Old people are holding the economy back

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It's no secret that America's aging Baby Boomer population is muddying the concepts of old age and retirement as the country has known them for decades.

Americans are living and working longer, and domestic birth rates have slowed. This dynamic is effectively throwing off labor force participation metrics, health care expenditures and Social Security's finances. Should ongoing trends continue unabated, the country's youngest workers today are on course to age in the years ahead unlike any prior generation.

And although an economic drag has often been implied by this trend – both within the U.S. and in other developed countries like Germany and Japan – few researchers have attempted to peg an exact number on how much an older population weighs on overall economic output.

But a paper published Monday by the National Bureau of Economic Research attempts to do just that, estimating that a 10 percent increase in the fraction of Americans that's at least 60 years old slashes national economic output per capita by 5.5 percent.

In other words, as a state's population gets older, its gross domestic product is measurably dragged down.

"Population aging is widely assumed to have detrimental effects on economic growth, yet there is little empirical evidence about the magnitude of its effects," the researchers said in the study. "This paper starts from the observation that many U.S. states have already experienced substantial growth in the size of their older population and much of this growth was predetermined by historical trends in fertility."

The study's authors examined Census data from 1980 to 2010 and found that the country's share of older Americans increased by 16.8 percent over that period, finding that the country's GDP over that 30 year window was "9.2 percent lower than it otherwise would have been absent population aging."

"This dramatic shift in the age structure of the U.S. population ... has the potential to negatively impact the performance of the economy as well as the sustainability of government entitlement programs, and could result in a decline in consumption for the population as a whole," the study said.

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"The Federal Reserve acted sooner and more aggressively than other central banks in keeping rates low," says Bernard Baumohl, chief global economist at the Economic Outlook Group.

In December 2008, the Fed slashed short-term interest rates to near zero and has kept them there. Ultra-low loan rates have made it easier for individuals and businesses to borrow and spend. The Fed also launched three bond-buying programs meant to reduce long-term rates.

By contrast, the European Central Bank has been slower to respond to signs of economic distress among the 18 nations that share the euro currency. The ECB actually raised rates in 2011 - the same year the eurozone sank back into recession.

It's worth keeping in mind that the Fed has two mandates: To keep prices stable and to maximize employment. The ECB has just one mandate: To guard against high inflation. The Fed was led during and after the Great Recession by Ben Bernanke, a student of the Great Depression who was determined to avoid a repeat of the 1930s' economic collapse.

Janet Yellen, who succeeded Bernanke as Fed chair this year, has continued his emphasis on nursing the U.S. economy back to health after the recession of 2007-2009 with the help of historically low rates.

(AP Photo/J. Scott Applewhite)


The United States moved faster than Europe to restore its banks' health after the financial crisis of 2008-2009. The U.S. government bailed out the financial system and subjected big banks to stress tests in 2009 to reveal their financial strength. By showing the banks to be surprisingly healthy, the stress tests helped restore confidence in the U.S. financial system.

Banks gradually started lending again. European banks are only now undergoing stress tests, and the results won't be out until fall. In the meantime, Europe's banks lack confidence. They fear that other banks are holding too many bad loans and that Europe is vulnerable to another crisis. So they aren't lending much.

In the United States, overall bank lending is up nearly 4 percent in the past year. Lending to business has jumped 10 percent.

In the Eurozone, lending has dropped 3.7 percent overall, according to figures from the Institute of International Finance. Lending to business is off 2.5 percent. (The U.S. figures are for the year ending in mid-June; the European figures are from May.)

(AP Photo/Steven Senne)

Economists say Japan and Europe need to undertake reforms to make their economies more flexible - more, in other words, like America's.

Europe needs to lift wage restrictions that prevent employers from cutting pay (rather than eliminating jobs) when times are bad. It could also rethink welfare and retirement programs that discourage people from working and dismantle policies that protect favored businesses and block innovative newcomers, the Organization for Economic Cooperation and Development has argued.

