Charles Davidson: Welcome to another Economy Matters podcast. I'm Charles Davidson, a staff writer with the Atlanta Fed's digital magazine, Economy Matters. I'm here today with Toni Braun. Toni is a research economist and senior adviser in the Atlanta Fed's research department, and Toni's major fields of study are macroeconomic risks and the effects of monetary policy. Today we're going to be talking about something that I think could be classified as a pretty significant risk, and that is a phenomenon called secular stagnation, which mainly results from the population aging. So, first off, Toni: thanks for being here today.
Toni Braun: Sure. It's a pleasure to be here.
The Atlanta Fed's Toni Braun. Photo by David Fine
Davidson: So let's jump into this. Toni, you've done extensive research on the macroeconomic effects of an aging population. Why should this concern us? Why should we worry that a bigger distribution of our population, and that of many developed nations, is starting to skew toward the older end of the spectrum?
Braun: Well, I'd say there are two big reasons why we should be concerned about aging. The first reason has been around for quite a while. It's not hard to find information about this, but as the population ages advanced economies—like the United States, or Europe, or Asia—have programs like Medicare and Social Security. As the population skews towards an older age distribution, expenditures—government expenditures—go up. You can think of that as being a fiscal aspect of an aging society.
The second thing that we've seen—and this has been based more on just what we've seen in data, and takeaways of economists—has been something that [economist] Larry Summers refers to as "secular stagnation." Secular stagnation really has two aspects to it. One is a term that's referred to as "asset demand glut"—that as the society ages, you can see people moving into retirement, thinking about, "Do I have resources? I'll need resources for retirement, because the replacement rate of my public pension or my private pension will be less than 100 percent." They save, and so as the collective actions of an aging population are that their savings goes up for a period of time—and Summers refers to that as an asset demand glut—as the economy, as a whole, saves more—provision for retirement. The other thing that happens: as a society ages, what changes? Well, the number of workers relative to the number of retirees changes, and you've got fewer workers providing the same amount of labor input that produces goods for a big society with lots of retirees. So you can think of the second factor as being that labor becomes scarce because you've got fewer workers and more retirees.
Davidson: We've seen that evidenced already in this mismatch between labor supply and demand, I think. Now, secular stagnation—can you specifically define what that means, Toni?
Braun: Yes. So, there are three macroeconomic observations that are associated with secular stagnation, and the three observations come from data that go back roughly 20 to 30 years, depending on the economy that you look at, the country you look at. But the observations are first below-trend—persistently below-trend—per capita GDP growth, low real interest rates, and disinflation, or, in a number of advanced economies—most notably Japan, as well as European economies—deflation. So those are the three private sector observations associated with secular stagnation. But the surprising thing for us as macroeconomists has been that these have occurred against a background of both fiscal stimulus and easing—and loose—monetary policy. You would have thought that these fiscal actions would buoy up the economy, or at least put upward pressure on prices. And the puzzle is that that really wasn't occurring in the period ending in, say, 2019. Obviously, COVID has shaken things up, and there's the question about what will happen moving forward.
Davidson: Right. So, Toni, just to clarify—you used two terms that people who work here understand—it's part of a daily lexicon—disinflation and deflation. Could you just very quickly distinguish between those two?
Braun: Sure. Disinflation just refers to going from an environment with a high average inflation rate to one with a low average inflation rate.
Davidson: Kind of what's happening right now, essentially—not as quickly as we'd like.
Braun: Yes, essentially— not as quickly as perhaps we'd like, but yes—we're seeing price pressure start to ease, and inflation rates are gradually coming down. So that's a type of disinflation. And then deflation is literally when you have a negative inflation rate.
Davidson: Right, so, prices are actually going down.
Braun: Yes, are falling. Both European economies and Japan saw protracted episodes of deflation prior to the COVID pandemic.
Davidson: Right. So we've hinted at this, but can you explicitly explain why aging induces secular stagnation?
