Last week the Bureau of Labor Statistics reported much higher inflation than almost anyone predicted, and inflationistas — people who always predict runaway price rises, and have always been wrong — seized on the news as proof that this time the wolf is real.
Financial markets, however, took it in stride. Stocks fell on the report, but they soon made up most of the losses.
Bond yields rose only slightly on the news, then ended the week right where they started — namely, extremely low.
Why so little reaction to the inflation news? Part of the answer, presumably, was that once investors had time to digest the details they realized there was little sign of a rise in underlying inflation; this was a blip reflecting what were probably one-time rises in the prices of used cars and hotel rooms.
Beyond that, however, is what I think is the realization that while we’re achieving dramatic, almost miraculous success in defeating COVID-19, once the pandemic subsides we’re likely to be in an environment of sustained low interest rates as a result of weak investment demand. And the biggest reason for that low-rate environment is plunging fertility, which implies slow or even negative growth in the number of Americans in their prime working years.
This isn’t a new issue. Last month’s census report showing the lowest U.S. population growth since the 1930s only confirmed what everyone studying the subject already knew. And America is relatively late to this party. Japan’s working-age population has been declining since the mid-1990s. The euro area has been on the downslope since 2009. Even China is starting to look like Japan, a legacy of its one-child policy.
Is stagnant or declining population a big economic problem? It doesn’t have to be. In fact, in a world of limited resources and major environmental problems there’s something to be said for a reduction in population pressure. But we need to think about policy differently in a flat-population economy than we did in the days when maturing baby boomers were rapidly swelling the potential workforce.
OK, let me admit that there is one real issue: An aging population means fewer active workers per retiree, which raises some fiscal issues. But this problem is often exaggerated. Remember all the panic about how Social Security couldn’t survive the burden of retiring boomers? Well, many boomers have already retired; by 2025 most of the growth in the number of beneficiaries per worker caused by retiring baby boomers will already have occurred. Yet there’s no crisis.
There is, however, a different issue with low population growth. To maintain full employment, a market economy must persuade businesses to invest all the money households want to save. Yet a lot of investment demand is driven by population growth, as new families need newly built houses, new workers require the construction of new office buildings and factories, and so on.
So low population growth can cause persistent spending weakness, a phenomenon diagnosed in 1938 by economist Alvin Hansen, who awkwardly dubbed it “secular stagnation.” The term and concept have been revived recently by Larry Summers, and on this issue I think he’s right.
Secular stagnation can be a problem, because if interest rates are very low even in good times there’s not much room for the Fed to cut rates during recessions. But a low-interest-rate world can also offer major policy opportunities — if we’re willing to think clearly.
For what we’re looking at here is a world awash in savings with nowhere to go: Households are eager to lend money out, but businesses don’t see enough good investment opportunities. (Bitcoin doesn’t count.) Well, why not put the money to work for the public good? Why not borrow cheaply and use the funds to rebuild our crumbling infrastructure, invest in the health and education of our children, and more? This would be good for our society, good for the future, and would also provide a cushion against future recessions.
What about the burden of debt, you ask? Well, federal debt as a percentage of GDP is twice what it was in 1990, but interest payments on the debt are only about half as high. That’s what low borrowing costs — largely a byproduct of demographic stagnation — do.
So, are the Biden administration’s infrastructure and family proposals the kind of things I have in mind? They’re a gratifying step in the right direction. But they aren’t nearly as ambitious as they’re often portrayed, and to my mind they’re too fiscally responsible — the administration is excessively concerned with paying for its plans.
The fact is that, like it or not, we’re going to be living for a long time with very slow population growth. And we need to start thinking about economic policy with that reality in mind.
Paul Krugman, winner of the Nobel Memorial Prize in Economic Science, is a columnist for The New York Times.