The Demographic Deficit

There has been a slowdown in growth in the world's largest economies. One argument is that this slowdown represents a permanent shift in potential output because the innovations available to us in the future will not lead to the productivity growth that we have experienced in the recent past. An alternative argument, the Secular Stagnation hypothesis - is that the slower growth reflects a shortfall of aggregate demand at current interest rates. In this view the real natural rate of interest has declined and the real interest rate required to equate savings and investment at full employment is negative. One important issue that both explanations must confront is accounting for the differences in slowdown across the major developed economies. Differences in TFP growth turn out to play a minor role. The largest contributions to the differences in GDP growth are demographic factors: population growth, labor market participation, average number of hours worked, and capital intensity. Accounting for the historical differences gives a laboratory to project future growth rates given population forecasts.