The news cycle runs so incredibly fast these days that it is often hard to grasp that many of the truly important events governing our lives occur in relative obscurity and unfold over a long period of time. The postwar baby boom in the U.S. was exactly like that–lots and lots of babies were born and were growing up well before we began to think about the impact this demographic fact might have on the economy and on social programs. And because demographic phenomena are both slow-moving and inexorable, it is easy to ignore them for long periods.
The world economy is undergoing an even more dramatic transformation now, under the radar and at such a low frequency that it is easy to overlook. But we ignore it at our peril because it has profound consequences for issues–like “global imbalances”–that many think are directly linked to our current economic woes.
Let’s begin with a few facts about population growth. In almost all of the economically successful countries and regions, birth rates have declined and, as a result, the population is aging. In some countries, the population growth has or will become negative.
In China, for example, the median age of the population is expected to increase by nearly 11 years between now and the year 2050–from roughly 34 years to 45 years–and the population growth rate there will turn negative in the next several years. The picture is similar in Japan, where the growth rate has already reached close to zero. The average age is expected to increase from 44.7 years to over 55 years by 2050. In Korea, the median age of the population is expected to increase by nearly 20 years by 2050. If you’ve traveled to these countries recently, you’ll probably have noticed the significant graying of their population.
Similar patterns hold in Russia and much of Eastern Europe. All are expected to have shrinking populations. In Western Europe, the pattern is a little bit different, but the outcome is similar. The average age of the population is currently 40 years and is expected to increase to 47 by year 2050. Obviously, birth rates are well below replacement, and the population growth rate is projected to be negative eventually for the whole of Western Europe.
The demographic picture for the U.S., in contrast, is quite good. The median age is 36 and is expected to increase to just over 40 by 2050. The population growth rate will continue to stay positive and significant.
Why is this important? For one thing, it has grave implications for the social fabric of society. An aging population means that the fraction of working-age population to total population is declining and the old age dependency ratio is increasing. With fewer workers supporting the needs of more and more elderly, the fiscal burdens are worrying. An aging population increases pension and health care burdens on the whole system. If you think we in the U.S. have a problem with social security and health care issues (and we do), those issues loom even larger for most other developed nations.
When the population ages at a different pace in different parts of the world, it impacts capital flows across regions. People tend to save when they are young in order to finance their consumption during retirement. Ben Bernanke and Alan Greenspan both pointed to the glut of savings as part of the reason for the tremendous credit boom of the past decade. This is entirely consistent with the demographic trends cited above.
There has been a lot of hand-wringing of late about the need to rectify imbalances in the global economy that led the U.S. to be a net borrower from the rest of the world. Global imbalances are thought to be at the heart of many of our current global financial problems because so much U.S. debt of various forms has ended up on foreign balance sheets. Certainly, it seems incongruous that the world’s wealthiest nation is also the world’s biggest debtor.
But we have experienced two decades of imbalance in the flows of capital to the U.S. There is a commonplace view–presaged by the very term “imbalance”–that the U.S. current account deficit cannot continue and that the longer it lasts, the more drastic and painful will be the ultimate adjustment. When considered together, the net effect of the demographics transition is that savings will continue to flow to the U.S. from regions that are aging faster. These demographic forces are already in place, and there is little that could alter this equilibrium for some time to come.
Demographics are also important because they have implications for productivity growth. Innovation is more apt to be generated by the young and vigorous. The young are also more adaptable, better able to acquire the new skills called for by innovation, and more likely to take advantage of educational opportunities that better prepare them for such opportunities.
There is a reason for our demographic good fortune. It is immigration. Our willingness to provide opportunities for immigrants from every class and every country has been the driving force of our economy. Our ability to continue to create new ideas and drive innovation depends critically on our willingness to welcome the best and the brightest and the hardest working, who understand the potential that the U.S. represents.
It is worth pausing now to think about this “slow news” because our political leaders seem incapable of thinking beyond lunch. Legislative blunders like the Sanders-Grassley “Hire Americans First” and other anti-immigration measures may play well on the Lou Dobbs circuit. But they are a serious threat to our long-term good fortune.
Thomas F. Cooley, the Paganelli-Bull professor of economics and Richard R. West dean of the NYU Stern School of Business, writes a weekly column for Forbes.