Category: US Economy

The Economy’s New Boss: Demographics

Editors

The next President will have to contend with unfavorable demographics.

An enormous amount of money will be spent in the last few weeks of the Presidential campaign. Each side will promote its candidate and his platform with much passion and conviction. In the end, one side will treat victory as the road to salvation and the other will see defeat as an unprecedented and largely irreversible calamity. But in reality, this time around, the identity of the winner will probably matter less to future growth prospects than in previous contests. This is because the demographic input in the economy for the next four years is already programmed on an immovable trajectory and it is less positive than in the past.

Because of the overhanging debt and a poor demographic picture, the next four years will continue to be challenging (though not necessarily recessionary), regardless of whether Barack Obama is re-elected or Mitt Romney replaces him. Like it or not, the boss of the economy, and therefore to some degree of all of us, will be demographics. One could argue that this boss has been with us since at least 2005 when the dependency ratio started to rise again in the United States.

Among all the important factors which drive economic growth, the demographic factor is now weaker than it has been in decades and as a result, domestic demand for most goods and services will be weaker than it has been in a long time. The most telling numbers are as follows:

– The US population grew by over 1% a year until 2007 and is now growing by less than 1% per year. Its rate of growth will continue to decline as the number of baby boomer deaths rises relative to the number of new births.  Since 2008, the US total fertility ratio (TFR) has fallen below the replacement level of 2.1 and is now approaching 1.9 children per woman. See the data here and here. (Note that the TFR is an imperfect measure and a decline may only mean that more women are delaying, not altogether foregoing, having children.)

– The total number of Americans aged 30 to 60 years, the most economically active bracket, grew by over 1% per year for 30 years, from the mid 1970s to around 2005.  It has levelled off and will essentially remain flat at around 120-125 million until the end of this decade. Stagnation in the size of the most economically active bracket combined with growth in the young and elderly brackets will result in lower economic growth. I made a case here that the resulting effect on housing will not be positive.

– The US dependency ratio, which is the sum of people under 14 and over 65, divided by the number of people aged 15-64, has declined for several decades from 0.67 in 1960 to 0.49 in 2005 but, according to UN estimates (see pages 478 and 479 of this UN report), it is now expected to climb back to 0.53 by 2015, 0.56 by 2020, 0.64 by 2030 and 0.67 by 2050. Discretionary spending is bound to come under pressure as more funds are diverted to take care of dependents. (Note that the dependency ratio as defined by the UN and others considers any person under 14 and over 65 to be a ‘dependent’.  This seems antiquated on both ends. In the US, a young person is still a dependent until at least 18, and in some measure as late as 25. And an older person may not become a dependent until the retirement age of 67, or more likely 70.  I ran the numbers for these brackets here and they show that raising the retirement age from 67 to 70 would buy us some time and help the economy.)

– Assuming a run rate of 1 million newcomers per year, immigration, though a clear net positive in the long run, will be insufficient to neutralize or reverse these negative effects in the short run. It would take a much greater number of immigrants to offset the slack. But as noted by some demographers, citizens of any given country become less welcoming of immigrants when that country’s fertility ratio declines or when the economy is weak.

Although much frustration is expressed on the stagnation of the economy, in particular the unemployment rate and the rising deficit, pinning the blame on one or the other of the two political parties ignores a stronger underlying dynamic. The next POTUS will be similarly constrained as POTUS 43 (Bush) in his second term and POTUS 44 (Obama) and will have to implement some steps to mitigate the negative demographic effect. If demographics are failing us, there are other levers to stimulate  growth but we will need to work them harder.

Does U.S. Population Bust Spell Fiscal Doom?

Editors

FROM INVESTORS’ BUSINESS DAILY:

Some news that gets little attention can have a big impact down the road. Case in point: U.S. population growth this year hit its lowest rate in decades. And no, this isn’t a good thing.

Population-control extremists are no doubt dancing a jig on word that the U.S. rate of growth was 0.74% in the most recent year, slowest since World War II (see chart). From the end of the 2010 census ended April 1 to July 1 of this year, we added just 2.8 million people, for a total of 311.6 million.