Prime Minister Shinzo Abe has proposed reforms meant to make the Japanese economy more competitive. He wants to expand child care so more women can work, replace small inefficient farms with more large-scale commercial farms and allow more foreign migrant workers to fill labor shortages in areas such as nursing and construction.

Yet his proposals face fierce opposition.

"Europe and Japan remain less well-positioned for durable long-term growth, as they have only recently begun to tackle their deep-rooted structural problems, and a lot remains to be done," says Eswar Prasad, a professor of trade policy at Cornell University.

China is struggling to manage a transition from an economy based on exports and often wasteful investment in real estate and factories to a sturdier but likely slower-growing economy based on more consumer spending.

(AP Photo/J Pat Carter)


Weighed down by debt, many European countries took an ax to swelling budget deficits. They slashed pension benefits, raised taxes and cut civil servants' wages. The cuts devastated several European economies. They led to 27 percent unemployment in Greece, 14 percent in Portugal and 25 percent in Spain. The United States has done some budget cutting, too, and raised taxes. But U.S. austerity hasn't been anywhere near as harsh.

(AP Photo/Pablo Martinez Monsivais)


The Fed's easy-money policies ignited a world-beating U.S. stock market rally. Over the past five years, U.S. stocks have easily outpaced shares in Europe, Japan and Hong Kong. That was one of Bernanke's goals in lowering rates. He figured that miserly fixed-income rates would nudge investors into stocks in search of higher returns. Higher stock prices would then make Americans feel more confident and more willing to spend - the so-called wealth effect.

Most economists agree it's worked.

(Photo by Andrew Burton/Getty Images)

A separate analysis of historical Census data reveals that the median national age in the U.S. ballooned to 37.4 in 2014 from just 30 in 1980. Interestingly, the five states and regions that saw the smallest increase in median age over that 34-year window – the District of Columbia, Utah, California, Kansas and Texas – accounted for about 25 percent of America's GDP in 2014.

The five states that aged the most over that period – Maine, Vermont, New Hampshire, West Virginia and Montana – accounted for just 1.6 percent of the country's output.

However, the report stops short of comparing individual states with one another, noting that population age and economic output are not independent variables.

"[E]conomic changes can themselves shape the population age structure by affecting ... patterns of migration and mortality, and thus any association between economic growth and population aging at the state level is unlikely to represent the causal impact of population aging," the study said.

It's been well-documented that the country's labor recovery in the aftermath of the Great Recession has favored larger metropolitan regions while wiping out some job opportunities in more rural parts of the country. The District of Columbia, New York and thriving cities in Texas like Dallas, Houston and Austin offer plenty of opportunities for young, skilled workers that may not otherwise be available in West Virginia or Maine.

On the flip side, though, older Americans may flock to cheaper tax-friendly states like New Hampshire or Montana to retire. These economic differences between states help mold the U.S. population age landscape, but they also make it difficult to compare a state like Texas with a state like Montana, considering how many variables are at play when it comes to population age.

At the national level, though, it's clear that the country's aging populace is a drag on the economy as a whole. Researchers estimate that about one-third of the slowdown is related to "slower labor force growth," suggesting that job opportunities in older states aren't expanding at nearly the same rate as some younger, more economically thriving regions.

Another two-thirds of the economic reduction plays out in "slower growth in the labor productivity of workers," or the amount of product an individual employee pumps out per hour worked.

Productivity has long been considered a missing piece to the country's broader economic growth – as productivity gains often translate into raises for workers. The National Bureau of Economic Research study found that "population aging slows earnings growth across the age distribution," impacting young and old workers alike.

It ultimately suggests that an older America won't be nearly as productive or see nearly the same kind of wage increases that the country would've seen years ago, before decades-old fertility and aging dynamics set in.

And as the country continues to age, the economic drag is expected to only get worse. Between 2010 and 2020, economic growth is expected to be held back by 1.2 percentage points per year due solely to the older population.

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