“Peanuts” comic-strip creator Charles Schulz quipped that once you’re over the hill, you begin to pick up speed. He clearly wasn’t talking about the global economy.
Developed countries are aging, and a growing body of research suggests that demographic headwinds are reining in potential growth and curbing how high interest rates can rise. That’s causing a massive rethink at central banks, who may find themselves with little room to cut rates and boost growth during the next recession.
Papers that dig into big structural changes in the global economy, from the demographically-induced slowdown to slumping productivity, are the focus of this edition of our economic research wrap.
Aging Changes Everything
Fed Vice Chairman Stanley Fischer included this gem of a paper in the footnotes of his October 17 speech. Today’s sub-par U.S. economic growth and low interest rates were predictable, the authors find, based on a model that takes into account changes in the U.S. population, family composition, life expectancy and labor market activity. Those are long-run changes, so the low growth-environment they’ve created seems poised to persist.
Most of the demography-induced slowdown has happened since 2000, so “downward pressures on interest rates and GDP growth due to demographics could be easily misinterpreted as persistent but ultimately temporary influences of the global financial crisis.” Interpretation: We thought growth was crummy because we were getting back to normal, but in fact it may be that tepid growth and low rates are normal.
You Can Also Blame Aging For America’s Homebodies
Americans have grown less likely to move across state borders, which means that people might be slower to move to places with jobs that fit their skills and interests, perpetuating labor market mismatches. New York Fed economists dig into what’s behind the trend.
Aging directly explains less than 20 percent of the decline in interstate migration, they find, but add in indirect effects and it explains about half of the slowdown. The theory here: a bigger share of the working population is advancing through middle age, and mid-career workers are less likely to move. That makes it efficient for companies to recruit locally, which has reduced employment-related moves across the age spectrum. (See "What Caused the Decline in Interestate Migration in the United States?" at the New York Fed website.)
It’s An Uncertain Era