Braun: Yes. I've talked already about one aspect of aging—that the number of workers relative to the population gets smaller. If you think about that: as the number of workers becomes more scarce, like I explained, you've got fewer people producing output—GDP—and yet, there's still a lot of people consuming, and so per capita GDP declines as a fraction of workers in the society declines. But the second thing that happens is workers become relatively scarce. And as workers become scarce, that tends to put upward pressure on the real wage and downward pressure on the return on capital. And so, this second thing—lower return on capital—we can think of as meaning lower real interest rates. And so lower GDP growth—as workers become scarce—lower real interest rates occur because capital is in relatively abundant supply as compared to labor. So those are the first two things: low real interest rates, and low GDP growth. And then the asset-demand glut is really demand. As I mentioned, not only do households save more as they approach retirement and hold a lot of savings as they enter retirement, but the composition of their savings changes. What I've documented in my own research is that in the aging society, we see not just an asset demand glut but a demand glut for liquid assets, savings accounts, treasuries—more liquid assets as compared to, say, housing. The demand for liquid assets goes up a lot, because those are the easiest things to draw down during your retirement. That can put downward pressure on the inflation rate.
Davidson: So it's a savings glut. As you mentioned, capital is abundant—that's the savings. You touched on one or two, but I wanted to ask you to elaborate a little on the major macroeconomic implications of this savings glut. Why is it something to be aware of, and maybe concerned about?
Braun: It's relatively easy to account for downward pressure on real interest rates, downward pressure on per capita GDP growth. The puzzle has always been, why does this asset demand glut create disinflationary pressures? And that's the thing that I pick up in my research—I close that remaining loophole in terms of our understanding. And that's really what I was just talking about: that really, if you think about what's happening, is that on net people in an aging society, they want more liquid assets. And who's a big supplier of liquid assets? The government. And if the supply of liquid assets doesn't increase sufficiently, then the price on that asset is going to drop.
Davidson: Yes, and that price is the real interest rate.
Braun: Yes.
Davidson: So, in a sense it's basic supply and demand at work there?
Braun: Yes, it's basically that people are demanding a lot of liquid assets. If the supply isn't going up enough, then the price is going to have to adjust—the real value of those liquid assets is going to have to rise, and the price is going to have to fall.
Davidson: Right. Okay, we're going to pause here for just a second to hear some information about some of the other material here at atlantafed.org—please give it a listen. Thank you.
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Davidson: Okay, Toni—so aging causes labor shortages. That's pretty straightforward, and that causes real wages to rise, on average, also pretty straightforward, I think. And yet, the other forces—like the savings glut and the attendant low interest rates—I guess are more powerful forces, and so they sort of went out and inflation stays low. Is that the basic argument here?
Braun: Yes. The basic argument is that you've got fewer workers, and that means lower real returns. And when you combine that with increased demand for assets, that also puts downward pressure on real interest rates as well. The big open question still is: why haven't governments stepped in to try to rectify this problem, and why hasn't that been more effective? Those are the substantive issues that I'm trying to address in my research: Why hasn't the fiscal stimulus that we've seen been more effective? When you look in the economies in Europe and Japan in particular, why hasn't the massive monetary stimulus that you see in these economies produced inflation?
Davidson: Are there theories as to why those policies haven't had the desired effect?
Braun: Yes. I have a theory in some of my work that you can find, the nontechnical versions that you can find in Policy Hub and other places on our web page. And I also have some more technical papers that actually work with a formal model and try to work through how an aging population impacts households in different age groups. The best way to think about the takeaway from that research is to recognize, first, that aging has different impacts on the young versus people that are close to retirement age or have just passed into retirement. And if you think about people like me, who are approaching retirement—and what does "an aging population distribution" mean? Well, if you take it as what I've described to you: "I'm trying to save for my retirement, and now what's been happening, while the return on my savings has been falling in real terms…and so, what do I need to do? I either work longer or save more." Aging is a very persistent, slow-moving thing, so even if young Americans, or young Japanese, were to start having more kids now, it'll take 20 years before they enter the labor force, at least. And so these are very persistent phenomena, and they can induce pretty strong negative wealth effects on people that are approaching retirement.
Davidson: You mentioned the losers from this are people like yourself—and I'm right behind you, I'll say. So, on the other hand, are there winners from this somehow? Do the effects play into the hands of some other segment of the population?
