January could easily be called “Outlook Month.” It’s an economics feeding frenzy, with top economists sparring at highbrow events to convince others that their views are the ones everyone should be listening to. The events aren’t by any means a cloistered chin-wag; they’re some of the best attended forums in any industry. It shows how critical the outlook has become, and more recently perhaps, how difficult it’s to do a forecast in today’s turbulent socio-political environment. Even so, there’s a general coalescing around the theme of slowdown. Many agree that policy uncertainty is to blame; others think a “natural” slowdown is overdue. Some point to the decades-long slowing growth trend, and put the blame to demographic trends—which leads to this week’s question: do weak demographics condemn economies to weak overall growth?
To many, it’s a foregone conclusion. Fewer people, fewer workers, fewer needs. Lower aggregate income and spending. And if the population is aging, well, a host of them are well past their peak consumption years, and, of course, consumption is the dominant driver of the economy, and so on. Yes, typically, demographics have held enormous sway over the progress of an economy. A key example of this is the post-war baby boom, which ushered in a huge wave of sustained growth and overall prosperity. It’s hard to argue that demographics aren’t critical.
Couple this with the world’s current demographic picture, and it’s hard not to join the growth pessimists. Western Europe is hitting peak population, as organic population growth has long been below the replacement rate. Italy has particularly poor demographics, prompting the word “crisis” from certain analysts. Other Organisation for Economic Co-operation and Development (OECD) nations are little better. China is reaping the consequences of a decades-long, one-child policy. Sustained spectacular growth has sopped up hundreds of millions of “spare” workers, and the economy is now being impacted by increasingly scarce domestic labour. The growth bears are all over this. Russia and others face the same dilemma. So, is that where the story ends? Is slowing growth all we have to look forward to?
Normally, yes. But these are hardly normal times. Thankfully, the long-term economy is not just driven by population. Two other pillars of growth are critical determinants of the future: the amount of capital in the economy and the productivity growth that we generate from the way we combine labour and capital. How are these other factors doing?
Here’s where the standard story changes. Exponential growth in technology is bringing capital to a point where it could revolutionize growth. Labour constraints are putting the bite on growth, but technology is now displacing a lot of tasks that previously labour alone could do. Robotics, machine learning, artificial intelligence and other digital applications are being enabled through ever-more-powerful communications systems, promising to enhance the contribution of capital and productivity to the equation. If all of this sounds a lot like the industrial revolution, bingo! That’s exactly what it is. And by their very nature, revolutions are seldom smooth, so there will be fallout. But this one’s not happening when we are swimming in surplus labour; one could say that it’s just in time to fill an increasingly concerning labour gap.
Even so, there are justified worries about skill mismatch—that is, the jobs that are displaced are simpler, manual tasks. In fact, there’s a broader concern about a concurrent white-collar displacement. There’s also concern about winner-take-all technologies, and increased corporate concentration, which suggests a widening of income disparity. These concerns are all legitimate. But if we foresee that democracy continues as the predominant political system, then these issues will no doubt see their ultimate resolution at the ballot box. Output will no doubt be higher, and the broader political question will be how to ensure an appropriate distribution of output’s proceeds.
