Changing demographics will transform the US economy and its politics. Image: Library of Congress.

The US’ looming demographic shock

Mark Pisano

Why is the American economy not performing as expected? Many of our rules of the thumb for macroeconomic behavior do not seem to be working. Ten years after the great recession the US and the world’s economic growth is creeping along. Something seems to be out of whack and holding back the economy. Part of the problem is that our traditional fiscal and monetary tools are not well suited to new challenges. They do not look at the epic changes that are transforming the world’s population and changing the role of the collective choice of individuals.

Big data create the possibility for understanding and quantifying the new economic realities. My new book, The Puzzle of the American Economy, applies the tools of demography to help us to understand the effects of our collective choices. While the focus of this book is the US, the world is the backdrop. The changes around us are no longer invisible using these tools. And what is learned in this book is startling.

We are getting older. Soon, 80% of our population growth in the US will be over 65: collectively making less money, spending less, and pay less taxes. At the same time, working age population growth will be half the rate of growth of the past 30 years. That is a slower growth rate of individuals who make more, spend more and pay more taxes. The combination of these two trends means extraordinary demographic penalties for our economy. For the next twenty years, the annual growth rate in income will drop by 24.7 percent. The growth rate for expenditures (consumption) will decline by 15.4 percent, and the growth rate for total taxes paid by individuals will decline by 45.8 percent.

The Puzzle of the American Economy was published by Praeger in March 2017

We have already witnessed the effects of demographic change. Over the last fifteen years, these trends led to a total reduction in GDP of $3.34 trillion, a decline in consumption of $2.27 trillion, and a reduction in taxes paid of $2.27 trillion. This last statistic needs to be emphasized. In the three decades before 2000, American governments experienced an annual growth in taxes of 3.4 percent. Since 2000, the growth rate has been halved to 1.7 percent.

In 2016, the last year of the Obama presidency, GDP was $486 billion lower than it would have been if demographic changes had not kicked in over the preceding fifteen years. This “demographic penalty” will hurt the Trump administration too. Over the next four years, total GDP loss will be about $2.6 trillion. Lost revenues for government will amount to $1.3 trillion.

The effects of these demographic penalties help explain the political condition of the day and why our economy is so puzzling. They portend gray clouds ahead for the US and the globe. Adding insult to injury, the factors behind the penalty — that is, the decline in the working-age population growth — could further decrease the rate of growth of the economy. Over the past seventy years, growth in workers explains 60 percent of the GDP growth. If the potential growth in supply is half, what will that do to the already slow GDP growth rate of 1.9 % the last 15 years? Another growth determinate, productivity, is at a forty-year low and not projected to increase and bail us out. Finally, we are awash in the final determinate of growth: money. Thinking we can grow our way out of our current malaise is wishful thinking.

Responding to them will define the true capacity of America’s exceptionalism. The strongest tools of this struggle are the character of the American people and our political system if we let them work for us. Our political system is flexible and diversified and fostered reciprocal relations among science, technology and the marketplace. The United States has always prided itself on its decentralized governmental structure and the capacity of its population to collaborate though partnerships and associations to accomplish its social and economic goals. These two strengths are exhibited within our communities, local government and regions.

The Puzzle of the American Economy explains how strategies that build on these strengths are emerging throughout the country. Examples are provided for rebuilding the economy base of our communities and regions, showing how the use our people and governmental system is altering the top down hierarchy of the past to a more decentralized, diverse and distributed (3D) strategy. Strategies and approaches that will enable government to deal with growing fiscal stress are developed. The Tocquevillian spirit is alive and well in a growing number of communities and regions of the country. Even more important are the innovations that are emerging.

We are increasingly aware that “no one”, absolutely “no one” is disposable. Our current penchant for warehousing or excising those who are not contributing is no longer an option. Those who are incarcerated, those who are not functional, those who not here legally, and those who want to come here should be encouraged and assisted. If we change how “We the People” solve the “Puzzle of the Economy” will truly expand the meaning of American exceptionalism.

Mark Pisano is a Professor of the Practice of Public Administration at the USC Sol Price School of Public Policy. The Puzzle of the American Economy was published by Praeger in March 2017.