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October 10, 2016 at 08:42 AM
Growth-wise, the world seems to be in a little bit of a rut.
Oh, sure, we’re OK. We just don’t seem to be going much of anywhere. Global production has recovered somewhat since the catastrophe of the financial crisis, but it didn’t bounce back entirely. Instead, we’re staggering along at a noticeably lower rate of growth, both abroad and at home.
What’s going on? One theory is that this is simply the aftermath of a financial crisis. We had a lot of malinvestment, and now we have a lot of fiscal and monetary problems to work out, and as with a bad illness, it’s going to take a little time for us to get back to 100 percent. A more worrying theory is that this may be the new normal because of the developed world’s aging populations. And that’s especially bad because when the population is aging, that’s when you need growth the most.
Most developed nations have made enormous promises to their elderly populations — promises that they could continue to live in the style to which they had become accustomed during their working years. Those promises were easy to fulfill when the ratio of workers to retirees was, say, five to one. As that ratio collapses, it gets harder and harder, because each worker has to devote a larger and larger fraction of their income to supporting another nonworking adult.
A simple numerical example may illustrate how important growth rates are to an aging economy. Let’s say we have 99 workers and one retiree, and we want all of them to enjoy the same standard of living. Now say each worker can produce $100 worth of stuff. If each of our workers donates $1 apiece to the retiree, everyone gets $99 dollars.
But now let’s say nine more people retire over the next nine years. Now we have 90 workers, generating total output of $9,000 a year. Split 100 ways, everyone gets $90 instead of $99. As more people retire, the math gets worse and worse. Eventually, the workers may well say “You nonworkers are on your own.”
Of course, this example is a static economy. Make those workers more productive, and things get very different. If the economy is growing by just 2 percent, and people retire at the same rate, we can maintain this system indefinitely with neither workers nor retirees getting poorer.
Related: The roots of retirement uncertainty: Not knowing how much to save
On the other hand, if growth falls to 1 percent, then over time, incomes start declining. Gross domestic product is going up, but income is falling. That’s obviously undesirable — and it’s also politically unstable. Which is why we need productivity growth now more than ever.
Unfortunately, a new paper suggests that now is when we’re least likely to get it. Economists have long known that economies were likely to slow down as the population aged, simply because the size of the workforce declined. Economic growth is composed of two components: workforce growth and productivity growth. If those numbers fall, so will the growth rate.
