FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 9, 2019

IN THIS ISSUE:

1. America is Not Aging Gracefully, Dire Implications

2. An Aging Population is Bad News For the Economy

3. As Workers Age, Productivity & Innovation Decline

4. How to Deal With This Serious Problem Going Forward?

America is Not Aging Gracefully, Dire Implications

The average American is getting older as Baby Boomers hit retirement age and our national birthrate continues to fall, according to new data from the US Census Bureau. The median American was 38.2 years old in 2018, the Census Bureau said, up from 37.2 years in 2010.

The American working population is getting older, too, and that has some gloomy consequences for the economy. The median age of the American worker today is 42, four years older than the median working age 20 years ago.

The number of Americans who have crossed into retirement age is growing rapidly, the new Census figures show. In 2016, 16% of the US population was more than 65 years old, up 30% since 2010. Over the same time, the number of Americans who are under the age of 18 has fallen by 1.1%.

Americans are used to hearing dire warnings about aging. We are told it could bankrupt the social safety nets as Medicare and Social Security run out of money. We are regularly reminded about the inadequacy of our retirement nest eggs.

Yet these may be the least of our worries. While reshaping the workforce and improving our patterns of saving and investment are indeed important, the aging of the American population is carving an unexpectedly broad path of concern across the economy. Unfortunately, there’s little we can do about it -- unless we’re willing to significantly change our immigration policies.

Aging, according to recent economic research, is stunting the emergence of new businesses and sapping productivity -- although worker efficiency saw a nice bounce in the 1Q, as I wrote in my BLOG on June 27. Aging is contributing to the rise in corporate monopoly power and eating into workers’ share of national income. Many of our economic ills can be traced to some degree to this irreversible fact: America is getting old.

This problem is, of course, not limited to America. Europe, Japan and several other developed nations face the same problem – in some cases even worse than our own.

Today, we’ll look at some of the major implications our aging population will have on the economy and other important trends. Let’s begin with the most basic measure of progress: economic growth. 

An Aging Population is Bad News For the Economy

Researchers at Harvard and the Rand Corporation recently concluded that a 10% increase in the share of the population over 60 reduced the growth rate of per capita Gross Domestic Product by 5.5%. They projected that aging would shave no less than 1.2 percentage points off annual economic growth in the next decade. Some forecasters say it will be even worse.

The Congressional Budget Office weighed in recently with a similarly downbeat view on long-term growth prospects. The CBO projects real GDP growth of only 1.9% over the next three decades, based on projected labor force growth of only 1.4% and productivity growth of 0.4%.

There were high hopes that the revolution in information and communication technology would provide a more sustained boost to productivity, not just a short-term jolt. It remains to be seen whether existing IT will yield additional benefits as-yet-undiscovered synergies among technologies emerge, or whether it will take the next generation of innovations to boost productivity.

One of the biggest problems is our shrinking labor supply. As Baby Boomers move into retirement, leaving the workforce to their younger replacements, the share of Americans who are working is shrinking -- while the share of the elderly who no longer depend on a paycheck is rising.

And this stat is really stark: By 2030, only 59% of adults over 16 will be in the nation’s labor force, according to the Census Bureau. That’s three percentage points less than in 2015. Other data suggest it could be even lower.

Population growth has slowed most significantly among white Americans in recent decades, but the new Census data show members of other races are growing older too. The median African American is 1.4 years older than they were in 2010; the median Hispanic American is 2.2 years older; and the median Asian American is 1.7 years older. So, this trend is now spread across racial and demographic borders.

As Workers Age, Productivity & Innovation Decline

As workers get older and as the share of the population at work shrinks, it stands to reason that economic growth per person will slow too — as a smaller proportion of Americans are engaged in income-generating work. Yet data show that two-thirds of the growth shortfall comes from slowing labor productivity growth.

It’s not obvious why the change in the composition of workers (more workers in their 50s and 60s, fewer in their 20s and 30s) slows down innovation. It may be that older workers have a harder time coming up with new ideas and learning new skills, so businesses with an older workforce may be less likely to invest in new technology.

Whatever the precise cause, the slowdown shows up in the data. Moody’s Analytics concluded that aging over the past 15 years reduced productivity growth in the US by 0.25% to 0.7% per year. That might not sound like much, but it’s huge over time.

Nonfarm Business Productivity: Real Output Per Hour of All Working Persons

Source: Federal Reserve Bank of St. Louis
 

Other researchers suggest that an older, smaller labor force can also account for the sluggish rate of business start-ups. Roughly half of American companies are at least 11 years old today, up from less than one-third in the late 1980s. Simply put, there are fewer new companies entering the marketplace now than there were several decades ago.

And here’s another troubling issue to think about: The declining supply of workers may not even be the most intense headwind caused by our aging population. Instead, the most worrying feature of our time may be older workers’ high rate of savings and low rate of spending, as they build nest eggs to support themselves through what is likely to be a long retirement.

Remember, consumer spending accounts for apprx. 70% of Gross National Product. If older workers are saving more for retirement and spending less, that can be a significant drag on the economy in the years to come.

How to Deal With This Serious Problem Going Forward?

Unfortunately, there are no easy answers. The most common suggestion is that we increase immigration to help address some of the shortcomings of our aging labor force. Yet in the current political environment, the odds that the United States will open the door to more foreign workers look very small.

On the other hand, I would highly agree that revamping our immigration laws to make it easier for the hundreds of thousands of foreign students who graduate from our colleges and universities each year to stay in the US after graduation. This should be especially true for those who get advanced degrees in such fields as science, technology, engineering and mathematics (“STEM”).

Making these talented, highly educated, English-speaking foreigners leave the country after graduating from our colleges and universities may have made sense a long time ago, but not today, with our aging workforce. I believe many of them would stay in the US, especially if we gave them a path to citizenship. This should be a no-brainer today!

Another idea is to try to increase our birthrate. Tax breaks, child subsidies, paid leave and other subsidies have had some modest success in increasing birthrates in countries like France, Canada and Sweden. But there is little evidence that such policies would convince American women to have more children. I think that ship has already sailed.

Finally, one great paradox of this predicament is that robots could help address some of these problems, replacing workers that age out of their productive lives. Studies show that most Americans have negative feelings about robots taking over jobs in the workplace.

I have been doing a good bit of reading on this subject, and I have a more positive outlook on robots and our future. But I’ll save those thoughts for another time when I can explore this sensitive topic more fully. Bottom line: Robots and new technologies like 3-D printing, for example, will be a big part of our future.

Finally, while the discussion above on our aging workforce is troubling, there is some good news I can report so we can end on a positive note.  The National Bureau of Economic Research – the arbiter of when economic recoveries begin and end – reported last week that we are now in the longest economic recovery on record. July marks the 121^st month of the current recovery, surpassing the previous longest of 120 months from March 1991 to March 2001.

That’s great news! I’ll have more to say on this important achievement soon.

Best regards,

Gary D. Halbert

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