The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund

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The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
MARCH 2020

                             Summers on secular
                             stagnation P.17

                             Japan’s
                             shrinkonomics P.20

                             Older but not
                             poorer P.30

The Long, Good Life
 Demographics and Economic Well-Being
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
Contents

                                                                                  Demographics
                                                                                  are not set
                                                                                  in stone,
                                                                                  nor are their
                                                                                  implications
                                                                                  for individual
                                                                                  and collective
                                                                      26          well-being.

THE LONG, GOOD LIFE
4    Population 2020                                                20 Japan's Shrinkonomics
     Demographics can be a potent driver of the pace                   Japan is the world’s policy laboratory for dealing
     and process of economic development                               with an aging, shrinking population
     David E. Bloom                                                    Gee Hee Hong and Todd Schneider
10 The Long, Good Life                                              24 Eastern Europe’s Exodus
   Longer, more productive lives will mean big changes                 In Europe’s newest states, emigration compounds
   to the old rules of aging                                           the problem of aging populations
   Andrew Scott                                                        Maria Petrakis
14 Reversing Demographic Decline                                    26 Immigrant Swan Song
   Singapore’s experience in trying to raise its fertility             Immigration can solve the demographic dilemma—
   rate offers lessons for other countries                             but not without the right policies
   Poh Lin Tan                                                         Giovanni Peri
17	Accepting the reality of                                        30 Getting Older but Not Poorer
    secular stagnation                                                 As societies age worldwide, pensions and public
    New approaches are needed to deal with                             policies must adapt
    sluggish growth                                                    David Amaglobeli, Era Dabla-Norris, and
    Lawrence H. Summers                                                Vitor Gaspar

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The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
FINANCE & DEVELOPMENT
               A Quarterly Publication of the International Monetary Fund
               March 2020 | Volume 57 | Number 1

                                                               DEPARTMENTS
                                                               42 People in Economics
                                                                  Retirement Behaviorist
                                                                  Peter J. Walker profiles Wharton’s Olivia S.
                                                                  Mitchell, a founder of modern pension research
                                                               46 Picture This
                                                                  Coming of Age
 35                                                               By 2050, as birth rates continue to drop and people
                                                                  live longer, the world’s population will change
                                                                  Neil Ruiz, Luis Noe-Bustamante, and Nadya Saber
ALSO IN THIS ISSUE
                                                               48 In the Trenches
35 Youth Rising
                                                                  Rebuilding Somalia
   Three under thirty forge their own futures
                                                                  Finance Minister Abdirahman Dualeh Beileh
   Sahiba Chawdhary, Omar Chennafi,                               sees hope for his country’s economic development
   and Jjumba Martin
                                                               50 Back to Basics
52 Access to Finance:
   Why Aren’t Women Leaning In?                                   How Can Interest Rates Be Negative?
   Women are self-selecting out of the African                    Countries are starting to experiment with
   credit market                                                  negative interest rates
   Hanan Morsy                                                    Vikram Haksar and Emanuel Kopp

54 Where the Sun Shines                                        61 Book Reviews
   Renewable energy sources, especially solar, are ideal          Good Economics for Hard Times, Abhijit V. Banerjee
   for meeting Africa’s electrical power needs                    and Esther Duflo
   Gregor Schwerhoff and Mouhamadou Sy                            Capitalism, Alone: The Future of the System That
                                                                  Rules the World, Branko Milanovic
58 60 Years of Uncertainty
                                                                  Narrative Economics—How Stories Go Viral and
   Our new index provides novel insights                          Drive Major Economic Events, Robert Shiller
   into an amorphous concept
   Hites Ahir, Nicholas Bloom, and Davide Furceri              64 Currency Notes
                                                                  Natural Treasures
                                                                  Samoa honors its environmental heritage in
                                                                  colorful currency
                                                  58              Melinda Weir

                                                                                                               42
                                                                              March 2020 | FINANCE & DEVELOPMENT        1
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
EDITOR'S LETTER                                                                                                   FINANCE & DEVELOPMENT
                                                                                                                                                                                                                         A Quarterly Publication of the
                                                                                                                                                                                                                         International Monetary Fund

                                                                                                                                                                                                  EDITOR-IN-CHIEF:
                                                                                                                                                                                                  Gita Bhatt
                                                                                                                                                                                                  MANAGING EDITOR:
                                                                                                                                                                                                  Maureen Burke
                                                                                                                                                                                                  SENIOR EDITORS:
                                                                                                                                                                                                  Jacqueline Deslauriers
                                                                                                                                                                                                  Peter Walker
                                                                                                                                                                                                  DIGITAL EDITOR:
                                                                                                                                                                                                  Rahim Kanani
                                                                                                                                                                                                  ONLINE EDITOR:
                                                                                                                                                                                                  Lijun Li

                                                                                                                    Demographics                                                                  PRODUCTION MANAGER:
                                                                                                                                                                                                  Melinda Weir

