Aging populations and the slow recovery

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.

Dr. Doom on Europe, China and the US

NYU Stern Professor Nouriel Roubini, aka Dr. Doom, offers his thoughts on the economic situation in Europe, China and the US in last Saturday's WSJ.  Great quote in the 2nd paragraph: 

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier.

Roubini thinks that Europe will be the first to stumble, with a Greek default, a banking crisis and a severe recession across most of the continent.  He thinks China's days of can-kicking are limited as well, as state-owned enterprises stay committed to an overly rapid expansion strategy that leaves consumers with inadequate income to purchase what is being produced.  Roubini is more optimistic (!) about the US, believing that long-awaited fiscal reform and continued population growth will carry the day. 

Roubini will always be remembered as being the only economist with solid academic credentials who called the 2008 meltdown months in advance.  Until he totally blows a forecast, people will continue to listen carefully when he speaks. 

Jim Owens on economic policy

Today President Obama gave an update on the progress of his economic plan to the White House Business Council, chaired by Caterpillar CEO and NC State alum Jim Owens (Ph.D., economics, 1973).  Owens gave the President some unsolicited economic advice in a WSJ op-ed yesterday.  He made the following suggestions:

• Adopt transparent accounting in government (e.g., do not assume state retirement plans will get 8% returns)
• Simplify the tax code and reduce corporate tax rates
• Spend more on infrastructure (you have to say this if you are Cat's CEO)
• Promote free trade agreements
• Control health costs
• Reform immigration laws to allow those obtaining graduate degrees in the US to work here
• Keep the Federal Reserve independent

Nothing radical and mostly sensible.   The President talked mostly about improving K-12 education through Race to the Top, health care reform, and financial regulation.

Too much pessimism?

Interesting column in today's NYT from David Leonhardt about the prospects for a robust recovery. Most prognosticators (yours truly included) are not very upbeat about the odds of a quick bounce-back. Many solid businesses are still having trouble raising funds and the bailouts are unlikely to last forever; so what will kick in? Leonhardt cites four possible scenarios for a GDP jump start: (1) China revalues its currency and encourages more domestic consumption; (2) American shoppers cannot stay hunkered down forever; (3) more stimulus (next year is an election year); and (4) the unknown -- no one saw the internet coming in the 1990s, after all. The latter angle is the one that I find most intriguing; we should never underestimate the impact of innovation and technical change.

Why is Houston growing and NYC isn't?

MBA 505 veteran Lea Chan sent me this link to an article by well-known Harvard economist Ed Glaeser about this question. Having visited both cities on multiple occasions, one might think at first glance that this is a simple case of "de gustibus not est disputandum. " Glaeser does a very nice analysis of all the economic factors that might lead a household to prefer to reside in one city or the other, including housing prices, commuting, wages and salaries, and taxes. Of course there are many other factors to consider: Houston has NYC beat bigtime on Mexican food and NYC has sports teams that actually win championships. As I said, de gustibus!