Demographic Headwinds and Tailwinds

My thanks to Peyton Dobbins for pointing me to an article about the relationship between age structure change and the economy written not by demographers but by people who are professional investment advisors. It is a well-researched and well-written article and it is fun when people "see the light" and want to share that with others who might benefit, in this case financially, from demographic insight. The paper is "Demographic Changes, Financial Markets, and the Economy" by Robert D. Arnott and Denis B. Chaves, both of whom work for Research Affiliates in Newport Beach, CA. The paper was published in the Financial Analysts Journal in 2012. Their point is one that is familiar to readers of my book--age structures with a disproportionate share of people of working age are good for economic growth (economies with a demographic tailwind), and age structures with lots of kids or lots of older people are not so good (economies with a headwind). They summarize the situation nicely:

Children are not immediately helpful to GDP. They do not contribute to it, nor do they help stock and bond market returns in any meaningful way; their parents are likely disinvesting to pay their support. Young adults are the driving force in GDP growth; they are the sources of innovation and entrepreneurial spirit. But they are not yet investing; they are overspending against their future human capital. Middle-aged adults are the engine for capital market returns; they are in their prime for income, savings, and investments. And senior citizens contribute to neither GDP growth nor stock and bond market returns; they disinvest to buy goods and services that they no longer produce.

To their credit, they don't offer investment advice on this simple age structure formula. The world is obviously more complex than this, but a country's age structure frames the kinds of policy and investment decisions that governments, private institutions, and private individuals are going to be making.