An Aging Economy Is a Sluggish Economy

Source: “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity.” (Click for more legible image.)

by James A. Bacon

Why is U.S. economic growth slowing? Perhaps for the same reason economic growth is slowing in Europe, Japan and other advanced economies — our populations are getting older. That was a major theme of my book “Boomergeddon,” written in 2010, when I accurately predicted that U.S. economic growth would fall short of the optimistic expectations in U.S. eonomic and budget forecasts. I don’t pretend I got everything right — I failed to foresee the fracking boom that ignited the U.S. energy boom, and I did not anticipate how quantitative easing would goose goosing the economy by inflating asset values. But I was pretty certain about one thing — the U.S. population was getting older, and an older population would dampen economic growth.

That’s not a controversial view among the handful of economists who study the impact of aging. It just isn’t appreciated by the broader economic profession, the geniuses who have consistently overshot economic growth forecasts over the past decade, or a political class that has shown no willingness to put entitlements and debt accumulation on an economically sustainable basis.

Now comes a study, “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity,” by Nicole Maestas, Kathleen J. Mullen, and David Powell, and published by the National Bureau of Economic Research. Their disturbing conclusion: “We find that a 10% increase in the fraction of the population ages 60+ decreases the rate of GDP per capita by 5.5%. … Our results imply annual GDP growth will slow by 1.2 percentage points this decade and 0.6 percentage points next decade due to population aging.”

Extrapolating from differential rates of aging and economic growth in the 50 states, the authors see a number of forces at work. Slower growth in the workforce accounts for about one-third of the effect. The rest comes from slower productivity growth from an aging workforce, with possible spillover affects among younger workers.

The fraction of the United States population 60 or older will increase by 21% between 2010 and 2020, and by 39% between 2010 and 2050. This dramatic shift in the age structure of the U.S. population — itself the effect of historical declines in fertility and mortality — has the potential to negatively impact the performance of the economy as well as the sustainability of government entitlement programs.

We can argue over the impact of taxes, regulation, quantitative easing, fiscal policy, and most will retreat into our respective ideological corners, agreeing upon nothing. But the aging of the population is an undeniable phenomenon that transcends partisan analysis. And there is consensus in the economic profession that once a tipping point is reached — as it has in many countries — the economic impact is negative. The U.S. and other aging countries which once had the demographic wind at their back now are leaning into a gale. None are likely to return to the economic growth rates of the early post-World War II era.

Virginia impact. Sadly, the paper did not provide a state-by-state breakdown for aging. However, two maps in the appendix (including the one above) show that Virginia’s population aged more rapidly than that of most other states between 1990 and 2000, and again between 2000 and 2010. One could conjecture that the aging effect has dampened economic growth here somewhat more than the national average. There may be more to blame for Virginia’s economic sluggishness than federal sequestration or flawed public policy.

No one can foresee the future, but if there is one aspect of the future that is predictable with some reliability, it is a nation’s (or state’s) demographic profile. And if there’s one thing we can say with some certainty, it is that economic growth will be slower. Our elected leaders should bear in mind as they discuss expanding entitlements and taking on more debt. No miraculous resurgence of economic growth will make it easier to pay our bills.

When the political class ignores this advice, don’t say I didn’t warn you.

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12 responses to “An Aging Economy Is a Sluggish Economy”

  1. LarrytheG Avatar

    this can get pretty complicated. For instance, what if you DID cap Medicare… but people still retired at the same age and trend… so you have less folks in the workforce…???

    or what happens if retiring workers are replaced with immigrants?

    and on the entitlements aspect ….

    what we pay in taxes for Medicare is about what we pay in tax expenditures to provide tax-free employer-provided health insurance.

    If you capped Medicare and did away with the tax cuts for employer-provided and people had to pay for their health insurance with post-tax money – we’d wipe up the deficit – totally.

    so why not do that?

    cap Medicare – get rid of Medicare Advantage and make all retired pay 20% co-pay and for retired folks making 85K in income -make them pay much more than $122 a month for Medicare.

