I thank the organizers for inviting me to speak at the Cato Institute's 35th Annual Monetary Conference. To some of us, 35 seems relatively young, but for a conference series it is a ripe old age. The series' longevity underscores the important contributions it has made over the years to the public discourse on monetary economics and policy. Whether you interpret 35 as young or old depends on the context, which brings me to my topic today: demographics and their implications for the economy and policy. This might seem like an unusual topic for a Cato conference, but demographics have been on my mind, and not just because I had a birthday last month.
The word "demographics" comes from the Ancient Greek: "demo" meaning people and "graphics" meaning measurement. There is a strong tradition of studying demography as part of economics. Malthus's writings on population growth are a part of many history-of-thought courses in economics. More recently, as the economy has moved from financial crisis and the Great Recession to sustainable expansion, attention has shifted from cyclical aspects of the economy to structural factors. In addition, as policy has begun to normalize, the question has been raised: What is normal? To answer such a question, we need to understand how the underlying fundamentals of the economy are evolving. A critical factor is demographics.
Demographic change can influence the underlying growth rate of the economy, structural productivity growth, living standards, savings rates, consumption, and investment; it can influence the longrun unemployment rate and equilibrium interest rate, housing market trends, and the demand for financial assets. Moreover, differences in demographic trends across countries can be expected to influence current account balances and exchange rates. So to understand the global economy, it helps to understand changing demographics and the challenges they pose for monetary and fiscal policymakers.
Today I will talk about some of these demographic trends and their policy implications. Of course, the views I'll present are my own and not necessarily those of the Federal Reserve System or of my colleagues on the Federal Open Market Committee (FOMC).
Until the early 18th century, world population grew little because high mortality rates offset high fertility rates.' But increased knowledge and technological change in the form of advances in medicine, public health, and nutrition began to lower mortality rates. Fertility rates also began to decline. In the United States there were shifting preferences for smaller families because of the rising opportunity costs of having children and the higher costs of raising and educating them. The shift in population from rural to urban areas reduced the need for large families to run farms. There were changes in social norms regarding the use and availability of birth control. The baby boom in the United States after World War II, and the subsequent echo when the baby boom generation began having their own children, were exceptions to a generally downward trend in the birth rate. Today, the U.S. fertility rate is 1.88 births per woman (United Nations 2017: 807). This is less than the United Nations' estimated 2.1 replacement rate needed to keep the population stable, and it is considerably less than the fertility rate in 1900, which was over 3. (2)
As these demographic changes have played out, the average life expectancy in the United States has risen and the population has aged. Average life expectancy at birth is now nearly 80 years old, 30 years higher than it was in 1900. (3) The median age of the U.S. population is approaching 38 years old, nearly 10 years older than in 1970. (4) The United Nations projects that by 2050, the median age in the United States will be 42 years old and that the number of people age 65 or older per 100 of working-age people, those age 15 to 64, will be more than double what it was in 1970. (5)
Reflecting projections of relatively stable fertility rates and continued aging of the population, world population growth is expected to slow. (6) It averaged around 2 percent per year in the latter half of the 1960s and slowed to 1.2 percent per year over 2010-15 (United Nations 2017: 3). U.S. population growth, including net international migration, is expected to slow from about 0.8 percent in recent years to under 0.5 percent in 2050, with nearly two-thirds of that growth coming from net migration. (7)
A number of advanced economies are further along in this demographic transition than the United States is, and the process of population aging is accelerating worldwide (Bloom and Canning 2004: 18). In Japan, the population has been shrinking over the past five years, the ratio of older people to working-age people is the highest in the world, and die median age is almost 47 years old (United Nations 2017: 415). (8) Across Europe, fertility rates have been below the replacement level for some time (United Nations 2017: xxvii). In China, the growth rate of the working-age population has slowed since the late 1980s, and, partly because of its previous one-child policy, China's population is also rapidly aging (United Nations 2017: 191; Peng 2011). The median age in China has increased from around 19 years in 1970 to 37 years in 2015.
On the other hand, many low- and middle-income countries are at a considerably earlier phase in the demographic transition, with young and faster-growing populations, and rising labor force participation rates. In India, the median age is around 27 years and the annualized growth rate of the population from 2010 to 2015 has been 1.2 percent (United Nations 2017: 383). The United Nations projects that, in seven years, the population of India will surpass that of China, currently the most populous country, and that India's population will continue to grow through 2050. Much of the increase in world population between now and 2050 is projected to be in Africa, where fertility rates remain high.
The implications of these global demographic patterns for the future of the U.S. economy are worth considering because they pose some challenges for policymakers. Indeed, the magnitude of the effects will depend on policy responses. The remainder of my talk will discuss some of the ways these changing demographics could influence the U.S. economy, in particular, labor markets and economic growth. Then I will turn to considerations for monetary, fiscal, and other government policies.
Demographic Implications for Labor Markets
Demographics influence the supply of labor. Typically, as mortality rates decline and people live longer, the supply of labor increases. We saw this pattern begin in the United States in the late 1960s and the 1970s, especially as women and the baby boomers began entering the workforce. The result was an increase in the available supply of prime-age workers, both females and males, and potential growth rates in the 3 to 4 percent range (CBO 2017b).
Even though increased life expectancy means individuals will need to work longer in order to save more for retirement, usually population...