Braun: This was a surprise to me, but the winners turn out to be young, working-age households. And let me explain why it was a surprise: a lot of work that we've done to date has focused on the fiscal implications of aging. If you think about aging population and higher expenditures, because there's a higher share of retirees and government expenditures—well, who's going to pay for that? Well, presumably the young in the form of higher taxes. Now, those channels are operating in the framework I'm working with. My framework identifies some other channels, which are working more through markets. If you think about what's happening to the situation of young people: as labor becomes more scarce, that pushes up their wages—which is good for them. They also benefit from something else. What do young people like to do? Well, on average young people borrow to buy a car, or they borrow to buy a TV, or borrow to buy a house. I may be using technical terms, but they're basically borrowing to buy liquid assets or physical assets, things like a home. And if interest rates come down, and in particular the borrowing rate comes down or they squeeze in—this is good for young households. The spread on borrowing rates narrows. That's good for young households. That's what you see in the model, and that's what we also saw in data in the period prior to 2019.
Davidson: So, yes, 2019. And of course, right after that we had a major shock that has shaken us on every level—economically, societally, any way you can imagine. And largely because of that, today, Toni, as we all understand, we're in an environment of elevated but moderating inflation and rising interest rates—and in general, a lot of conditions that you would certainly not expect to prevail under secular stagnation. But at the same time, we have seen excess retirements, more retirements than would have been expected in normal circumstances. That's cut into the size of the labor force. Nevertheless, I have read that some economists will contend that they don't think we'll return to the era of secular stagnation. We know there's seldom consensus around these sorts of thorny economic puzzles, but what do you say about that, Toni? Why do you think that it is going to come back?
Braun: I think it's important to be clear about what I'm trying to do, and that's trying to identify the quantitative significance of a single factor: aging. Aging is very attractive in terms of thinking about the future because, as I explained, that distribution is kind of locked in now. Life expectancy is not changing all that much, fertility rates—even if birth rates go up moving forward, it'll take 20 years before these people enter the economy. And so, if we're making projections about the age distribution of the population, they evolved very slowly and are highly predictable. What I found is that, yes, aging is putting significant downward pressure on real interest rates, output growth, and the inflation rate, particularly in the most rapidly aging societies—like Japan, who started aging well before other advanced economies. The reason why I think this is important moving forward, and likely to be important moving forward, is aging is an ongoing phenomenon that is really just starting to pick up in places. It's picking up in Korea. Korea is going to have a higher old-age dependency ratio than Japan, I think, within the next five to seven years.
Davidson: Toni, just to clarify very quickly: "dependency ratio." That's the number of young workers paying, or
Braun: The number of retirees per young worker.
Davidson: OK.
Braun: So, you can think of it as the number of workers divided by the working population.
Davidson: So a lot more older people as compared to younger.
Braun: Yes. And so, Korea is aging very rapidly. China has seen its population growth rate turn negative. In Europe, Spain, Greece, and Italy are just now starting to see the types of retirements and flows into retirement that Japan has been experiencing for about 10 to 15 years already. What about the United States? We're here in the United States, and the United States has been special because of immigration flows, up to this point. The immigration flows have brought in a lot of relatively young people, so it's increased the size of the working-age population, but these immigrants and immigration flows into the United States also have relatively high fertility rates. And so both of those things have worked to stave off the most, I think, dire consequences of an aging population period.
Davidson: That's a great explanation, Toni—I really like that. There's some expression, "you can't fight demographics" or something to that effect, and it's indisputable: the population is aging, you can't stop it, here we are. There's little to be done to change that, or nothing to change that.
Braun: I guess it's really big, that's the thing. If we think through this, what it means is an aging society. It's like a gorilla—I sometimes refer to it as a gorilla. It's getting bigger and bigger—almost like in manga or anime—it's growing over time, and there's not all that much we can do to prevent it from growing. And so, the gorilla in the house, moving forward in many advanced economies, is going to be aging—or certainly one gorilla.
Davidson: This is an old gorilla, but a very powerful one.
Braun: Exactly.
Davidson: It may have gray hair, but it's strong. All right, well, Toni—good stuff. Thanks so much for your time today.
Braun: Sure—thank you.
Davidson: Thank you for listening, and come back next month for another Economy Matters podcast. Thanks so much.
Braun: Thanks for inviting me, Charles.