The Hidden Age Decelerants in Our Economy

Clearly the United States is figuring on growth, now or at some time in the next few years, to reignite our economy and stabilize our future. We are also looking to future earners to settle our national debt issues, since clearly whatever we do now is going to leave trillions and trillions on the table for our children and grandchildren to repay. Putting aside budget cuts to research, innovation and education, the changing nature of America’s demographic mix is putting another damper on growth, and while we aren’t experiencing the severe population contraction that Japan is facing, these changes definitely suggest a limit on what may be achievable.

“Children now make up less of America's population than ever before, even with a boost from immigrant families… Currently, the share of children in the U.S. is 24 percent, falling below the previous low of 26 percent of 1990. The share is projected to slip further, to 23 percent by 2050, even as the percentage of people 65 and older is expected to jump from 13 percent today to roughly 20 percent by 2050 due to the aging of baby boomers and beyond.” Huffington Post, July 12^th. We’re putting the brakes on immigration, and Americans (like Russians, French and Japanese) are having fewer children. Maybe it’s just too expensive to raise a child or perhaps pessimism from the economy and world affairs is giving potential parents second thoughts about bring children into the world. Only 20% of the U.S. population is children under the age of 15.

The growing number of older Americans definitely reduces growth potential. Even as many are postponing their retirement because of losses in pension savings, there is inevitably a push for older people to leave the workforce at some time in their lives. “More retirees mean slower household formation, reduced consumer spending and downward pressure on equity prices as retirement cuts people’s purchasing power, according to John Lonski, chief economist at Moody’s Capital Markets Group in New York, and Gus Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pa… Household purchases rose at an average annual pace of 3.2 percent in the quarter-century that began in 1972, when the oldest of the boomers turned 26, and averaged 2.8 percent since 1996, when they turned 50, according to Lonski. He forecasts the decline will continue, to between 2 percent and 2.5 percent a year, as growth slows for Americans aged 15 to 49…

“‘A weaker labor force does dampen the pace of the rebound,’ along with ‘our expectation for what an expansionary trend is,’ said Dean Maki, chief U.S. economist at Barclays Capital in New York. ‘We should be lowering our sights on potential GDP compared to when our population was younger.’… Anemic gains in the number of new workers has effectively cut the long-term ‘speed limit for growth’ to 2.25 percent, estimates Maki, a former senior economist at the Federal Reserve. That compares with the Fed’s estimated 2.5 to 2.8 percent rate for gross domestic product and average growth of 3.2 percent from 1980 to 2000.” Washington Post, September 4^th.

Older consumers, living on limited and fixed incomes, spend less on houses, cars, recreational goods and services and even the quality and nature of food or clothing purchases. They are more selective and tend to hang on to older appliances and other durables longer than younger buyers. They also sell stocks to survive, another potential ripple for the economy: “The aging population also may hold down stock values for the next two decades as boomers sell shares to finance retirement, according to a Federal Reserve Bank of San Francisco research paper released Aug. 22… Faucher forecasts changing demographics will lead to a period when nominal GDP growth — which includes the impact of inflation — slows to 3.3 percent, compared with 5.5 percent before the 18-month recession. That means the rise in corporate profits and equity prices would slow to about 3.3 percent from 5.5 percent as well, he said.” The Post.

Contrast these demographic realities with China that, despite its one-child policy, still has 26% of its population under the age of 15 with no meaningful national debt, and an accelerating investment in infrastructure, research and education. This is our competition for the future, and between demographics and governmental policies, the smart money is on China, notwithstanding some very series projected shortages and environmental issues.

Short term, the slow growth in the workforce is both a reflection of the recession-driven lack of opportunity combined with the reduction in the number of younger Americans. Longer term, it will be the result of fewer Americans in the productive period of their lives. Whatever our planners are doing in this space, clearly we are moving in the wrong direction. With less labor, the emphasis has to be on productivity, and that takes innovation, infrastructure, research and education… all the places our budget cutting Congress is stripping off value. Long term planning also appears to have become a sacrificial lamb.

I’m Peter Dekom, and if you care about these changes, let your elected officials know how you want your tax dollars spent.