The reasons for this are many. Immigration, for one, has slowed considerably. Of more importance, however, Americans are having fewer babies, just 3.96 million in 2011, a number that’s expected to decline for years.

Why is this happening? READ MORE.

US Demographics not as Strong as Widely Believed

Editors

A recent op-ed in the Wall Street Journal by Mr. Ben Wattenberg, a senior fellow at the American Enterprise Institute, takes an optimistic view on US demographics and on their likely impact on the economy.  The WSJ today published my response in which I repeat the argument I made in America Heading Towards Zero Population Growth? that the growth of the US population is in a multi-decade decline.

Text of my letter:

“Regarding Ben J. Wattenberg’s (“Immigrants and ‘Comparative Advantage’,” op-ed, Aug. 9): It is true that the U.S. is in better shape than Europe or Japan, but the rate of growth of the U.S. population has fallen below 1% per year and will decline further over the next four decades. Due to the passing of baby boomers in increasing numbers, the two decades starting in 2030 will see no population growth except for immigration.

Mr. Wattenberg’s figure of 400 million Americans in 2050 is too high and would be reached only if the birth rate, life expectancy or the number of immigrants rises significantly in coming decades. My own estimate is 375 million in 2050, which is 61 million more Americans than we have today. This may appear nominally attractive, but the population grew by 60 million, or 24%, in the 22 years since 1990. A 60 million increase by 2050 would be equivalent to growth of only 19% in 38 years.

Even Mr. Wattenberg’s optimistic scenario would be growth of 27% in 38 years, a rate which is well below that of recent decades, with predictable consequences for domestic consumer demand.”

End of letter.

Mr. Wattenberg is not alone in holding an optimistic view.  In fact, robust population growth is seen by many as one of the unique assets of the US economy.  Last month, Goldman Sachs CEO Lloyd Blankfein argued that US economic prospects look promising in part due to demographics:

“The U.S. has a number of major competitive advantages that we sometimes overlook — especially given the focus of the 24-hour news cycle on sensational, and mostly deflating, events. First, the U.S. has favorable demographics — thanks to its relatively high birth rates and immigration. While the BRIC countries — Brazil, Russia, India and China — have generated extraordinary economic growth, the U.S. remains a magnet for many of the smartest, most ambitious people in the world. […] Immigration is one of the main reasons why the U.S. has grown faster than many other developed economies. The growth in the foreign-born population contributed roughly 30 percent to 40 percent of total U.S. population growth from 1980 to the mid-2000s. New immigrant workers provide a boost to economic growth. Just think about the effect new workers have on demand for housing, let alone creating new businesses.”

Because they are only partially accurate, some of these comments end up painting an overall picture which is too optimistic. First on the birth rate, it is higher than that of Japan or Europe, but it had been until recently near replacement level, equivalent to a total fertility rate (TFR) of 2.1 children per woman.  But since the financial crisis  began in 2008, the TFR has fallen below 2.1, as recently reported by The Economist. The TFR may well recover to replacement level as the economy improves. That is better than sub-replacement but a TFR of 2.1 is not sufficient to turn demographics into a source of economic strength. In addition, discussing birth additions without mentioning death subtractions presents only half of a full picture.  As increasing numbers of baby boomers pass away in the next three decades, the population will grow at a slower rate than in recent decades.

Another factor to consider within the overall population numbers is the evolution of each age group.  The expected increase in the number of older people has been widely documented and discussed, in particular as it relates to the pressure it will place on government social programs. A subsidiary measure of this development is the rise of the dependency ratio, which is the number of dependents (children and retired people) per working adult. In the US the ratio had been declining for decades and it is now set to start rising. (See Our Growing Inactive Population).

Turning to immigration, it is true that the US could open its doors wider to more immigration and by doing so, reach any population level that it wishes. But few commentators or politicians are advocating this approach. If we continue with the current run rate of 1 million new (legal) immigrants per year, the growth rate of the US population will continue to decline. And that would be true even if we raised annual immigration to 1.5 million newcomers.

