast for 2025 shows, labor force growth is expected to remain stuck at 0.5% for the next decade. This means that, absent a surge in productivity, slow growth in the labor force will be a restraining factor on the U.S. economic speed limit.

Source: San Francisco Fed

Of course, America isn’t the only nation with a demographic problem. Japan’s working-age population has been declining since the 1980s. And it may shrink by another 20 percent by 2040. Indeed, economists point to that decline as a trigger for its “lost decades” of economic stagnation. There was a notable correlation between Japan’s working-age population and economic activity.

Chart via the World Economic Forum.

But despite that working-age population decline, the number of workers has begun to rise again, as this chart from Goldman Sachs illustrates:

Goldman goes on to note that “the strong positive correlation once seen between the working-age population and economic activity” has now reversed because of three key factors or tailwinds:

A swing back to growth in the number of workers, despite a decline in the working-age population, chiefly driven by a prominent rise in the labor participation rate among women and the elderly.

A pickup in capex aimed at enhancing efficiency chiefly in response to the decline in the working-age population, amid the tapering off of overseas relocation of production facilities.

An increasingly proactive lending stance at banks, amid a low interest rate environment, which is likely to support capex and other business activities, particularly at SMEs.

And here are the takeaways from Goldman:

We believe that Japan’s experience could provide useful lessons for some Europe economies and China where Japanification is becoming a concern. Such lessons include securing the number of workers by raising the labor participation rates among the elderly and women, especially, and increasing the number of foreign workers, although Japan has been reluctant to do so until quite recently. Businesses also need to find substitutes for human labor by aggressively leveraging automation and digital investment, especially in the labor-intensive service sector. Additionally, banks could provide full support for corporate capex and other relevant activities aimed at enhancing productivity in response to worsening demographics.

The US is in better demographic condition than many other advanced economies, but some of those lessons — especially regarding participation rates and immigration — are worth noting.

Published in Economics

There are 4 comments.

  1. David Foster Member
    David Foster

    The average individual & family economic well-being doesn’t depend so much on the overall GDP as it does on the GDP per capita. If the GDP doubles and the population does as well, people aren’t really any richer.

    There is a partial exception to the above in that population-based GDP increases can help repay national debts that were incurred in the past, and can help increase aggregate national power. But still, productivity-based increases are the main ones that matter in terms of individual affluence.

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  2. lowtech redneck Coolidge
    lowtech redneck
    @lowtech redneck

    So, the answer is to force old people to work more and to import millions more Democrat voters to embed the dystopia we currently live in….predictable.

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  3. DonG (2+2=5. Say it!) Coolidge
    DonG (2+2=5. Say it!)

    David Foster (View Comment):

    BINGO! All the doom and gloom articles ignore per capita metrics, so they are mostly not worth reading. 

    I worry that a lot of the GDP growth in the last few decades has been financial products that measure nicely, but don’t have much impact on family prosperity. Is the honest value of moving money around captured with GDP measurement? I have doubts.

    I also worry that a *lot* of the economy is flowing through government or heavily regulated by government and will be slow to make more productive. I think education and healthcare and military are stagnant. Worse, Biden and his socialists will force a lot of mal-investment in wind and solar boondoggles.

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  4. Mark Camp Member
    Mark Camp

    DonG (2+2=5. Say it!) (View Comment):
    Is the honest value of moving money around captured with GDP measurement [in the case of financial goods and services]?

    [Emph. added]

    It’s an important question! Everyone wants to know (in Economics land, at least).

    Obviously you don’t mean it literally as a binary yes/no question, but rather mean “To what extent is it true that the honest value of moving money around is captured with GDP measurement in the case of financial goods and services?

    Not being an economics genius, I wouldn’t claim to know.

    I only know how to think like an economist. Here is how that would go.

    To think like an economist, you have to follow the scientific method, to the letter.

    Before asking this question, a scientist would have to ask

    “What is the operational definition of honest value adopted by national accountants, when they report GDP?”

    That is because a scientist knows that

    • Without definitions of all its terms, every question is a meaningless string of symbols.
    • A definition of a measurable value is meaningless unless a repeatable measurement operation is specified. For example, the scientific definition of “mass” is: “What you get when you measure mass. Here is the repeatable operation to measure mass…”

    The answer is this:

    • These accountants always define “value” simply as “market value, measured in monetary units (measured honestly according to a consistently applied, honest, standard methodology.)
    • Where possible, the operation to measure the market value of an economic good other than money is
      • measure or estimate the amount of money paid for it on the market, if that is possible. Example: a bakery’s inventory of flour. Otherwise…
      • …make a reasonable estimate of the amount of money that would be paid for it, at the beginning and end of the accounting period, if that is possible. Example: the imputed value of the use of a house for the accounting period by its owner. Otherwise…
      • …ignore the economic good, with a footnote explaining why. Example: the value added by a the labor of a parent taking care of his children.

    So I think you are asking one or both of these questions, which are completely independent of each other:

    • “Is the above accountants’ definition of value appropriate?” For example, isn’t the appropriate operation to measure value really, “Go out and measure, as DonG put it, ‘[t]he average individual & family economic well-being’?”or,
    •  “Do the accountants measure value appropriately? Implicit assumption: the above definition of “value” is appropriate.

    Anyone who wants to answer the question scientifically (i.e., by thinking like an economist) can now start the process!

    Caution: the unscientific thinkers have a head start on you. They don’t have to do all of the time-consuming thinking above. They really don’t need to think at all.

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