Demographic Dividends Of The Past And Headwinds That Will Shape US Growth In The Trump Era

by: Ed Dolan

Summary

The US economy has not seen sustained growth of 4% since the 1970s or 3% in this century.

Rapid growth in the past was fueled by demographic trends that have run their course.

Key tends include growth of working-age population, dependency, and women in the workforce.

One of Donald Trump's signature campaign promises is a 4 percent growth rate for real GDP. During his confirmation hearings, Treasury secretary designate Steven Mnuchin scaled that back to a 3 to 4 percent range, but that is still an ambitious goal. US GDP growth has not reached 4 percent in any year since the start of the century and has not averaged 4 percent over any four-year period since the 1970s.

The new administration is counting on changes in tax rates, trade policy, infrastructure investment, and the burden of federal regulation to reach its growth targets. Assessing the effects of those policies would be speculative at this point, as they exist only in outline. One thing we can be fairly sure about, though, is the demographic environment that the Trump administration faces. Let's look at some of the key demographic dividends that boosted growth in the past and at the headwinds the American economy will face over the next eight years.

Population growth

One factor that boosted US economic growth in the past was a growing working age population. Here are recorded trends and forecasts for the growth of the US population aged 15 to 64 from 1960 to 2024, based on World Bank data:

As the chart shows, the working-age population grew by more than 2 percent per year in the 1970s. That demographic dividend, produced by the entry into the labor market of the baby boom generation, propelled GDP growth past 4 percent for several years. From the 1990s through the early 2000s, when GDP growth rates of 3 percent per year were still common, the working age population grew at 1 percent per year or more. In 2009, growth of the working age population fell below 1 percent. It is now about 0.3 percent and is forecast to fall to 0.1 percent by 2024.

The Dependency Ratio

If we were content to measure prosperity in per capita terms, as we should, slowing population growth by itself would pose no threat. However, another demographic trend does pose a headwind for per capita GDP growth. That is the dependency ratio-the ratio of the non-working-age population to those of working age. Here are the World Bank data and projections for the US dependency ratio:

During the transition from a high-birth-rate, high-death-rate demographic situation to one of low birth and death rates, every country hits a sweet spot when the last large generation of children enters the labor force. For the United States, that sweet spot occurred in the 1980s through the early 2000s. After about 2010, as the boomers started to age out of the labor force, the dependency ratio began an inexorable rise that will continue into the foreseeable future.

A higher dependency ratio slows the growth of per capita GDP in two ways. First, it decreases the numerator (fewer hands at work) and increases the denominator (a larger population to support). Second, it strains government budgets at all levels by reducing the number of taxpayers and increasing expenditures on pensions and healthcare. As a result, part of any increase in productivity is used up just to counteract those negatives, meaning that still more productivity is needed for further growth.

Women in the labor force

If we look back to the years of high GDP growth in post-World War II America, we see that one more factor played a key role: The entry of millions of women into the labor force. As the next chart shows, women's labor force participation rate rose steadily from the 1960s until it topped out in the 1990s. Since 2000, the labor force participation rate for women has fallen by about 4 percentage points while the rate for men has fallen by about 6 points, narrowing the gap slightly but leaving total participation significantly lower.

From the early 1970s to the mid-1990s, the growth of women's labor force participation provided a unique demographic dividend for the US labor market. During those years, as the next chart shows, the mass entry of women allowed the labor force to grow more rapidly than the working-age population as a whole. (The labor force, unlike the population, is subject to significant annual and cyclical variations, as shown by the thin red and blue lines in the chart. The bold red and blue lines use 10-year moving averages to make it easier to compare participation trends with population growth.)

The surge in women's labor force participation came along just as population growth was experiencing a slowdown. By the time participation rates had peaked, population growth temporarily picked up again as the children of baby boomers began to reach working age. By 2000, both of these demographic dividends had played themselves out. In the future, it is unlikely that growth of the labor force will contribute more than half a percentage point to economic growth, even if participation rates continue their still-incomplete recovery to pre-recession levels.

The bottom line

Putting these various trends together, we see that the demographic environment for economic growth in the Trump era is far less favorable than it was during past decades when GDP grew at sustained rates of 3 to 4 percent per year. Negative trends include slowing growth of the working age population, a rapidly rising dependency ratio, and labor force participation rates that leave little room for increase.

None of these things mean that well-designed reforms of tax, trade, and regulatory policy or a well-targeted program of infrastructure investment are not worthwhile on their own merits. What they do mean is that we should think more broadly about how we frame goals for the future. Perhaps we should not be asking if it is possible to get growth back to the rates of some imagined golden age, but whether faster growth is really a priority goal. Maybe what we need is not the raw economic power of ever more GDP, but an economy that is flexible enough to respond to shocks from technology, automation, environmental change, and global conflict. Maybe it is time to think out of the box if we really want to make America great.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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