    Then take away the tax-free status for employer-provided health insurance.

    between the two – we’d cut the deficit totally and even generate a surplus to pay down the debt.

    1. Neither party has the stomach to push through these proposals. Indeed, both Clinton and Trump are running campaigns promising an expansion of entitlements. Clinton at least promises to pay for her spending with higher taxes. But higher taxes would dampen economic growth (although people will argue endlessly over how much) and reduce tax revenues. Americans will not face up to the tough choices that need to be made until it is too late. The political class will forestall the inevitable as long as it can, doubling down and doubling down again, and then the crash will come. If it’s any consolation, the U.S. will have plenty of company.

    2. TooManyTaxes Avatar

      How about making all money received by an individual from the government taxable and raise the personal exemption? Or even all the money over a set amount. That would end the free money mentality for all those living in the U.S.

      Then put a limit a 10-year life on any private foundation that has tax-exempt status. After which it becomes taxable like any business.

      Put the same limit on charitable donations from a decedent, trust or estate that exists for inheritances. No more Bill Gates getting to keep control his fortune from the grave on a tax-free basis. If you can give $10 M to your heirs without triggering the estate tax, you can give $10 M to charity or your personal foundation without triggering the estate tax. Anything above the cap is treated as taxable.

      Any tax exempt organization that hires a paid lobbyist – in-house or consultant – or that gives money to another tax exempt organization that does the same loses its tax exempt status. During Bill Clinton’s administration, lobbying expenses became largely not-deductible as a business expense. It’s time to extend this to nonprofits.

      There are lots of ways to cut the deficit.

  2. LarrytheG Avatar

    re: ” But higher taxes would dampen economic growth (although people will argue endlessly over how much) and reduce tax revenues.”

    higher taxes don’t dampen economic growth.

    higher taxes redirect money from one purpose to another.

    that money still pays for something.

    you might want that money to buy a big screen TV instead of Medicare for your Mom but in either case – the money pays for something. In the former case – a factory worker making big screen TVs – in the later case – an x-ray tech shooting a picture of your mom.

    when you cut Medicare – you cut the x-ray tech – and yes.. your tax refund – you might spend that extra money for a big-screen TV.


    collected taxes don’t disappear into an economic black hole … they just go to a different part of the economy.

    I’m not arguing against cutting spending – I’m just saying when you cut spending -you cut jobs also.. whether it’s an x-ray tech, or a shipyard worker in Hampton…

    If we could AGREE on this part -we might make headway on other parts!!!

    we need to deal with the realities of spending cuts and what they do and don’t do for the economy.

    you don’t have to convince me if we spend more than we take-in in taxes – and add to the deficit/debt… that’s totally true. That’s like borrowing money to pay operational expenses (as opposed to capital facilities).

    but tax cuts without spending cuts is what adds to the deficit…

    when you couple spending cuts to tax cuts -you’re then cutting shipyard workers in Hampton… or a x-ray Tech for your Mom.

  3. LarrytheG Avatar

    re: ” There are lots of ways to cut the deficit.”

    getting rid of tax exemptions though is not cutting taxes – it’s increasing them, right?

    the basic problem with cutting the deficit is deciding what to cut – as well as accepting the reality – that whether you cut Medicare or Homeland Security or the Military – you are, in fact, cutting jobs also.

    when you cut DOD -you cut shipyard workers in Hampton

    When you cut Medicare (or MedicAid) – you are cutting a Doctor or Nurse or some other provider.

    the conventional wisdom is that all the money the govt spends – goes into an economic black hole as a dead loss to the economy.

    The guy who inspects your USDA meat or fills your pothole is paid with Federal budget dollars. You cut those dollars and you cut your USDA meat inspector or leave that pothole unfixed.

    it’s not a savings – it’s a choice of whether to spend the money on a USDA meat inspector or something you’d rather pay for yourself for your own direct benefit. Do you want a USDA meat inspector or a new bathtub for your bathroom?

