Thursday, February 24, 2011

Will Demography Slow Down Economic Growth in the US?

As the world climbs out of a deep recession, people are naturally trying to figure out what lies down the road. The McKinsey Global Institute, the research arm of the large McKinsey & Company consulting firm, has just issued a report titled "Growth and Renewal in the United States: Retooling America's Economic Engine." A major takeaway from this report is that America's demographics will likely be a drag on the economy. Ben White of Politico summarized the report this way:
Should the nation be bracing for a new economic reality of slow growth, high unemployment and a declining middle-class standard of living? That’s what a provocative McKinsey Global Institute study suggests, arguing that without significant productivity gains, the United States faces decades of slow growth with possibly devastating implications.
The driving force behind the possible GDP decline, McKinsey said, is demographics. With the massive baby-boom generation retiring, the size of the labor force will not grow fast enough to drive significant economic expansion. In short, the U.S. will have to find ways to get more from a labor force that is growing more slowly.
“If, over the next 10 years, the labor force were to grow as currently projected and productivity increases at the average 1.7 percent annual rate that the United States has posted both over the long term (1960 to 2008) and more recently (1990 to 2008), U.S. GDP growth would decline to 2.2 percent per year,” McKinsey said. “With the working-age population declining from 67 percent to 64 percent, Americans, on average, would experience slower gains in living standards than did their parents and grandparents.”
The report then lays out a variety of specific ways to increase productivity. They note, for example, that only 40 percent of a typical nurse's time is spent caring for patients, with the being spent on paperwork. Reversing that ratio would certainly increase productivity in the health sector.
An important consideration for the global future is this: If the age structure of the US is calculated to be a drag on the economy, what about the situation in more rapidly aging societies such as most of Europe and much of East Asia?

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