In real terms, the US economy has grown at 3.2% a year since World War II, or 2% per person. But those days are likely over, says Citigroup in a new report. The bank’s econ team predicts US GDP growth will average 1.6% to 2.2% between now and 2030, and 0.8% to 1.5% on a per capita basis.
Call it the Big Downshift. And blame, mostly, demographics:
1. An acceleration in the pace of aging means rising elderly dependency ratios and likely a declining share of workers relative to the overall population. … Our resulting projections indicate that labor force participation in the United States is likely to stay broadly constant near current levels until the mid-2020s.
2. There are also indirect effects. For example, aging also means that the average worker who remains in the labor force is likely older than was the case a decade or two before, and older workers typically have chosen to work fewer hours than their younger counterparts.
3. Pressures associated with aging populations are already exerting stress on government fiscal positions and stoking uncertainties about medium-term debt sustainability. The political economy of this situation is thorny. An aging population means that older voters are a rising share of the electorate, and it may very well be difficult to convince them to cut their own benefits.
Economic growth is nothing more than how many workers you have and how much output they can produce per hour. And the aging of our society (and of Europe’s and Japan’s) will drive down the share of the working-age population and restrain labor force participation and hours per worker. But Citi also sees a slight slowdown in productivity growth historical rates. Put them together and you have an economy that won’t grow like it used to.
This is also the message from the Obama White House, which warned in its recent budget that in “the 21st century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post–World War II baby boom generation, and later due to a decline in the growth of the working age population.” Obama economists are looking for real GDP growth of 2.3% in the final years of its budget projection.
1. The US is projected to grow twice as fast as the EU and Japan. So we got that going for us, which is nice.
2. Americans would still, as Scott Winship has pointed out, experience large absolute gains in income and wealth despite lower rates of economic growth. If per capita income is 50,000 a year, a 2.2% gain would be $1100, while a 3.2% gain off a 25,000 income — roughly what US per capita GDP was 30 years ago — equals just $800.
3. Demographics are not destiny. Citi: “None of the adverse effects of aging are predetermined, and we believe that the risks to our projections are probably skewed to the upside.”
We can change tax and entitlement incentives to keep older Americans working longer, and put in place structural reforms (tax, immigration, education, regulation) to boost productivity. Also, Citi suggests that “pressures associated with demographics will likely fuel further advances in automation, computerization, and robotics.” (But can workers win the “race against the machines?”) That echoes a recent study coauthored by AEI’s Stephen Oliner, which raises “the possibility of a second wave in the IT revolution, and we see a reasonable prospect that the pace of labor productivity growth could rise to its long-run average of 2¼ percent or even above.”