  4. Jim:

    Good article on an important point. However, I wonder how much the ageing population could have contributed to the economic sluggishness over the last 8 years. The population may be ageing but we’re not in Japan’s boat yet. I see it as more of a future issue than an explanation for past poor performance. Rather, I think John B. Taylor is onto the right answer …

    Artificially controlling anything in a relatively free market has consequences. Often, the consequences are not well understood until the resultant bubble bursts and an “economic autopsy” is performed. Artificially low interest rates make capital artificially cheap. This distorts the economy and has consequences whether those consequences are understood or not. Dr. Taylor has his opinion on those consequences.

    LarrytheG is over-simplifying the question of higher taxes vs economic growth. If you use government spending as a percentage of GDP as a proxy for taxation you’ll find the highest percentages include Cuba near the top of the list with 2/3 of GDP spent by government. Does anybody really believe that Cuba has been an example of effective economic growth? The United States checks in at 41.6% with Denmark at 57.6% (the highest country with an effective economy). Interestingly, the US is essentially the same as Canada (41.9%) despite the widespread belief that Canada has a far wider and stronger social safety net than the US. I guess when you can rely on your southern neighbor for military protection you can spend your own tax receipts on meeting social needs. At the bottom of the list are broken states like Guatemala and the Philippines.

    I believe there is a relevant range of government spending (as a percentage of GDP) where honest debate can be had. Somewhere between 35% and 55% is worthy of discussion. However, pretending that here is no difference between government spending and private sector spending without considering the relevant range is somewhat silly.

    Hat tip on John Taylor: DJ McGuire, BearingDrift

    1. Don, you know me well enough to know that I’m inclined to blame the poor performance of the economy on (1) over-regulation, (2) letting the Bush tax cuts expire, and (3) unforeseen negatives from quantitative easing. I still believe all those things to be hurting the economy, but I try not to be blinkered in my analysis.

      Here’s why I think the aging of the population has been a factor. It’s not about Baby Boomers retiring and the workforce shrinking. It’s Baby Boomers aging in the workforce and experiencing a decline in productivity as they move from their 40s into their 50s. You and I have gone back and forth on the causes of declining productivity in recent years. Is the problem over-regulation? Is it automation? One factor that neither of us considered was the aging of the workforce.

      When you consider that the slowdown in economic growth coincides with a slowdown/decline in productivity, the aging-workforce theory helps explain both phenomena.

      1. I agree that an ageing workforce creates challenges for any economy. I just wonder how much of a factor it presents to the American economy. It was in 1973 that the historic linkage between productivity and rising median wages was broken, apparently forever more. America’s ageing workforce problems would not surface for several decades after that linkage was broken.

        As for your thoughts on the productivity of fifty-somethings, I’ll remember that as I recall my last three weeks in Amsterdam, Manhattan, Atlanta, Chicago and San Jose. I’ll have time to reminisce as I fly from DC to New York this afternoon for a week that will be split between New York and Boston. LOL. It certainly feels good to have been able to slow down in my dotage.

  5. LarrytheG Avatar

    I’m NOT advocating Govt spending – I’m pointing out that the money being spent is not going into an economic black hole for govt spending any more or less than if it went for non-govt spending.

    either path will end up paying for a service or a good…. and the question is do you need/want a VA doctor (for instance) or less VA doctors and more big screen TV jobs (for instance).

    Don points out Cuba for high levels of taxation and govt spending.

    Let me point out Sweden or even Singapore.

    don’t confuse govt taxation and spending with govt deficit and debt but do note that you can reduce deficits by taxing more which INCLUDES removing tax breaks like mortgage deductions… or other deductions…to include tax-free employer-provided insurance.

