DEMOGRAPHIC CONSTRAINTS If one is looking for the primary reason for real GDP growth in the 2010s (economic expansion has been stuck in the 2.5% territory rather than 3%-plus or higher), one needs to look no further than the demographic headwinds. The simple arithmetic of real GDP growth is that it is the sum of the growth in labor productivity plus the growth in the labor force. Labor productivity growth ebbs and flows, with the long-term growth rate staying in a range around 1% to 2%, say a 1.5% trend. By contrast, US population dynamics have shifted enormously in the decades since the end of WW II.

The decade of the 1960s saw the early Baby Boomers start to enter the workforce. In the 1990s, the Baby Boomers had been fully absorbed into the work force, yet labor growth remained quite strong as more women took jobs and the labor participation rate rose. Both the economic expansions of the 1960s and the 1990s had very strong following winds in the form of the rapid growth of the labor force.

The 2010s had major demographic headwinds. The Baby Boomers started to retire. Equally important, the generations of the 1980s and 1990s had fewer children than the generations of the 1940s and 1950s. Labor force growth in the 2010s slowed to a crawl.

Chart 2: Civilian Labor Force 120

1960’s 115 110 105 100 95 1990’s 2010’s

Moreover, and this is critical to appreciate, there is nothing that fiscal or monetary policy can do in the short run to alter demographic patterns, short of a major push for more immigration, which is clearly not going to happen. Even in China, where the aging demographic pattern is even more severe than in the US and likely to be a major constraint on economic growth in the 2020s, removal of the one-child policy will have no impact on labor force growth for at least two decades.

Politicians always wish they could create a set of policies to foster persistently strong economic growth during their tenure in office, but when the demographic headwinds from an aging population and slow growing labor force are so powerful as they are now, it is not possible. Politicians frustrated that the economic expansions are not producing the economic growth they desire, often resort to policies that expand debt. A quick expansion of debt can lift real GDP for a quarter or two, but it will not lift the long-term trend. And as debt loads grow heavier and heavier, economies get more fragile and more susceptible to policy mistakes.





40 Source: CME Group Economics, Federal Reserve Bank of St. Louis FRED Database (CLF16OV)



70 Number of Quarters of Expansion.






19 | ADMISI - The Ghost In The Machine | July/August 2019

1st Quarter of Expansion = 100.

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