I Thought Slower Population Growth was a Good Thing
On March 31, David Altig discussed this paper by Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle and William Wascher:
On balance, the results suggest that most of the decline in the participation rate during and immediately following the 2001 recession was a response to business cycle developments. However, the continued decline in participation in subsequent years and the absence of a significant rebound in 2005 appears to reflect other more structural factors.
Mark Thoma notes this review from Bloomberg:
A Federal Reserve study is shaking economists’ forecasts by suggesting U.S. economic growth will have to decelerate more over the next decade than most expect … The study projects a slower pace of workforce growth than most economists now forecast, suggesting the economy can’t keep growing at the present-day pace without generating pressure for higher wages and inflation. To prevent that, the Fed will have to enforce a lower speed limit on the economy by pushing up interest rates.
Baker, DeLong, and Krugman discussed one aspect of this possible slowdown in population growth – the implications for asset returns:
Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return.
During the blog discussion that preceded this paper, I had mused about the role of the Solow growth model:
If population growth declines and national savings rates stay the same, the logic has it that we will enjoy capital deepening, which would predict a fell in the return to capital consistent with Dean Baker’s financial modeling.
Simply put – less population growth along with continued national savings (assuming the Bush fiscal train wreck is eventually reversed) means rising capital to labor ratios and increasing real wages as the Bloomberg piece suggests. But I don’t know why Bloomberg thinks rising per capita income is a problem or would be inflationary.