Impact of Demography on the Economy

At the most basic level, the size and structure of the population impacts the economy via changes in how many young people or immigrants are entering the labor market every year; how many are leaving due to age, emigration, and disability; and whether there are the right numbers of people of the right ages available to smoothly fill the vacancies that are created.  The US is currently faced with three distinct demographic problems – an aging population, a dysfunctional immigration system, and the after-effects of the baby boom/bust cycle, with the ripples it has left in the age structure of the population.  All of these add up to a notably flatter growth rate for our labor force, which will in turn lead to a strong downward pressure on our GDP if productivity doesn’t go up by a considerable amount (at least 30%).  This may not manifest as an actual drop in GDP, but rather by keeping our economy at its current paltry post-Great Recession average real growth rate of around 2%.

The problem with demographic trends is that they’re extremely difficult to change on purpose – the population will continue to get older, the baby boomers will continue to age out of the workforce, and there simply are not enough younger Americans to replace them all.  There’s not much we can do at the moment to reverse any of those trends.  However, there is one big thing we can do to cushion the blow, as it were: fix our immigration system.

Immigration is really the only lever the government has to modify our demographic trends; because we’re approaching a period of distinctly negative impacts from our demographic structure, such a lever is something that we really should be making use of.  Fortunately, we seem to be edging closer to an actual solution.  The US Senate has passed a bill to fix some of the worst problems with our immigration system.  Whether the House will pass it, or anything close to it, is an open question, but the Congressional Budget Office (a mostly-unbiased government economic think-tank) recently weighed in on the economic benefits of reform:  the relatively modest reforms being considered by the Senate would represent a 3.3% increase in real GDP over and above what the CBO expects our GDP to be by 2023, and a 5.4% increase above its expectations of our GDP in 2033.

This is not small change, even if such increases are spread out over 10 or 20 years.  It works out to approximately a quarter of a percentage point of additional real growth each year, compounding year after year for 20 years, which is a lot when we are seeing an economy failing to sustain 2% real growth in the 4th year of what should be the aggressive growth phase of the business cycle.  A reasonable estimate of what a thorough overhaul of immigration would do for the economy would be about twice the CBO’s estimate, or at least half a percentage point of additional real growth, year after year, at no cost to the taxpayers.

As a bonus, solving the immigration problem would also let us solve a large part of the third problem (retirement of the baby boomers) and some of the first (our aging population).  A clear, competitive point system for immigrants would allow us to assign bonus points for immigrants born in (and with children born in) years with deficient births in the US, allowing us to fill out those undersized age cohorts and stabilize our age structure, eliminating the seesaw legacy of past baby booms and busts and the economic instability it creates for the national economy and especially for state and local governments.


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