Macroeconomic analysis typically focuses on money markets, government spending, private saving, and the like. When explaining the causes of recessions and recoveries, the analysis typically looks at variables such as exchange rates, interest rates, and tax policy. Demographic factors typically receive scant attention.
But we know we have an aging society. Japan has faced this challenge for 20 years and has had flat growth. Most European countries are in the same boat, at least for their native populations. So could aging have something to do with the not-so-hot recovery we have experienced over the last seven years?
A study by economists in the RAND Corporation and Harvard Medical School suggests there could be something to this. (Click here for a WP summary.) They explored different states of the US and found that the regions with the most aging had the slowest growth.
What might be going on here? Obviously with more retirees, the labor force shrinks and that hurts economic growth. Maybe today's more elderly population saves more because of uncertainty about Social Security, pensions, longevity and their own savings. With an apparent surplus of savings chasing ever lower yields, this also could be a drag on growth. The study finds that productivity falls with aging, a wrinkle that is hard to easily rationalize.
Bottom line: if this study is correct, then we may be in for a longer period of slow growth than anyone has anticipated.
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