                                                                                                                    and Destiny
                                                                                                                                                                                                  COPY EDITORS:
                                                                                                                                                                                                  Michael Harrup
                                                                                                                                                                                                  Lucy Morales
                                                                                                                                                                                                  ADVISORS TO THE EDITOR:
WHEN I VISIT my home country, India, I am always struck by how young
                                                                                                                                                                                                  Bernardin Akitoby                 Thomas Helbling
it looks. From the big cities to the tiny villages, one can see the hopes                                                                                                                         Celine Allard                     Tommaso Mancini Griffoli
and aspirations of twenty-somethings, many in search of work. In Japan,                                                                                                                           Bas Bakker                        Gian Maria Milesi-Ferretti
demographic trends have been moving in the opposite direction. Homes                                                                                                                              Steven Barnett                    Christian Mumssen
                                                                                                                                                                                                  Nicoletta Batini                  İnci Ötker
sit vacant, and villages are vanishing, as people have fewer children. In                                                                                                                         Helge Berger                      Catriona Purfield
response, the Japanese are embracing technology to fill the gaps through                                                                                                                          Paul Cashin                       Uma Ramakrishnan
innovations like robot chefs and automated medical services.                                                                                                                                      Luis Cubeddu                      Abdelhak Senhadji
                                                                                                                                                                                                  Alfredo Cuevas                    Alison Stuart
   Changes in the size and structure of a nation’s population affect how we                                                                                                                       Rupa Duttagupta
work, age, and live. In many advanced and emerging market economies,
a shrinking pool of working-age people will have to support a growing                                                                                                                             © 2020 by the International Monetary Fund. All rights reserved.
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to generate a staggering number of new jobs just to keep pace with the                                                                                                                            to copyright@imf.org. Permission for commercial purposes also
youth joining the job market.                                                                                                                                                                     available from the Copyright Clearance Center
                                                                                                                                                                                                  (www.copyright.com) for a nominal fee.
   Changing age dynamics have profound implications for growth, social
stability, and geopolitics. They influence how people save, spend, and invest,                                                                                                                    Opinions expressed in articles and other materials are those of
                                                                                                                                                                                                  the authors; they do not necessarily reflect IMF policy.
with consequences for everything from marriage to retirement to migration.
                                                                                                                                                                                                  Subscriber services, changes of address, and
   This issue brings together leading thinkers in their fields to explore the                                                                                                                     advertising inquiries:
many facets of population trends and consider what they mean for our future.                                                                                                                      IMF Publication Services
   David Bloom focuses on the main drivers of demographic transitions,                                                                                                                            Finance & Development
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including life expectancy, fertility, and migration. Vitor Gaspar and                                                                                                                             Washington, DC 20090, USA
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and tried-and-tested policy solutions, such as using technology to boost
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   Demographics can shape a country’s destiny. But policy choices matter,                                                                                                                         The English e­ dition is printed at Dartmouth Printing Company,
from encouraging technological innovation and institutional reform to                                                                                                                             Hanover, NH.
investing in people, both young and old. With wise policies, more of us                                                                                                                           Finance & Development is
will enjoy the long, good life.                                                                                                                                                                   published quarterly by the
                                                                                                                                                                                                  International Monetary Fund, 700
                                                                                                                                                                                                  19th Street NW, Washington, DC
GITA BHATT, editor-in-chief                                                                                                                                                                       20431, in English, Arabic, Chinese,
                                                                                                                                                                                                  French, Russian, and Spanish.
                                                                 MARCH 2020

                                                                 Summers on secular
                                                                 stagnation P.17
                                                                                                                                                                                                  English edition ISSN 0145-1707
                                                                 Japan’s
                                                                 shrinkonomics P.20

                                                                 Older but not
                                                                 poorer P.30

                                                                                                    ON THE COVER
                                    The Long, Good Life
                                     Demographics and Economic Well-Being

                                                                                                    Our March 2020 issue focuses on demographic shifts taking place globally and how the
                                                                                                    right policies can help people live longer, happier, and more productive lives. Illustrator
    C1-34_IMF_MAR20_FOB_P5.indd 1                                                2/13/20 12:15 PM
                                                                                                    Davide Bonazzi’s cover is a whimsical depiction of the path to a long, good life.

2   FINANCE & DEVELOPMENT | March 2020
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
IMF ECONOMIC REVIEW

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       I N T E R N A T I O N A L                      M O N E T A R Y                F U N D
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
4   FINANCE & DEVELOPMENT | March 2020
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
ION
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                                                                    March 2020 | FINANCE & DEVELOPMENT   5
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
D
                             emography is destiny” is an oft-cited             Countries the United Nations classifies as less

              “              phrase that suggests the size, growth, and
                             structure of a nation’s population deter-
                             mines its long-term social, economic, and
                                                                            developed encompassed 68 percent of world popula-
                                                                            tion in 1950; today they represent 84 percent. That
                                                                            share will continue to rise, because virtually all of the
                  political fabric. The phrase highlights the role of       nearly 2 billion net additions to world population
                  demographics in shaping many complex challenges           projected over the next three decades will occur
                  and opportunities societies face, including several       in less developed regions. This is a major concern,
                  pertinent to economic growth and development.             because less developed regions tend to be more
                    Nevertheless, it is an overstatement to say that        fragile—politically, socially, economically, and eco-
                  demography determines all, as it downplays the            logically—than their more developed counterparts.
                  fact that both demographic trajectories and their            With 1.44 billion people, China currently has the
                  development implications are responsive to economic       largest national population in the world, followed
                  incentives; to policy and institutional reforms; and to   by India, with 1.38 billion. But by the end of this
                  changes in technology, cultural norms, and behavior.      decade, India will be the most populous country,
                    The world is undergoing a major demographic             with a projected 1.50 billion people, compared
                  upheaval with three key components: population            with China’s peak population of 1.46 billion.
                  growth, changes in fertility and mortality, and           Between 2020 and 2050, Nigeria (projected to
                  associated changes in population age structure.           overtake the United States to become the world’s
                                                                            third-most-populous nation) and Pakistan—
                  Population growth                                         already among the 10 most populous—will surge
                  It took more than 50,000 years for world population       forward. Asia will continue to be home to a domi-
                  to reach 1 billion people. Since 1960, we have added      nant but declining share of the world’s population
                  successive billions every one to two decades. The         (60 percent today and 54 percent in 2050).
                  world population was 3 billion in 1960; it reached 6         Finally, notwithstanding continued global pop-
                  billion around 2000, and the United Nations proj-         ulation growth, in 61 countries and territories that
                  ects it will surpass 9 billion by 2037. The population    are currently home to 29 percent of the world’s
                  growth rate has been slowing, however, from peak          people, population growth in 2020–50 is projected
                  annual rates in excess of 2 percent in the late 1960s,    to be negative, with the sharpest decline (−23 per-
                  to about 1 percent currently, to half that by 2050.       cent) projected for Bulgaria (see “Eastern Europe's
                     Although global income per capita more than            Exodus” in this issue of F&D).
                  doubled, life expectancy increased by 16 years, and
                  primary school enrollment became nearly universal         Mortality, fertility, and migration
                  among children during 1960–2000, rapid popula-            Population size and growth reflect the underly-
                  tion growth poses myriad challenges that are both         ing forces of mortality, fertility, and international
                  privately and publicly daunting. These challenges         migration. These forces vary considerably across
                  include the need for more food, clothing, hous-           countries and can help account for key differences
                  ing, education, and infrastructure; the absorption        in economic activity and performance, such as
                  of sizable numbers into productive employment;            physical capital, labor, and human capital accu-
                  and more strenuous environmental protection.              mulation; economic well-being and growth; and
                  Although the explosive nature of global population        poverty and inequality.
                  growth is abating in relative terms, decade-on-              These forces generally respond to economic shocks;
                  decade increases remain sizable and are taking place      they may also respond to political developments such
                  from ever more populated starting points.                 as the beginning and ending of wars and governance
                     Earlier concerns about a global population explo-      crises. In many developing economies, population
                  sion have, to some extent, yielded to concerns about      growth has been associated with a phenomenon
                  rapid population growth in particular countries and       known as the “demographic transition”—the move-
                  regions (see “Coming of Age” in this issue of F&D).       ment from high to low death rates followed by a
                  Indeed, the overall slowdown in the rate of world         corresponding movement in birth rates.
                  population growth masks significant shifts in the            For most of human history, the average person
                  distribution of world population by development           lived about 30 years. But between 1950 and 2020,
                  status and geographic region.                             life expectancy increased from 46 to 73 years, and

