Demographics explain the recent slowdown in U.S. economic growth, according to new research from the Federal Reserve that leaves little room to blame the financial crisis or President Obama’s policies for the weak growth of recent years.
A paper published by economists at the Fed’s Board of Governors Monday concluded that slowing population growth accounted for 1.25 percentage points in slower inflation-adjusted economic growth since 1980, based on a model of the economy that incorporates demographics.
The demographic changes accounted for “essentially all” of the declines in both economic growth and interest rates in recent years, according to the study. That conclusion leaves little room for alternative explanations of what’s gone wrong, such as the theory that financial crises such as the one in 2008 lead to slower recessions or the idea, advanced by former Obama adviser Larry Summers, that the U.S. is suffering from “secular stagnation,” a situation in which there is a permanent shortfall of demand for goods and services. It also says that some of the remedies suggested in those analyses, such as the call for greater stimulus spending, might be off the mark.
Economic growth has run at a slow pace by historical standards in recent years. Annual growth in the gross domestic product, adjusted for inflation, hasn’t eclipsed 3 percent during Obama’s tenure. At the same time, interest rates have fallen to historically low levels and the Fed has targeted interest rates close to zero since 2008. Low interest rates could reflect that investors are guessing there aren’t many good investments to be made because future growth will be low, which in turn might be attributable to slower population growth.
U.S. fertility declined dramatically after the births of the baby boomers. While there were more than three births per woman, a standard metric of fertility, in the early 1960s, that rate had declined to less than two by 1980. That slowdown soon translated into the size of the workforce.
Population growth is expected to remain slow. As a result, the research predicts, “low interest rates, low output growth and low investment rates are here to stay, suggesting that the U.S. has entered a new normal.”
Researchers might have been fooled by the timing of the demographic changes and mistakenly chalked up the slower growth the financial crisis, the study notes. Demographics began pushing down growth most dramatically in the early 2000s, meaning that it was easy to confuse the effects of the housing bubble collapse and the effects of America’s changing population trends.