There is nothing wrong with being too optimistic on demographics except that it could prevent policymakers from considering other steps to promote economic growth. If there is a widespread belief (as seems to be the case) that population growth will be a strong driver of the economy, we may forego some other growth-boosting measures which are in fact necessary.

In my opinion, growth for the US economy in the next few decades has to come from two main engines, first the perennial innovation engine, and second the manufacturing and export engine. The US can become once again an export powerhouse, not just in agriculture and technology, but also in other manufactured products along the entire value-added chain. Whether this requires a dramatic devaluation of the US dollar remains to be seen. If such is the case, we would not be the only country racing for a depreciated currency. Europe certainly does not want to see a stronger Euro, and if the Euro breaks up, virtually all countries except for Germany, Finland (and possibly France) will end up with currencies which are relatively weaker than the Euro. Germany may end up with a new Deutsche Mark which like the Swiss Franc will be stronger than its exporters would like to see.

Repatriating as many manufacturing jobs as possible and searching for new markets overseas are likely to be two important elements of a future growth strategy. Based purely on demographic trends, India and Sub-Saharan Africa look especially promising because improving health care and declining fertility rates (the two go hand in hand) could possibly yield the same kind of very large demographic dividend which we have seen in China and other Asian countries in recent decades.

Michigan is Losing Population Ground — Naturally

Editors

Detroit face unique demographic challenges and Michigan was the only state to show a net population decline in the decade ending in 2010.

RON DZWONKOWSKI writes in the DETROIT FREE PRESS:

In the period from 2000 through 2010, amid the economic upheaval that shook Michigan to its foundations, people in the state were remarkably consistent at one thing: dying.

Annual deaths for that 11-year period averaged 86,746 — with a range of just several thousand year to year in a state of about 10 million people. Meantime, births were declining almost every year over that same span, from 136,048 in 2000 down to 114,717 by 2010.

The result, according to a new analysis by Data Driven Detroit, was a 47% drop in Michigan’s natural population change from 2000-10. In 2000, births exceeded deaths by 49,060; by 2010, the margin was just 26,659. READ MORE.

New York Times: Is Simple Demography Behind Weak Economy?

Editors

DAVID LEONHARDT writes in the NEW YORK TIMES:

Economic growth in the United States has been disappointing for more than a decade now. Some of the reasons are complex and hotly debated, and will be the subject of a series of posts here starting next week. But one of the reasons is not mysterious at all. It simply reflects demographic changes.

The share of Americans who are working age — old enough to be out of school but young enough not to be retired — is no longer growing. Only about 53 percent of the population was between the ages of 25 and 64 last year, unchanged from 2007 and up only slightly from 52 percent in 1997. Between 1967 and 1997, by contrast, the share grew 8 percentage points, to 52 percent from 44 percent. As more baby boomers retire, the share will begin to fall.

Fewer people of working age means, obviously enough, fewer workers. It also means fewer potential entrepreneurs creating new businesses that hire people. READ MORE.

USA Today: Midwest School Districts Hammered by Population Loss

Editors

STEVEN RICH WRITES IN USA TODAY:

Midwest states saw the largest net loss of school buildings from 2006-07 to 2010-11 school years, according to Education Department data.

The Midwest has lost more than 2,100 public schools in recent years as school districts hammered by population loss scrambled to shift students and save money.

From 2006-07 through 2010-11, the region saw a net loss of 2,110 K-12 schools, according to a USA TODAY analysis of U.S. Department of Education data. The rest of the nation had a net gain of 965, largely from growth in the West.

The closings — which often see students moved to other buildings in a district — can affect home prices and businesses and often take an emotional toll on residents.

“It’s like losing the soul of the community,” said Terry Ryan, vice president for Ohio Programs & Policy at the Thomas B. Fordham Institute, a public policy center focused on education. “It’s a painful experience.”

The Midwest has been losing schools for some time, but the trend has accelerated in the past decade, largely because of economic issues, Ryan said. READ MORE.

