New York Fed Chair William C. Dudley, one of the top decision-makers at the central bank, last week delivered an economic speech that The Financial Times called “upbeat.” During his speech, however, he singled out the aging of the population as a “significant headwind” to the U.S.’s economic potential.
There’s a problem here. This is like the captain of a cruise ship telling a boatload of passengers to expect smooth sailing - despite the oncoming tsunami.
Aging isn’t a “headwind.” It’s the seminal economic question of the U.S. in the early 21st century – and it will either sink our economy or propel it forward. As birthrates continue to fall and as life spans continue to extend, the entire shape and balance of the population is transforming into an unprecedented new shape.
This new demographic reality demands completely new thinking.
If older adults remain active economic participants, the U.S.’s economic outlook and global competitiveness remains promising. But if we perpetuate retirement models that were crafted over a century ago – by Otto von Bismarck and FDR, no less – then aging is a Category 5 hurricane.
William Dudley’s comments only make sense if one assumes that what aging meant in the 1980s is what it means right now. Our entire life course has shifted, including education, work, and retirement. The old school-work-retire model was built for life spans that would only rarely stretch into the 70s. Longevity that was once near-mythical has become the norm, and aging adults will keep working not only for economic reasons but for social and psychological engagement. Research shows that work is good for healthy aging, both physically and mentally.
When people say an aging population will lower productivity, they’re making two critical errors. First, they assume that those past “retirement age” are takers, not producers. Second, they’re working with too narrow a conception of economic productivity. Even if older Americans aren’t working – which they are in historically high numbers, and will do even more of into this century – many remain valuable economic participants. When 80-year-olds buy cars, for example, or home care or mobile phones or just about anything else, they’re circulating dollars through the economy.
The aging of the population can become the U.S.’s global competitive advantage in the coming decades if our leaders define a new path of aging – and a new role for the aging in the economy.
Aging, of course, is a global issue. The G7 nations are historically old and the emerging economies are aging most rapidly of all – with stunningly lower birth rates than ours and equally exciting longevity.
The proportion of old to young is transforming everywhere. Projections for the least developed nations also forecast dramatic population structural change, precipitated by their own incredible increases in longevity and precipitous drops in fertility.
So what can the Fed do to catch up with the 21st century? How can the Fed lead the U.S.’s thinking – and the rest of the world’s – to understand that aging not a headwind at all, but a tailwind?
First, look at the economic lessons of Japan. Japan has the “oldest” population in the world, with an incredible 30 percent of its population over the age of 60. The Japanese economy – given the post-WWII history – is a stunning corollary for the U.S. If the U.S. makes the same mistakes as Japan – and the same mistakes that we are seeing in Europe – then Mr. Dudley’s forecast of a headwind will prove an understatement, if only for self-fulfilling reasons.
Second, consider how the U.S. is still, relatively speaking, young. Our fertility rate remains higher than that of our economic peers (thanks largely to immigration), and the “aging solutions” it needs to create aren’t going to be as hard as they are in Italy, Germany, Japan, and – soon enough – China. The stakes are equally high for all nations, but “the lift” is less dramatic for the U.S.
The Fed’s ascension to prominence over the past half-decade has been the product of multiple intersecting forces: the “Great Recession,” the show-happiness of Ben Bernanke, the nonstop media cycle. So this is a moment for leadership – but right now, at least, its thinking seems to be stuck in an earlier time. Too bad: Markets depend on its getting things right.
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