An enormous amount of money will be spent in the last few weeks of the U.S. presidential campaign. Each side will promote its candidate and his platform with much passion and conviction. But this time around, the identity of the winner will probably matter less to future growth prospects than in previous contests because the demographic input in the economy for the next four years is already programmed on an immovable trajectory and is less positive than in the past.
The next four years will continue to be challenging, regardless of whether Barack Obama is re-elected or Mitt Romney replaces him. Like it or not, the boss of the economy, and therefore to some degree of all of us, will be demographics. One could argue that this boss has been with us since at least 2005, when the dependency ratio started to rise again in the United States.
Among the important factors that drive economic growth, the demographic factor is now weaker than it has been in decades and as a result, domestic demand for most goods and services will be weaker than it has been in a long time. Here are the most telling numbers:
• The U.S. population grew by over 1 percent a year until 2007 and is now growing by less than 1 percent per year. Its rate of growth will continue to decline as the number of baby boomer deaths rises relative to the number of new births. Since 2008, the U.S. total fertility ratio (TFR) has fallen below the replacement level of 2.1 and is now approaching 1.9 children per woman.
• The total number of Americans aged 30 to 60 years, the most economically active bracket, grew by over 1 percent per year for 30 years, from the mid-1970s to around 2005. It has leveled off and will essentially remain flat at around 120 to 125 million until the end of this decade.
• The U.S. dependency ratio, which is the sum of people under 14 and over 65 divided by the number of people aged 15 to 64, has declined for several decades from 0.67 in 1960 to 0.49 in 2005. But according to U.N. estimates (see pages 478 and 479 of this U.N. report), it is now expected to climb back to 0.53 by 2015, 0.56 by 2020, 0.64 by 2030 and 0.67 by 2050.
• Assuming a run rate of 1 million newcomers per year, immigration, though a clear net positive in the long run, will be insufficient to neutralize or reverse these negative effects in the short run. It would take a much greater number of immigrants to offset the slack.
Next year’s president will be similarly constrained as George W. Bush in his second term and Obama in this term, and he will have to implement some steps to mitigate the negative demographic effect. There are other levers to stimulate growth, but we will need to work harder with demographics failing us.