Learning to live with low national fertility – 05/17/2021 – Paul Krugman

Last week, the Bureau of Labor Statistics released inflation much higher than almost everyone had predicted, and inflationists – people who always predict skyrocketing price increases and always get it wrong – have taken the news. as proof that this time the wolf is real.

The financial markets, however, have been easy. The stock fell after the report, but quickly made up for most of the losses. Bond yields edged up with the news, then ended the week exactly where it started – extremely low.

Why so little reaction to the news of inflation? Part of the answer, presumably, was that when investors took the time to digest the details, they realized that there was little sign of an increase in core inflation; it was a small bubble probably reflecting isolated increases in the prices of used cars and hotel rooms.

Further, I believe I am the perception that while we have spectacular, almost miraculous success in beating Covid-19, when the pandemic passes, we are likely to be in an environment of low and sustainable interest rates. weak demand for investments. And the main reason for this low interest rate environment is the sharp decline in fertility, which implies slow or negative growth in the number of Americans of the most profitable working age.

This is not a new topic. Last month’s census report showing the weakest population growth in the United States since the 1930s only confirms what everyone who studies the subject already knew. And the United States is relatively late for this party. Japan’s working-age population has been declining since the mid-1990s. The eurozone has been in decline since 2009. Even China is starting to resemble Japan, a legacy of its one-child policy.

Is the stagnant or declining population a major economic problem? It doesn’t have to be. In fact, in a world of limited resources and major environmental problems, there are arguments for reducing population pressure. But we need to think policies differently in an economy with a stabilized population than we did when the baby boom generation has matured and the potential workforce has grown rapidly.

Okay, let me admit that there is a real problem: an aging population means fewer active workers per retiree, which poses tax problems. But this problem is often exaggerated. Remember all the panic over how Social Security could not survive the weight of post-war generation retirees? Well, a lot of them are already retired; by 2025, most of the growth in the number of beneficiaries per worker due to the retirement of this generation will have already taken place. But there is no crisis.

There is, however, a different problem with low population growth. To maintain full employment, a market economy must convince businesses to invest all the money families want to save. But much of the investment demand is driven by population growth, as new families need new homes, new workers demand the construction of new office buildings and factories, etc.

Thus, low population growth can lead to persistent low spending, a phenomenon diagnosed in 1938 by economist Alvin Hansen, who strangely called it “secular stagnation.” The term and concept was picked up recently by Larry Summers, and I think he’s right about that.

Secular stagnation can be a problem, because while interest rates are very low even in good times, there isn’t much room for the Fed to cut rates during recessions. But a world with low interest rates can also offer great political opportunities – if we are prepared to think clearly.

Because what we see here is a world awash in savings and nowhere to go: Families are eager to lend money, but businesses don’t see good investment opportunities. (Bitcoin doesn’t count.)

Well, why not put the money at the service of the public good? Why not borrow cheaply and use the funds to rebuild our crumbling infrastructure, invest in our children’s health and education, and more? It would be good for our society, good for the future and would also provide a buffer against future recessions.

What about the debt burden? Well, the federal debt as a percentage of GDP is double what it was in 1990, but interest payments on the debt are only about half. This is what low borrowing costs do – often a byproduct of population stagnation.

So, are the Biden government’s proposals for infrastructure and family the kind of thing I have on my mind? They are an enriching step in the right direction. But they’re not as ambitious as they usually are, and in my opinion they’re too fiscally responsible – the government is too concerned about paying for its projects.

The point is, whether we like it or not, we will live a long time with slow population growth. And we need to start thinking about economic policies that take this reality into account.

Translation by Luiz Roberto M. Gonçalves

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