6   FINANCE & DEVELOPMENT | March 2020
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
DEMOGRAPHICS

In the coming decades, demographics will be more
favorable to economic well-being in the less developed
regions than in the more developed regions.
it is projected to increase by another four years by       population growth in the short and medium term,
2050. Moreover, by 2050, life expectancy is pro-           because low fertility per woman is more than offset
jected to exceed 80 years in at least 91 countries         by the number of women having children. This
and territories that will then be home to 39 percent       feature of population dynamics is known as pop-
of the world's population. Increased longevity is a        ulation momentum and helps explain (along with
colossal human achievement that reflects improve-          migration) why the populations of 69 countries and
ments in survival prospects throughout the life            territories are currently growing even though their
cycle, but especially among infants and children.          fertility rates are below 2.1.
   Cross-country convergence in life expectancy con-          Cross-country migration is also relevant to pop-
tinues to be strong. For example, the life expec-          ulation growth. The effects are quite important
tancy gap between Africa and North America was             in some countries, such as Guyana, Samoa, and
32 years in 1950 and 24 years in 2000; it is 16            Tonga, where net emigration in the past 30 years
years today. Historic and anticipated reductions           has been appreciable. Bahrain, Qatar, and the
in cross-country health disparities reflect gains          United Arab Emirates have had the highest rates
in income and nutrition among low- and middle-             of net immigration. Among the world’s 10 pop-
income countries, the diffusion of innovations             ulation super powers, migrants have the largest
in health technologies and institutions, and the           relative presence in the United States (15 percent
distribution of international aid.                         in 2019). For most countries, though, international
   In the 1950s and 1960s, the average woman               migration has not been a dominant demographic
had roughly five children over the course of her           force, because more than 96 percent of the world’s
childbearing years. Today, the average woman has           population currently live in their countries of birth
somewhat fewer than 2.5 children. This presumably          (see “Immigrant Swan Song” in this issue of F&D).
reflects the growing cost of child-rearing (including
opportunity cost, as reflected mainly in women’s           Age structure dynamics
wages), increased access to effective contraception,       The age structure of a population reflects mainly
and perhaps also growing income insecurity.                its fertility and mortality history. In high-mortal-
   The social and economic implications of this            ity populations, improved survival tends to occur
fertility decline are hard to overstate. Among             disproportionately among children. This effectively
other things, lower fertility has helped relieve           creates a baby boom. Eventually, the boom ends
many women of the burden of childbearing and               when fertility abates in response to perceptions
child-rearing. It has also contributed to the empow-       of improved child survival and as desired fertility
erment of women in their households, communi-              declines with economic development. But as the
ties, and societies and has allowed them to partici-       relatively large baby-boom cohorts proceed through
pate more actively in paid labor markets. All these        adolescence and into their adult years, the population
factors reinforce the preference for low fertility.        share at the peak ages for work and saving swells.
   Between 1970 and 2020, the fertility rate declined         This enhances the productive capacity of the econ-
in every country in the world. Fertility tended to         omy on a per capita basis and opens a window of
decrease more in countries with high initial fertility,    opportunity for rapid income growth and poverty
another facet of demographic convergence. Among            reduction. Events of the past decade, ranging from
geographic regions, Africa and Europe are currently        the Arab uprisings to more recent mass protests in
homes to the highest (4.3) and lowest (1.6) fertility      Chile and Sudan, also show that countries that fail to
rates, respectively.                                       generate sufficient jobs for large cohorts of young adults
   If the population’s age structure is sufficiently       are prone to social, political, and economic instability.
weighted toward those in prime childbearing years,            The “demographic dividend” refers to the pro-
even a fertility rate of 2.1 can translate into positive   cess through which a changing age structure can