Detroit’s aging population on collision course with nursing home shortage

Editors

The population of Detroit fell by 25% in the decade to 2010, an unprecedented development for a large American city which has created new challenges for its remaining residents.  ROCHELLE RILEY writes in the Detroit Free Press:

Marylyn Thurmond had been a registered nurse at Detroit Receiving Hospital for 13 years when she was diagnosed with arthritis. She has had both hips replaced. Six weeks ago, she was diagnosed with lupus. She also suffers from hypertension, diabetes and coronary heart failure.

Marylyn Thurmond is 57 years old.

Novella Walker-Page was a registered nurse at Hutzel Hospital in high-risk labor and delivery for 26 years before becoming a home care nurse and then a contract nurse for the Detroit Public Schools. One day, she fell from the bus that took her around for student care. During that same doctor’s visit, she learned that she had sarcoidosis, an inflammatory disease. She also suffers from hypertension, high cholesterol and atopic dermatitis, a skin condition.

Walker-Page, who cares for her 95-year-old mother at her northwest Detroit home, is 60. She doesn’t think she’ll live as long as her mother or her grandmother, who died at 116.

Thurmond and Walker-Page are among a fast-growing part of Detroit’s population — the new elderly, people who are 50-59 years old but more like 60-74 in terms of their health. Neither, for now, wants or needs nursing home care. But as that need is growing among their age group, their chances of finding it are in decline. READ MORE.

Pew Research: The Rise of Asian Americans

Editors

Asian Americans are the best-educated, highest-income, fastest growing race group in the country. PEW RESEARCH CENTER’S NEW REPORT paints a comprehensive portrait of Asian Americans, examining their demographic characteristics, social and family values, education, economic circumstances and more. The report also explores six subgroups by nation of origin.  READ MORE.

California Voters Approve Pension Cuts

Editors

IAN LOVETT WRITES IN THE NEW YORK TIMES:

LOS ANGELES — As Wisconsin residents voted on Tuesday not to recall Gov. Scott Walker — who has become an enemy of labor unions nationwide — two California cities dealt blows of their own to organized labor.

In San Diego and San Jose, voters overwhelmingly approved ballot initiatives designed to help balance ailing municipal budgets by cutting retirement benefits for city workers.

Around 70 percent of San Jose voters favored the pension measure, while 66 percent of San Diego residents supported a similar measure.

“This is really important to our taxpayers,” Mayor Chuck Reed of San Jose, said Tuesday night. “We’ll get control over these skyrocketing retirement costs and be able to provide the services they are paying for.” READ MORE.

CBO: US Entitlements Put Federal Debt on Unsustainable Path

Editors

PETER SUDERMAN WRITES IN REASON:

The latest long-term budget outlook from the Congressional Budget Office reads like a particularly dark noir: Things start out pretty bad. And then they get worse.

“Over the past few years,” the report’s first sentence explains, “the federal government has been recording budget deficits that are the largest as a share of the economy since 1945.”

Before the year is out, debt held by the public — the federal government’s outstanding debts to outside parties — will equal 70 percent of the total economy. That’s not a pretty picture. And it’s not likely to get better. It is a foregone conclusion that large entitlements, Medicare and Medicaid in particular, are destined to cost far more as a percentage of the economy due to the aging of the Baby Boomer generation, the rise in health costs, and long-term care expenses born by Medicaid. If today’s laws are kept on the books, “spending on the major federal health care programs alone would grow from more than 5 percent of GDP today to almost 10 percent in 2037 and would continue to increase thereafter.”

In a quarter century, entitlements, which currently account for about 10 percent of GDP, would alone chew up a full 16 percent of the economy. That would represent a massive historical shift: For the last four decades, the entire federal government, including entitlements, has consumed an average of 18.5 percent of the country’s economic output.  Relative to the size of today’s economy, that would be like spending an extra $850 billion annually on entitlements. In a growing future economy, it will be far more. READ MORE.

OR READ THE CBO’S FULL REPORT.