Building shield

After a week of manifesto launches, we’ve heard a lot from politicians telling us what they’ll do to ‘grow the economy.’

This rather suggests that a national economy is like a delicate house plant, entirely dependent on the care and attention of those looking after it. A better analogy would be with a deeply-rooted tree – because though politicians can do a great deal of economic damage, the underlying rate of growth is largely determined by factors beyond their control.

One such factor is demographic change – the impact of which is examined by the economists Yunus Aksoy, Henrique Basso, Tobias Grasl and Ron Smith in an article for the website:

“The demographic age profiles in OECD economies are significantly changing. The average proportion of the population aged 60+ is projected to increase from 16% in 1970 to 29% in 2030, with most of the corresponding decline experienced in the 0-19 age group.”

The authors show how demographic trends help explain economic trends over the last few decades:

“We… investigate the impact of the baby-boomers entering the labour market in 1970s and approaching retirement in late 2000s in the individual countries analysed… we find that changes in age profile would have contributed to a significant reduction in hours worked, with Japan being the country most significantly affected.”

The example of Japan is a particularly interesting one. The country’s ‘Lost Decade’ (now two decades and counting) of low growth, low inflation, low interest rates and high debt is the subject of much debate. In the wake of financial crisis of 2008, American and European policy makers are desperate to succeed where the Japanese failed. But for all the arguments about this or that policy response, the essential truth is that the Japanese economy stagnated first because the Japanese population got old first.

Now that the rest of the OECD countries are going grey, they too will feel the economic chill:

“We find that in most countries, the decrease in working-age population and fertility and the increase in the proportion of retirees expected for the next 20 years would result in a strong decrease in trend output growth and significantly lower the real interest rate.”

There are other long-term factors that contribute to the underlying rate of economic growth. For instance, some economists have argued that GDP is being held back by the slowing pace of innovation. They may well be right, but innovation is itself affected by demographics:

“…we show that demographic structure also affects innovation, with older workers (in particular the 50-59 age group) having a strong negative impact on total number of patent applications. In general, innovation, which can be considered a measure of productivity gains, is positively affected by young and middle-aged cohorts…”

Is there anything sensible that governments can do in response to these factors?

If we implement family-friendly policies there’s some hope that we can boost the birthrate, but obviously this will take decades to feed through into a country’s overall demographic profile.

Some people will take this as a reason to ease-up on immigration controls. In fact, it’s a reason why we need to control immigration more carefully than ever – to attract those workers most capable of boosting our demographically degraded capacity for innovation.

We should also remember that we need innovation in the public sector too, because that’s where so much of our economy is. It is therefore vital that we overturn the restrictive practices that prevent younger, more socially entrepreneurial, workers from making change happen.

Finally, we need to learn from the Japanese experience and realise that building up ever greater levels of debt isn’t going to jump-start growth. Instead, let’s draw upon our collective maturity and accept that we must live with our means.

2 comments for: Heresy of the week: There’s only so much that politicians can do about economic growth

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