                                                                                          March 2020 | FINANCE & DEVELOPMENT   7
The Long, Good Life Demographics and Economic Well-Being - MARCH 2020 Summers on secular stagnation P.17 - International Monetary Fund
spur economic growth. It depends, of course,             high-savings part of the life cycle need policies to
                  on several complex factors, including the nature         realize the potential benefits of favorable demograph-
                  and pace of demographic change, the operation            ics. Such policies include support for the operation
                  of labor and capital markets, macroeconomic              of competitive labor and capital markets, equipping
                  management and trade policies, governance, and           workers with human capital, building infrastruc-
                  human capital accumulation. Nonetheless, the             ture, sound macroeconomic management, carefully
                  demographic dividend model can account for               designed trade policies, and good governance. Such
                  much variation in past economic performance              policies are always desirable, but a large working-age
                  among different countries and regions (e.g., East        population share raises the stakes.
                  Asia vs. Latin America vs. sub-Saharan Africa)              In some countries, making investments in these
                  and helps identify more- and less-promising              various sets of policies could be challenging, as per
                  country settings for future economic growth.             capita income is currently lower in real terms than
                  For example, from 2020 to 2030, Nepal, Jordan,           it was in some of today’s advanced economies when
                  Bhutan, and Eswatini are projected to experience         they were at a comparable demographic stage.
                  the largest gains among countries in the ratios of
                  their working-age to non-working-age populations.        Global graying
                     The dependency ratio—the inverse of the work-         Population aging is the dominant demographic
                  ing age to non-working-age ratio—measures the            trend of the twenty-first century—a reflection of
                  economic pressure working-age individuals face           increasing longevity, declining fertility, and the
                  to support, in addition to themselves, those who         progression of large cohorts to older ages. Never
                  are not of working age. In 1990, the ratio in more       before have such large numbers of people reached
                  developed regions was appreciably lower than in          ages 65+ (the conventional old-age threshold). We
                  less developed regions (0.68 versus 1.04).               expect to add 1 billion older individuals in the next
                     But by 2020, as a result of different patterns of     three to four decades, atop the more than 700 mil-
                  fertility decline and population aging, the ratio had    lion older people we have today. Among the older
                  increased to 0.70 in more developed regions and          population, the group aged 85+ is growing especially
                  decreased to 0.75 in less developed regions. And by      fast and is projected to surpass half a billion in the
                  2050, the dependency ratio is projected to be greater    next 80 years. This trend is significant because the
                  in more developed regions (0.89) than in those that      needs and capacities of the 85+ crowd tend to differ
                  are less developed (0.77). This switch suggests that     significantly from those of 65-to-84-year-olds.
                  in the coming decades, demographics will be more            Although every country in the world will experi-
                  favorable to economic well-being in less developed       ence population aging, differences in the progres-
                  regions than in more developed regions. This will        sion of this phenomenon will be considerable. Japan
                  be especially true in Africa, the only region in which   is currently the world leader, with 28 percent of its
                  this ratio is projected to decline by 2050.              population 65 and over, triple the world average.
                     For countries that have yet to experience appre-      By 2050, 29 countries and territories will have
                  ciable demographic transitions (like Chad, the           larger elder shares than Japan has today. In fact,
                  Central African Republic, Somalia, and Sierra            the Republic of Korea’s elder share will eventually
                  Leone), policies are appropriately oriented toward       overtake Japan’s, reaching the historically unprec-
                  catalyzing those transitions. Such policies include      edented level of 38.1 percent. Japan’s median age
                  investment that promotes infant and child survival,      (48.4) is also currently the highest of any country
                  such as expanded vaccine coverage as well as wider       and more than twice that of Africa (19.7). But by
                  access to well-provisioned and appropriately staffed     2050, Korea (median age 56.5 in 2050) is also
                  primary health care systems.                             expected to overtake Japan on that metric (54.7).
                     For populations that have experienced health and         Three decades ago, the world was populated by
                  survival gains, countries could benefit from policies    more than three times as many adolescents and
                  to enable a decline in fertility, such as promoting      young adults (15- to 24-year-olds) as older people.
                  girls’ education and access to reproductive health       Three decades from now, those age groups will be
                  and family planning services.                            roughly on par.
                     And countries with relatively sizable portions of        By income group, the sharpest growth in the num-
                  the population concentrated in the high-work and         bers of older people will occur in countries currently

8   FINANCE & DEVELOPMENT | March 2020
DEMOGRAPHICS

Among the older population, the group aged 85+ is
growing especially fast and is projected to surpass
half a billion in the next 80 years.
classified as middle income. This is unsurprising, as     reforms to promote the financial sustainability and
these countries make up 74 percent of the world           intergenerational equity of health and pension financ-
population. What may be surprising is that the older-     ing. Raising the legal age of retirement, which has
population share in middle-income countries is            been relatively stable in nearly all countries for the
increasing at a much faster rate than in their low- and   past several decades (see “Getting Older but Not
high-income counterparts. Moreover, in comparison         Poorer” in this issue of F&D) would also ease the
with high-income countries, today’s middle-income         burden. Pronatalist tax incentives are also a policy
countries are projected to have appreciably greater       option for the long term, but their effect on fertility
real incomes when their older-population shares           is thus far unproven.
reach comparably elevated levels. This contradicts           Additional approaches include efforts to increase
the common claim that developing economies are            health systems’ emphasis on early detection and
getting old before they get rich.                         on prevention of disease through, for example,
   The challenge middle-income countries face is not      better awareness of the benefits of physical activity
predominantly insufficient income to take care of their   and subsidization of such activity. Relaxing the
older people. Rather, it is how well institutions and     institutional and economic barriers to interna-
policies can promote economic and social security         tional immigration from regions with relatively
among older people in a financially sustainable way.      large working-age populations could alleviate
   Population aging is sounding alarms worldwide.         labor shortages.
Whether increased longevity is associated with               Finally, technological innovations are likely to
more or less of a person’s life lived in frailty is       ameliorate the effects of population aging. New drugs
among the most salient unresolved questions public        to slow the process of aging and add healthy years
and private policymakers throughout the world face        to people’s lives and the invention and deployment
(see “The Long, Good Life” in this issue of F&D).         of assistive devices such as robots are two among
   Economists continue to express concerns. These         many such improvements. Institutional innova-
relate to downward pressure on economic growth            tions like new models of home health care, public
due to labor and capital shortages and falling asset      transportation systems, the design of urban layouts,
prices in the future as a growing and more aged           and financial instruments are also on the horizon.
cohort of older people seeks to support itself by
liquidating investments. Another major issue has          The bottom line
to do with fiscal stress. Government coffers will be      Global, regional, and country demographic indi-
strained by rising pension liabilities and the cost       cators have changed dramatically since the early
of health and long-term care associated with the          1950s and are poised for equally dramatic changes
expected growth in the incidence and prevalence           in the coming decades. Population aging contin-
of chronic diseases such as cancer, among others.         ues to displace population growth as the focal
These challenges will, however, be partially offset       point of interest among global demographic phe-
by the increasing, but typically neglected, value         nomena. Nonetheless, both phenomena and their
older people create through productive nonmarket          underlying drivers have had, and will continue
activities like volunteer work and caregiving.            to have, profound repercussions for myriad indi-
   Without historical lessons from a world with such      cators and determinants of economic well-being
large numbers of older people, there is even more         and progress. Demographics are not, however, set
uncertainty about our collective future. However,         in stone. Nor are their implications for individual
adopting a business-as-usual approach to the chal-        and collective well-being.
lenges of population aging would be irresponsible.
   Various responses could cushion the economic           DAVID E. BLOOM is a professor of economics and demogra-
burden of population aging. These include policy          phy at Harvard University’s T. H. Chan School of Public Health.

