Demographic Shifts and GDP Growth

Economists are famous for casting predictions that turn out to be utterly wrong.  In fact, many will make multiple predictions that are quite opposite each other.  It is this that inspired Harry Truman to request he be given an economist with just one hand.  That way they could not quantify their statements by saying, “on the other hand”!

One such economist was Irving Fisher.  In early 1929 he predicted the stock market had reached a permanently high plateau, then the market crashed in October. 

One prediction that was off, but slightly less embarrassing was Alvin Hansen’s Presidential address to the American Economic Association in 1938.  He predicted the US economy was stagnating for the long term.  The two factors that were causing this were waning population growth and also a lack of investment. 

His prediction proved wrong.  Starting just after World War II, and going into the 1960s produced the baby boom generation.  Economic growth continued from 1950 to 2007 at a rate of 3.6% per year.  This period was one of great economic prosperity, investment, and innovation. 

However, Hansen’s prediction may not have been wrong, it may have just been 70 years early.  Following the financial crisis, many economists expected GDP to bounce back to previous levels of growth.  But GDP has averaged only 2.1% from 2010 to present and most recently, we have been happy to see any positive numbers.  In fact, it is puzzling the Federal Reserve Chair Janet Yellen, who commented, “Well, growth has been disappointing.  I’m not sure of the reason.”

It is sobering to think the one who we have put in charge of the central bank can’t figure out why growth is anemic!  So let’s help out Yellen out a bit to show what factors are hindering the economy.  Clearly the private and public sector’s debt burden contributes.  Debt dynamics appears to be a topic too complex for the Fed economists to grasp.  Other factors are burdensome regulations that cause business owns to just give up.   In general, these two create a large lack of hope.  If people have no hope, they will not start or grow their business.

These items are complex to grasp.  One that is easier is population trends.  Demographic shifts may help explain what economic growth has been underwhelming in developed countries.  The problems are not limited to the slowing population growth or rapidly aging societies.  The key is the total population size in the middle age window, the time when people earn and spend the most money.  This peaked in Japan late in the last century and has peaked in Europe.  Both these economies have been mired in stagnant growth in spite of everything from negative central bank interest rates to massive money printing to help stimulate business. 

The size of the middle age demographic group in the US, will continue to shrink until 2020.  Demographic changes are a long term economic headwind.  This is a root cause of economic stagnation.  The low interest rate environment is just a sign of economic malaise.  The Fed better wise up to the fact of these hurdles that are before us that limit our economic growth. 

Also bringing more unskilled people into the country is not an answer to create wealth.  One issue we face today is that many of the jobs that are available are in process of becoming scarce.  You can see that with the decline of the number of tellers at your institution. 

Some estimates I have seen believe that up to 1 in 5 jobs that we know today will not be there in the future.  I read of an example of this in San Francisco, where a burger restaurant opened up where the entire burger from start to finish is done by a machine.  You select how you want your burger, and the machine selects the ground beef, puts it in a paddy, cooks the meat, toasts the bun, slices the veggies, melts the cheese, and presents you with the finished product. 

So a lack of skilled workers, who are not in their peak earning and spending years will continue to hammer our economy for years to come.  If this continues, one day we may long for the day when treasury rates are as high as they are now.