Economists Have Aging on the Mind as They Face a ‘New Normal’

Aging populations and structural changes in the economy are spurring new research
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 “Peanuts” comic-strip creator Charles Schulz quipped that once you’re over the hill, you begin to pick up speed. He clearly wasn’t talking about the global economy. 

Developed countries are aging, and a growing body of research suggests that demographic headwinds are reining in potential growth and curbing how high interest rates can rise. That’s causing a massive rethink at central banks, who may find themselves with little room to cut rates and boost growth during the next recession. 

Papers that dig into big structural changes in the global economy, from the demographically-induced slowdown to slumping productivity, are the focus of this edition of our economic research wrap.  Check this roundup every week for the latest on interesting and influential economic research from around the world.  

Aging changes everything. 

Fed Vice Chairman Stanley Fischer included this gem of a paper in the footnotes of his Oct. 17 speech. Today’s sub-par U.S. economic growth and low interest rates were predictable, the authors find, based on a model that takes into account changes in the U.S. population, family composition, life expectancy and labor market activity. Those are long-run changes, so the low growth-environment they’ve created seems poised to persist. 

Most of the demography-induced slowdown has happened since 2000, so “downward pressures on interest rates and GDP growth due to demographics could be easily misinterpreted as persistent but ultimately temporary influences of the global financial crisis.” Interpretation: we thought growth was crummy because we were getting back to normal, but in fact it may be that tepid growth and low rates are normal.


Understanding the New Normal: The Role of Demographics
Published October 2016
Available on the Federal Reserve website

You can also blame aging for America’s homebodies. 

Americans have grown less likely to move across state borders, which means that people might be slower to move to places with jobs that fit their skills and interests, perpetuating labor market mismatches. New York Fed economists dig into what’s behind the trend. 

Aging directly explains less than 20 percent of the decline in interstate migration, they find, but add in indirect effects and and it explains about half of the slowdown. The theory here: a bigger share of the working population is advancing through middle age, and mid-career workers are less likely to move. That makes it efficient for companies to recruit locally, which has reduced employment-related moves across the age spectrum. 

What Caused the Decline in Interestate Migration in the United States? 
Published Oct. 17, 2016 
Available at the New York Fed website

It’s an uncertain era.

If you feel like we’re living in a time of constant turmoil, a new Global Economic Policy Uncertainty Index backs you up. It was 60 percent higher between July 2011 and August 2016 than the prior 14.5 years, and 22 percent higher than in 2008-2009, during the height of the global financial crisis. 

Why? Steven Davis, the University of Chicago Booth School of Business economist who’s created the index, cites the European immigration crisis, concerns about China’s economic transition and the British referendum to exit the European Union. Russia’s annexation of Crimea and surging populism haven’t helped, either. Davis’ index is a GDP-weighted combination of economic uncertainty indexes from 16 countries that account for two-thirds of the world’s output. The national indexes are based how often select economic uncertainty-related terms crop up in a country’s newspaper articles. 

An Index of Global Economic Policy Uncertainty
Published October 2016
Available on the NBER website

Puzzling over productivity?

Dallas Fed economists think they have part of the answer: U.S. high-tech economic activity has concentrated in research and development, the so-called “upstream” part of the innovation process, rather than in actual assembly and sale. Because upstream tasks are naturally less productive, given that “upstream tasks are also burdened with the responsibility of discovering and producing those new technologies,” that change is causing measured productivity growth to slow. 

U.S. Productivity Growth Flowing Downstream
Published October 2016
Available at the Dallas Fed website

Central bankers’ brave new world...

Even in countries that weren’t hard-hit by the economic crisis, central bankers have been reconsidering their mandates or implementing financial-stability related policy measures, based on a survey of central bankers and academic economists carried out by Princeton University economist and former Fed Vice Chairman Alan Blinder and his co-authors. “We hypothesize that central banks in the future will have broader mandates, use macro-prudential tools more widely, and communicate more than before the crisis,” the authors write, despite the lack of consensus about how effective extraordinary measures have been. 

 

Still, views aren’t uniform: “While many scholars typically support keeping most of the unconventional policies in central banks’ toolkits, central bank governors are considerably more skeptical.”

Necessity as the Mother of Invention: Monetary Policy after the Crisis
Published October 2016
Available at the NBER website

 

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