                                                                                            March 2020 | FINANCE & DEVELOPMENT   9
THE LONG,
             GOOD LIFE
               Longer, more productive lives will mean big changes to the old rules of aging
                                               Andrew Scott

10   FINANCE & DEVELOPMENT | March 2020
T
             he past 150 years have witnessed one
             of the greatest of human achievements.
             In 1870 average global life expectancy
             was about 30 years; today it is 73 and
rising (Deaton 2015). Further, the proportion of life
lived free of frailty or illness has remained broadly
unchanged, so people spend most of these extra
years in good health.
   The implications of this development for individ-
uals are profound. For instance, in 1960 the average
Chinese newborn had only a 27 percent chance of
making it to age 65; today that probability is 83
percent and rising. Around the world, on average,
people can now expect to live longer, healthier lives
than in previous generations.

The new frontier of aging
While for individuals this is good news, at an aggre-
gate level there is concern over an aging society.
In 1965 there were 129 million people over 65 in
the world; today there are nearly 750 million, and
this figure is expected to reach 2.5 billion by 2100.
The number of centenarians is also rising—from
20,000 in 1965 to a projected 19 million by 2100.
   The fear is that this phenomenon will weaken
economic growth as the number of people of                   professor Laura Carstensen, a “new map of life.”
working age declines and that governments’ fiscal            Longer lives mean changes to when we are edu-
burden will worsen because of higher pension and             cated or married, when we have children, how
health care costs.                                           long we work, and how we spend not just old age,
   The chart shows the changing size and structure           but also youth and middle age (Gratton and Scott
of the global population. The vertical axis shows            2016). From this perspective the question is not
the world’s population broken down by age, the               “How do we afford an aging society?” but “How
horizontal axis the split between men and women.             do we restructure behavior to make the most of
   Horizontally the chart shows a staggering increase        longer lives?”
in the proportion of people over 65. From repre-                Underpinning these changes is the fact that age
senting only 5 percent of the population in 1950             has become, to a degree, malleable. Nutrition,
to 9 percent today, this cohort is expected to reach         education, behavior, public health, the environ-
23 percent by 2100. Supporting this population               ment, and medical practice can influence the pace
shift will require profound changes in policies,             at which we age. Across a variety of measures
institutions, and practice.                                  (incidence of diseases, mortality rates, cognitive
                                                                                                                                  ART: ISTOCK / NESELENA; ANASTASIIA BORIAGINA

   Vertically, however, the chart tells a different story,   function, physical strength) people are in effect
highlighting not aging, but longevity. From this per-        not aging more but aging more slowly.
spective, children born today have much more time               This malleability requires drawing a distinction
ahead of them than past generations. The likelihood          between chronological age (how many years since
of living into old age has increased, as has the peak        you were born) and biological age (how fit and
of the pyramid, changing what constitutes “old.”             healthy you are). By defining “old” chronologi-
   Longevity represents an extension of the dura-            cally, the aging society narrative does not take into
tion of life and requires, in the words of Stanford          account whether people are aging better and rules out

                                                                                        March 2020 | FINANCE & DEVELOPMENT   11
structural changes in the course of life. As a result,     Myth #4 Aging is a rich-country problem
                  it focuses only on the negatives of an aging society:      Given the population’s young average age in many
                  more older people who require care and support. This       low-income countries, it is often assumed that
                  omits the potential gains from a longevity agenda that     aging is a rich-country problem. However, these
                  supports longer, healthier, and more productive lives.     young populations will age in the years ahead.
                                                                             Countries need to support 15-year-olds now to
                  Myths                                                      ensure that when they reach 65, in 2070, they are
                  There are then two forces at work: an aging society,       aging as well as possible. Aging does not begin
                  reflecting a changing demographic structure, and a         at 65, and governments should recognize this by
                  longevity effect, driven by improvements in how we         putting in place policies to help the elderly, both
                  age. Viewing demographic change only through the           in the future and today.
                  lens of an aging society risks missing the bigger story.
                                                                             Policies for longevity
                  Myth #1 Aging is best measured chronologically             The longevity agenda aims to address the whole
                  In the twentieth century our concepts of age solid-        life course and help people seize the opportunities
                  ified around chronological measures as government          longer lives present. The agenda covers all aspects
                  birth and death records became more reliable and           of life, but employment, education, and health are
                  formed the basis of increasing regulation. The apo-        central areas of focus and those in which govern-
                  theosis of this chronological measurement was the          ments have a key role to play.
                  definition of old age as starting at 65, enshrined in         Supporting older workers. Crucially important
                  the concept of an “old-age dependency ratio.” In           is finding ways to help older workers remain pro-
                  contrast, age malleability requires distinguishing         ductive. This topic covers more than just retirement
                  between chronological and biological measures of           age, since withdrawal from the workforce starts at
                  age, which makes for a much smaller rise in the            about age 50 and is often involuntary.
                  older population (Sanderson and Scherbov 2019).               The importance of this topic is evident in
                                                                             employment statistics. Between 2008 and 2018
                  Myth #2 All countries are aging                            people over 55 accounted for 79 percent of employ-
                  Over the past two decades the median age in France,        ment growth across Organisation for Economic
                  the United Kingdom, and the United States has              Co-operation and Development countries and
                  increased, but average mortality (as measured by pop-      103 percent in G7 countries. Further, the most
                  ulation deaths per thousand) has nonetheless declined.     important driver of cross-country variations in
                  The lower the average mortality rate, the longer the       employment of older workers is not changes in the
                  average citizen can expect to live. If we measure old      size of the older population, but changes in their
                  age as years from birth, the citizens of these countries   likelihood of working.
                  have been getting older, but if we think of old age as        Policies to promote higher labor force partici-
                  proximity to death, these nations are now in a sense       pation among older workers will depend on the
                  younger and possess a larger future. That does not         generosity and availability of pension plans, the
                  seem unambiguously best described as an aging society.     health and support available to workers, and the
                                                                             industrial structure and types of jobs offered.
                  Myth #3 Japan is a harbinger                               The use of robotics and artificial intelligence
                  Japan has the highest life expectancy in the world         should also help support employment among
                  and is often seen as leading the way in terms of an        this group. Older workers tend to value flexible
                  aging society. Japan’s demographic transition has          and part-time work arrangements highly, often
                  produced the largest increase in life expectancy and       despite lower wages—something that Japan and
                  the deepest decline in fertility among the Group of        Singapore have put to use.
                  Seven (G7) countries since 1950. As a consequence,            Supporting older workers also requires tackling
                  the aging society effect is much more pronounced           deep-seated corporate ageism that makes it hard for
                  in Japan than in its G7 peers. The balance of an           older workers to get new jobs and more likely for
                  aging-society versus the benefits of longevity varies      them to be fired. Governments need to be proactive
                  across countries and so, too, will the impact on           in extending disability rights as well as enacting diver-
                  economic growth and required policies.                     sity legislation to support and protect older workers.

