CRF Blog

Demography, growth, and inequality

by David De La Torre

In Age invaders, The Economist looks at the effects of world’s aging population.

The received wisdom is that a larger proportion of old people means slower growth and, because the old need to draw down their wealth to live, less saving; that leads to higher interest rates and falling asset prices. Some economists are more sanguine, arguing that people will adapt and work longer, rendering moot measures of dependency which assume no one works after the age of 65. A third group harks back to the work of Alvin Hansen, known as the “American Keynes”, who argued in 1938 that a shrinking population in America would bring with it diminished incentives for companies to invest — a smaller workforce needs less investment — and hence persistent stagnation.

The unexpected baby boom of 1946–64 messed up Hansen’s predictions, and unforeseen events could undermine today’s demographic projections, too — though bearing in mind that the baby boom required a world war to set the stage, that should not be seen as a source of hope. But if older people work longer and thus save longer, while slowing population growth means firms have less incentive to invest, something close to what Hansen envisaged could come about even without the sort of overall population decline he foresaw. A few months ago Larry Summers, a Harvard professor and former treasury secretary, argued that America’s economy appeared already to be suffering this sort of “secular stagnation” — a phrase taken directly from Hansen.

Who is right? The answer depends on examining the three main channels through which demography influences the economy: changes in the size of the workforce; changes in the rate of productivity growth; and changes in the pattern of savings. The result of such examination is not conclusive. But, for the next few years at least, Hansen’s worries seem most relevant, not least because of a previously unexpected effect: the tendency of those with higher skills to work for longer, and more productively, than they have done to date. [more]