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April 13, 2006
Demographics is not Destiny
Repeat after me
Demographics is not destiny.
Demographics is not destiny.
Demographics is not destiny.
Okay, now you may skeptically read the new study from five Federal Reserve economists, entitled "The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply." The study argues that the workforce is going to grow more slowly than people expect, because of the aging of the population, and concludes:
Absent a pickup in the underlying pace of productivity growth, such a slowing in labor input would, in turn, reduce the sustainable rate of economic growth relative to the robust pace experienced over the past decade or so.
Doesn't anyone ever read history here? It's always tempting for economists to make forecasts based on demographic arguments--after all, predicting the age structure of the workforce ten years from now is pretty straightforward.
But the track record of demographic-based forecasts is absolutely horrible. See, for example, my piece "Productivity Trumps Demographics". And notice that the authors of the new study leave themselves an out at the end:
the rising participation rates of the elderly??nother group for which the recent performance of the model has been problematic??ould seem to be a particularly important wild card in the years ahead. This age group is large and growing, and a further uptrend in these rates could contribute significantly to movements in the aggregate participation rate in the future. Moreover, longevity and health are particularly difficult variables to forecast, and coupled with the likely shortfall in the labor supply of younger workers, positive innovations in those determinants of participation could be especially potent.
Oh, I see. If health and longevity improves, and employers become more willing to hire older workers...then "never mind."
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?? A Slowdown in Baby Booming Growth? from Economist's View
The Fed study discussed in this article says that projections for economic growth over the next few decades are too optimistic. The authors expect baby boom retirements to lower labor force participation by 3 percentage points, about three times as [Read More]
Tracked on April 13, 2006 01:23 PM
Pete Peterson in his book Running on Empty points out that the low saving rate makes this problem even worse.The average baby boomer has very little in savings to live on by the time retirement hits and allot of debt.About one third of consumer spending are people using their home as credit cards to keep up with bills.
So how do you think this will play out ?
Posted by: John Konop at April 13, 2006 03:02 PM
I think Pete Peterson sees the world through a black cloud of doom. See my 2004 review of his book here. http://businessweek.com/magazine/content/04_35/b3897029_mz005.htm
Posted by: Mike Mandel at April 13, 2006 03:13 PM
I recall an article in BusinessWeek about immigration in Europe. It pointed out that the labor force of the future will rely on immigrants, since the native population is suffering from low or negative growth.
Could not the same be said of the U.S. labor force of the future? Our labor force participation has almost as much to do with our immigration policy as it does with demographics. Given the politics surrounding this issue, I would find the future labor force participation rate an impossibly hard number to predict. - pjw
Posted by: Patrick J. Walker at April 13, 2006 03:34 PM
*** About one third of consumer spending are people using their home as credit cards to keep up with bills. ***
That's obviously not even remotely close to being accurate. First, only 2/3 of HOUSEHOLDs own their houses. That limits the pool of people right off the bat.
You're therefore saying that among the remaining population of homeowners, fully one-half of their spending -- year after year after year -- comes from borrowing additional money against their houses. Sounds pretty ludicrous and probably financially impossible to me. Are you really willing to make that assertion?
Posted by: Kevin at April 13, 2006 06:23 PM
I have a study that shows 31% of consumer spending. I look this about on the internet tonight and it looks even worse. Read for yourself.
Mr. Mandel , you have to say this is alarming,when you combine falling wages with healthcare,childcare,college cost,energy prices growing 2 to 4 times faster than wages.
By Dr. Carl Steidtman, Chief Retail Analyst, Deloitte Research
The Housing Market as Consumer ATM
Over the past three years, low mortgage rates have allowed the housing market to operate much like an ATM for consumers. The rising value of homes coupled with low interest rates and an aggressive refinancing industry has made it easy for consumers to tap into the equity in their homes.
In recent years, money coming from mortgage refinancing accounted for as much as 60 percent of the increase in consumer spending. Even a small reduction in the flow of cash pouring out of home equity will put a squeeze on consumer spending.
Posted by: John Konop at April 13, 2006 11:54 PM
You might cite the 1970s as a period where a demographics-based analysis of the labor market would have led to the wrong set of conclusions. With baby boomers entering the labor force (and women as well, although this would have been harder to predict), one would have expected (1) rapid growth, (2) low wages, and (3) diminishing inflationary pressure. What we got was exactly the opposite: (1) slowing growth, (2) already historically high real wages remaining high, and (3) lots of inflation.
I remember reading a Brookings paper once by Blanchard and Diamond where they attempted to decompose labor market outcomes into various underlying factors. The chart showing the impact of demographics looked like a meaningless blob.
Posted by: knzn at April 14, 2006 07:21 AM
knzn--good point on the 1970s
pjw--absolutely right on the immigration.
Kevin--he probably means the increase in consumer spending--not sure whether it's nominal or real (makes a difference)
Posted by: Mike Mandel at April 14, 2006 09:03 AM
I am a businessman not an economist. Yet I have been part of teams that raised allot of capital in my time. If I went to borrow money with VC,IB Or banks and said that 60% of the growth of the product, I am selling is from people going to Las Vegas on home values to pay me. Do you think I would get the money using that as a long term factor for my needs for capital ? In fact the current lender would change my debt to equity ratio fast.
As soon as my research person gets here I will post the other study.
Posted by: John Konop at April 14, 2006 09:53 AM
Mike, I tend to agree with you. The boomers will either have to work or want to work later in life than projected.
Also, note that the rest of the developed world, and much of the emerging markets (esp. China) face demographic shifts that are even more startling than America's. So "demography *is* destiny* if an ultra-low fertility rate doesn't eventually tick up. Check out Mark Steyn in the WSJ earlier this year for a great piece.
Posted by: Bond inevstor at April 14, 2006 10:09 AM
The math only works if wages are high enough to pay for social service cost(schools,healthcare...).The wages are going down so debt would go up.This is the steal more from Peter to pay Paul and make it up in volume plan.
Posted by: John Konop at April 14, 2006 10:23 AM
Considering the stability of stock market returns over the centuries, I am inclined to believe growth is constant and lower population growth leads to higher productivity growth.
Posted by: Lord at April 14, 2006 02:01 PM
UCLA won 11 Championships in a row in Basketball. How come they did not win it this year? Could it be a different coach,team,atmosphere........... I am old school why not look at the facts that we are dealing with today and explain your answer.That would be hard , because you are holding an empty hand.
Posted by: John Konop at April 14, 2006 09:48 PM
thought you would find this interesting.
Posted by: John Konop at April 16, 2006 09:52 AM
Using the US as the yardstick by which we determine whether or not demographics is destiny is a bit tricky. France and Germany have dreadful demographics and haven't shown any real growth in years. I can't imagine it starting any time soon.
I'm with Bond Investor and Mark Steyn on this one. Demographics may not cement your future into place, but it certainly places boundary conditions on it.
Posted by: K T Cat at April 27, 2006 05:50 PM