12   FINANCE & DEVELOPMENT | March 2020
DEMOGRAPHICS

   Supporting longer productive lives. Longer              is a weak predictor of people’s needs and abilities
lives will require a greater focus on lifelong learning.   and should establish more nuanced policies with
Currently education is front loaded in a three-stage       different options depending on circumstances.
model of life consisting of “learn, earn, and retire.”        Targeting longevity. There is a growing debate
However, longevity and technological change will           around alternatives to GDP as a way of measuring
lead to a major increase in the need for adult edu-        welfare. One potential alternative is healthy-life
cation, requiring key changes in education systems.        expectancy. Given that improvements in healthy-
   Longer careers will demand more flexibility for         life expectancy depend not only on income and job
workers of all ages. Taking time out to retrain;           security. but also on broader social purpose—as
for family support (both of children and of aged           well as on environmental quality and inequality—
parents); and for reorientation, recuperation, and         longevity usefully connects to a broad range of
repurposing as individuals ramp up and ramp down           agendas. Longevity councils (like Japan’s Council
their work commitments will all be necessary in
a multistage life.
   All’s well that ages well. As populations age,
the disease burden shifts toward noncommunicable           By defining “old” chronologically,
diseases, such as heart disease, cancer, diabetes,
and dementia. In 2016 these diseases accounted
                                                           the aging society narrative does
for 71 percent of deaths globally, with 78 percent         not take into account whether
occurring in low- and middle-income countries.
Noncommunicable diseases are expensively and               people are aging better.
poorly managed through intervention, so to reduce
their impact, health care providers should consider
a major shift toward preventive health care. As with       for Designing 100-Year Life) would help monitor
past health improvements, this will require public         progress toward these targets and improve coor-
education aimed at changing people’s behavior              dination across government departments.
when it comes to activity, diet, engagement, and              How we are aging is changing, undermining
purpose. New monitoring and predictive technol-            nineteenth-century French philosopher Auguste
ogies, such as artificial intelligence and big data,       Comte’s assertion that “demography is destiny.”
will be needed as well.                                    Individuals are living longer, healthier lives—and
   The dominant cause of many noncommunicable              that should be good news for people and the econ-
diseases is age itself. This suggests that efforts to      omy. Designing policies to maximize the number
slow the aging process should play a more promi-           of people of all ages who benefit from this longevity
nent role in treatments rather than targeting par-         effect while seeking to boost productivity over a
ticular diseases, such as cancer (Ellison, Sinclair,       longer life is the goal.
and Scott 2020). A growing research program
is focusing on understanding why we age and                ANDREW SCOTT is professor of economics at the London
developing treatments that, if successful, could           Business School and cofounder of The Longevity Forum. He is
lead to dramatic changes in the malleability of            the author (along with Lynda Gratton) of the 2016 book The
age (Sinclair 2019).                                       100-Year Life: Living and Working in an Age of Longevity.
   Supporting diversity. Age malleability means
that there is considerable diversity in how people         References:
age. As many more millions live beyond 65, this            Deaton, A. 2015. The Great Escape: Health, Wealth and the Origins of Inequality.
will become ever more apparent, causing problems           Princeton, NJ: Princeton University Press.
for policies couched purely in terms of chrono-            Ellison, M., D. Sinclair, and A. Scott. 2020. “All’s Well That Ages Well.” Oxford University/
logical age, such as raising the state pension age.        Harvard Medical School/London Business School, unpublished.
Governments need policies that provide support             Gratton, L., and A. Scott. 2016. The 100-Year Life: Living and Working in an Age of
for those who are unable to continue working               Longevity. London: Bloomsbury Business.
while providing incentives to work for those who           Sanderson, W. C., and S. Scherbov. 2019. Prospective Longevity: A New Vision of
can. As is done with with other age groups, poli-          Population Aging. Cambridge, MA: Harvard University Press.
cymakers should recognize that chronological age           Sinclair, D. 2019. Lifespan: Why We Age and Why We Don’t Have To. New York: Altria.

                                                                                                             March 2020 | FINANCE & DEVELOPMENT             13
Planet sculpture (2008) by Marc
Quinn in the sunset at the Gardens
by the Bay, with Singapore’s
skyline in the background.