    I’m not “simplifying” here . I’m CLARIFYING because a lot of what I read and hear treats govt spending like it’s a dead loss to the economy and that by cutting that spending you put more money into the private sector side. You do put more money into the private sector side – but when you cut spending -you also cut shipyard workers in Hampton or a Medicare/Medicaid doctor in Emporia… or a USDA meat inspector in Omaha – depending on what you choose to cut.

    The “simplification” comes when various different folks make value judgements as to what can/should be cut that is “worth” losing that govt job and not other govt jobs and transferring the spending for THAT govt job to the private sector.

    And of course one guys idea that cutting entitlements is “better” than cutting shipyard workers – is NOT that one type of cut “better” in absolute dollar-saved terms than the other it’s really a value judgement that less doctors for Medicare is a “better” choice to reduce a job than one less shipyard job in Hampton.

    Again – I’m not advocating one over the other but rather a recognition of what it is and is not.

    the real rub comes when we all agree that we cannot be spending money we don’t have ( creating deficits) for more spending and we actually do have to make the value judgement in the choice … but again no matter the choice – you really are reducing a job wherever you decide to do that cut.

  6. People that had adjustable mortgages still have them because the interest is still lower than fixed rate, and their houses are still under water with no money to pay the loan difference. The reduction in ten years of interest and principle has decreased the interest deduction, increasing the total tax being paid for an accounting line valueless asset.

    Meanwhile, people are living off their credit cards. Start creating new ways to increase their taxes and the banks will be looking for new bailouts as people quit paying their cards. As banks lose money, negative interest rates would be another way to steal the customer’s remaining money, resulting in widespread mattress stashing. Converting fiat cash to digital currency to regulate hoarding will then increase the number of 2nd Amendment lead investors. The unintended consequences of this game after that, is infinite.

  7. LarrytheG Avatar

    One question is – does everyone get treated the same on tax breaks?

    or do tax breaks benefit some more than others?

    and should we have a system where tax breaks are more equitable ?

    People who get mortgage deductions – ALSO get deductions for real estate taxes and sales taxes while those that rent often do not.

    should the govt provide more favorable tax treatment to those that buy their homes than rent them? what’s the justification for doing that?

    How many people would buy a house if those that rent could also write off some of their rental costs?

    why should someone who buys two houses get tax writeoffs on both of them while someone who rents gets nothing at all?

    why can’t people put their money into something other than an traditional IRA and get the same tax deduction?

    why can’t someone who buys market health insurance get the same tax breaks for Federal, State and FICA taxes when they do?

    what we’ve done is we’ve made up rules that benefit some folks who can take advantage but not others who cannot take advantage.

    and Now we need to either cut spending or increase taxes so how should we impact all people – equitably?

    I agree about the cyber-currency .. I think the ways the govt taxes is going to have to evolve with the advent of electronic currency but at the end of the day – we still have to pay for National Defense, roads, education, medical care, etc.

  8. “How many people would buy a house if those that rent could also write off some of their rental costs?”

    People can already write off some of their rental costs, whether they pay rent or not. It’s called the Standard Deduction. They also can get some of your paid tax money back whether they worked or not, just by filing a return. Plus they get a big discount on health insurance when they get a subsidy for Obamacare.

    The problem isn’t that lower income people are getting cheated. The problem is richer people can afford to pay a tax law specialist to find supposedly legal loopholes that normal folks have never even thought of. The two federal houses of lawyers designed these loopholes with the help of outside financial lobbyists. Any idea of changing the way taxes are paid will only apply to those who don’t have lobbyist help. That’s you and any other middle class family who think there is a better way. Be happy the upper crust pays any tax at all instead of forcing you to cover their share in addition to yours.

    Trump says the system is rigged. He doesn’t mean just the voting system. It would appear he’s in a position to know, just like Buffet and other Dem leaning tax advocate billionaires. The question though is whether calls for the rich to pay more taxes comes from Buffet’s heart, or from imposing a new slick loophole designed to make the rest of us feel guilty.

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