Investigating Secular Stagnation, Part 2: Demographics

Note: This article originally appeared on the NATO Association of Canada's website.


In the first part of this series I introduced the theory that the industrialized world may be suffering from secular stagnation, and explained how wealth inequality could be one of the driving factors. Demographic shifts are another possible factor.

The populations of industrialized countries are barely expanding above the replacement rate, and would be shrinking if not for immigration. The median age in these countries is also rising, in some cases quickly. In 2015, for the first time in Canada there were more people older than 65 than there were children younger than 14, and the number of senior citizens was growing nearly four times faster than the Canadian population. By 2030 more than a fifth of US residents are expected to be older than 65, and the same percentage is projected to be over 80 years old worldwide by 2050.

As the population grows older so too does the share of people in and approaching retirement. Thanks to better nutrition and medical advances the average human lifespan is longer now than ever, including among the elderly who save more to plan for uncertainty in retirement. At the same time there becomes a smaller relative share of young dependants, who would otherwise demand greater consumption from their parents, as well as a smaller share of working-age citizens to fuel the labour force, impeding investment. More saving, less demand, and less investment are all necessary ingredients for reducing real interest rates and causing secular stagnation.

The demographic picture in East Asia, and in China in particular, appears to contribute significantly toward the global abundance of savings. During the late 1970s China implemented a one-child policy meant to avert overpopulation, which was a concern at the time. The policy reduced the number of dependents per family, freeing up money to be saved instead of spent on raising additional children. Still, although the government replaced the program last year with a two-child policy, damage to the country's demographic balance has long since been done. Chinese cultural factors caused the female population to drop, leaving a surplus of young men without similarly aged women to marry. A study revealed that the competition among young men for potential wives encouraged “households with a son to [save money and] accumulate wealth in order to gain a competitive edge in the marriage market,” and concluded that for this reason, “the imbalanced sex ratio significantly increases household savings . . .”

The one-child policy also raised the age of the Chinese population, with nearly a quarter expected to be older than 65 by mid century. Chinese culture carries an expectation that children will care for their parents in old age, so this practice likely adds motivation for the earning population to save money, even as China's working-age population shrank in 2015 for the first time in at least fifty years. Combined with the uncertainty of a transition from public to private provisions of education, healthcare, and housing during the 1990s, all of these forces have instilled a culture of saving among the Chinese.

Ben Bernanke has propounded the idea that a global savings glut may provide a better explanation for our observations than the secular stagnation theory. (A “savings glut” is exactly what it sounds like: excessive saving relative to investment, which affects exchange rates, influences trade flows, and drags down interest rates.) It is also possible that his notion fits inside the secular stagnation hypothesis because of the fact that savings gluts can spread in a globally-integrated economy. Savers seek the highest returns on their money, so capital in an economy experiencing secular stagnation, where interest rates are very low, will often flee to countries offering higher interest rates. The savings surge in the new location reduces interest rates there as well, spreading the contagion.

China's $513bn USD trade surplus contributes to the fact that it, Japan, South Korea, Taiwan, Hong Kong, and Singapore together save about forty percent of their collective GDP, the highest level of saving since at least 1980. In an attempt to remain a competitive exporter, China has long suppressed the yuan's value by purchasing US Treasury bonds. It was only recently overtaken by Japan as the largest foreign holder of US Treasury debt. Japan now holds $1.13 trillion. Due to the effect described above, the presence of that foreign money exacerbates America's trade deficit and drives down interest rates in the US, which may be contributing to secular stagnation if that is indeed what western economies are experiencing.

Long term trends like demographic shifts, where falling fertility rates and longer life spans mean the global population is at once plateauing and aging, make it difficult to see how secular stagnation can be resisted. Innovative political and economic thinking will be required to solve such unprecedented challenges.