Reversing
Demographic
Decline                                       Singapore’s experience in trying to raise its
                                              fertility rate offers lessons for other countries
                                              Poh Lin Tan

 14      FINANCE & DEVELOPMENT | March 2020
G
           lobally, fertility is on the decline. While a   the probability that families will achieve it, because
           total fertility rate below the replacement      of either unforeseen changes in circumstances such
           level of 2.1 is now the norm for advanced       as divorce, health, or income shocks, or reduced
           economies, the very lowest rates are found      ability to conceive and carry a child to term.
in Japan, the Republic of Korea, Singapore, Taiwan            The Singaporean policy approach aims to create
Province of China, and higher-income Chinese               a more conducive environment for marriage and
cities, including Shanghai and Hong Kong SAR. As           fertility for all groups—in particular to help married
a result, in the absence of immigration, this region       women reconcile labor participation with mother-
is set to experience the most rapid population aging       hood. However, few if any of the instruments are
and decline.                                               designed specifically to allow women to become
   In the case of Singapore, the government has            mothers at peak childbearing ages, either to stem
grappled with the relentless downward trend in             the decline among women in their 20s or to boost
fertility since the 1980s. After a public campaign         fertility rates among women in their early 30s. As
and limited programs failed to produce results, a          a result, the lack of age sensitivity represents a lost
package of pronatalist incentives was introduced in        opportunity to cater to the most receptive group of
2001 and enhanced over the years. Currently, the           prospective parents.
package includes paid maternity leave, childcare
subsidies, tax relief and rebates, one-time cash           Lesson 2: Reproductive technologies are not a panacea
gifts, and grants for companies that implement             One reason for older childbearing in advanced econ-
flexible work arrangements. Despite these efforts,         omies is the public’s misplaced faith in reproductive
the fertility rate deteriorated from 1.41 in 2001 to       technologies’ effectiveness. According to Judith
a precarious 1.16 in 2018.                                 Daniluk and colleagues at the University of British
   What can we learn from Singapore?                       Columbia, common fertility myths include the belief
                                                           that good health and in vitro fertilization (IVF) can
Lesson 1: Address the rising age at childbearing           offset the effects of age-related infertility (Daniluk,
The mean age of childbearing has increased by              Koert, and Cheung 2012). Few people are aware that
approximately one year a decade among Organisation         IVF poses health risks to women or that delayed
for Economic Co-operation and Development                  childbearing can lead to more complications during
countries, according to calculations by Oxford             pregnancy or birth and more birth defects. Men
University’s Melinda Mills and colleagues (Mills           and women thus tend to underestimate the risks
and others 2011). In Singapore, changes in the             associated with delaying marriage and childbearing.
age composition of women giving birth have been               As part of the package of pronatalist incentives,
especially dramatic. Women ages 20–24 are now as           the Singaporean government subsidizes up to 75
likely to give birth as women ages 40–44 and far less      percent of assisted reproductive technology treat-
likely than women ages 35–39. Moreover, unlike in          ment costs for qualifying married couples and
a number of European countries, the steep decline          allows them to tap into their medical accounts
in fertility among women in their 20s has not been         under the national savings program to pay for
offset by higher birth rates among women in their          the procedures. Singapore’s fertility experience
30s. Instead of merely being delayed, these missing        suggests that access to IVF and other reproductive
babies have vanished permanently.                          technologies is not sufficient to ensure that older
   The rising age at childbearing is the lowest-hang-      women have enough babies to compensate for
ing fruit from a policy perspective. It is far easier      fertility decline among younger women. Japan,
to help couples who are already married and desire         another excellent example, has the world’s highest
at least two children to achieve their fertility goals     percentage of babies born through IVF (about 5
than to attempt to match singles in the marriage           percent), as well as one of the lowest fertility rates.
                                                                                                                            PHOTO: DREAMSTIME.COM / ANDREI IANCU

market or persuade couples who do not want more
children to change their minds. While the two-             Lesson 3: Household production cannot be fully outsourced
child-family ideal continues to hold in Singapore, the     Singapore’s low fertility also demonstrates the lim-
phenomenon of higher ages at parenthood reduces            itations of formal sector provision of childcare

                                                                            March 2020 | FINANCE & DEVELOPMENT         15
and housework. Peter McDonald at the Australian          each child. Couples who might otherwise want
                  National University argues that even though women        children voice concern over the ethics of a stressful
                  have more educational and labor market oppor-            childhood and upbringing or worry that they would
                  tunities than ever, gender inequality at home,           lack the energy or ability to help their children
                  which places the burden of caring for children           compete effectively.
                  and household chores on women, results in very              Singapore’s human capital success story, which
                  high opportunity costs of childbearing and hence         has propelled it to the top of international rankings,
                  very low fertility (McDonald 2006).                      thus comes at a cost to its people’s willingness and
                     Singapore provides insight into this issue because    ability to build families. The inability to raise the
                  of the unusually robust range of options its formal      fertility rate is hence not so much a testimony to
                  sector provides. The government is heavily involved      ineffective pronatalist policies as to the overwhelm-
                  in the provision of low-cost and high-quality formal     ing success of an economic and social system that
                  childcare. Working mothers receive childcare sub-        heavily rewards achievement and penalizes lack of
                  sidies of S$300 a month for formal childcare;            ambition. Tackling the fertility rate may therefore
                  lower-income families receive more. Moreover,            require confronting some of the weaknesses of the
                  unlike in most other advanced economies, families        underlying system, which means not only address-
                  can (and many do) hire relatively low-cost domes-        ing demographic challenges, but also potentially
                  tic workers from neighboring Southeast Asian             helping build social cohesion or healthy cultural
                  countries such as Indonesia and the Philippines.         attitudes toward risk taking.
                  Hence, it is relatively easy for women to outsource         At the end of this year’s Forbes Global CEO
                  childcare and housework in Singapore.                    Conference, Singaporean Prime Minister Lee Hsien
                     Singapore’s low fertility rates suggest that formal   Loong noted that with help from immigration, a
                  sector provision cannot substitute for parents’          fertility of rate of 1.3–1.4 may be enough to meet
                  spending quality time with children. While access        the country’s needs (Yong 2019). As long as there is
                  to excellent childcare options and domestic workers      tension between human capital and fertility, raising
                  may help, institutional support—parental leave           birth rates in Singapore to replacement levels will take
                  and flexible work arrangements that allow families       more than just policy updates and patches. However,
                  to spend more time together— is needed as well.          a mix of age-sensitive policies and enhancements of
                                                                           pronatalist incentives may push fertility to a more
                  Lesson 4: Acknowledge human capital’s true cost          modest target of 1.4. Singapore has little time to lose:
                  It is no coincidence that Japan, Singapore, and other    as the population ages, fewer and fewer couples will
                  very low fertility countries also tend to score very     be of childbearing age, and a higher fertility rate will
                  well in human capital rankings, from Program for         deliver less bang for the buck. It’s now or never.
                  International Student Assessment tests to the new
                  World Bank Human Capital Index. Economists               POH LIN TAN is an assistant professor at the National
                  have long noted a trade-off between quantity and         University of Singapore’s Lee Kuan Yew School of Public Policy.
                  “quality” of children (in terms of resources devoted
                  per child). My coauthors and I argue (Tan, Morgan,       References:
                  and Zagheni 2016) that the East Asian institutional      Daniluk, J. C., E. Koert, and A. Cheung. 2012. “Childless Women’s Knowledge of Fertility and
                  emphasis on early life achievements increases returns    Assisted Human Reproduction: Identifying the Gaps.” Fertility and Sterility 9 7 (2): 420–26.
                  from investing in children’s human capital, which        McDonald, Peter. 2006. “Low Fertility and the State: The Efficacy of Policy.” Population and
                  means more children, more expense.                       Development Review 32 (3): 485–510.
                     The other side of the coin is the serious con-        Mills, Melinda, Ronald R. Rindfuss, Peter McDonald, and Egbert te Velde. 2011. “Why Do
                  sequences of being less successful than others,          People Postpone Parenthood? Reasons and Social Policy Incentives.” Human Reproduction
                                                                           17 (6): 848–60.
                  both for parents and their children. Local surveys
                  suggest that a large proportion of singles wish to       Tan, Poh Lin, S. Philip Morgan, and Emilio Zagheni. 2016. “Examining the Link between
                                                                           Education Costs and Lowest-Low Fertility.” Population Research and Policy Review 35 (5):
                  be married someday but choose to pursue educa-           327–50.
                  tional or career success over dating. The major-
                                                                           Yong, Nicholas. 2019. “We Must Make Enough of Our Own Babies to Secure Singapore’s
                  ity of married couples have children, but most           Future: Lee Hsien Loong.”Yahoo News Singapore, October 17. https://sg.news.yahoo.
                  stop at one or two, owing to high education-             com/we-must-make-enough-of-our-own-babies-to-secure-our-future-lee-hsien-
                  related expenses and the desire to invest more in        loong-083432783.html.

16   FINANCE & DEVELOPMENT | March 2020
POINT OF VIEW

                       Accepting the Reality of
                       Secular Stagnation
                       New approaches are needed to deal with sluggish growth,
                       low interest rates, and an absence of inflation
                       Lawrence H. Summers
                                                                                    recovery, and below-target inflation during a decade
                                                                                    of recovery, or the sustainability of high levels of
                                                                                    government debt with very low real interest rates.
                                                                                       Understanding these developments and crafting
                                                                                    policies that respond effectively will likely require
                                                                                    that economists develop what might be called a
                                                                                    “new old Keynesian economics” based on Alvin
                                                                                    Hansen’s Depression-era idea of secular stagnation.
                                                                                    This article summarizes the case for new approaches
                                                                                    to macroeconomics by highlighting important
                                                                                    structural changes in the economy of the industrial
                                                                                    world, explains the secular stagnation view, and
                                                                                    draws some policy implications.

                                                                                    The investment dearth
                                                                                    Barring a change in current trends, the industrial
                                                                                    world’s working-age population will decline over the
                                                                                    next generation, and China’s working-age popula-
                                                                                    tion will decline as well. At the same time, trends
                                                                                    toward increased labor force participation of women
PHOTO: RALPH ALSWANG

                                                                                    have played out with, for example, more women than
                                                                                    men now working in the United States.
                                                                                       These demographic developments eliminate the
                                                                                    demand for new capital goods to equip and house
                                                                                    a growing workforce. This trend is reinforced by
                       A FUNDAMENTAL DIFFERENCE between natural science             the observation that the amount of saving required
                       theories and social science theories is that natural sci-    to purchase a given amount of capital goods has
                       ence theories, if valid, hold for all times and places. In   declined sharply as the relative price of equipment,
                       contrast, the relevance of economic theories depends         especially in the information technology (IT) space,
                       on context. Malthus’s theory of food availability was        has sharply declined. A $500 iPhone today has
                       valid for the millennia before he formulated it, but         more computing power than a Cray supercomputer
                       not after the industrial revolution. Keynes’s ideas          did a generation ago. In addition to capital goods’
                       were much more valid during the Great Depression             having lower prices, the downward trend in their
                       than during the inflationary 1970s.                          prices encourages delaying investment.
                          I am increasingly convinced that current mac-                Moreover the IT revolution has been associated
                       roeconomic theories, with their premise that mon-            with a broader demassification of the economy.
                       etary policy can determine the rate of inflation,            E-commerce has reduced the demand for shopping
                       may be unsuited to current economic reality and so           malls, and the cloud has reduced the demand for
                       provide misguided policy prescriptions. They failed          office space by eliminating the need for filing cabi-
                       to anticipate Japan’s deflationary slowdown that             nets, allowing offices to be personalized with a flick
                       began in 1990, or the global financial crisis, slow          of the switch, down to family photos on the walls.

                                                                                                               March 2020 | FINANCE & DEVELOPMENT   17
POINT OF VIEW

                  I am increasingly convinced that current macroeconomic theories,
                  with their premise that monetary policy can determine the rate of
                  inflation, may be unsuited to current economic reality.
                     Fracking for oil and natural gas requires far less    Secular stagnation
                  capital than traditional drilling techniques, and        With a somewhat different list of factors in mind,
                  IT makes targeting of exploration much easier,           the Harvard economist Alvin Hansen labeled the
                  further reducing investment demand.                      failure of private investment to fully absorb private
                     Technology now permits sharing of everything          savings “secular stagnation” because of the threat
                  from apartments (Airbnb) to planes (NetJets) and         that it would mean insufficient demand.
                  dresses (Rent the Runway) to cars (Uber) in ways            There are a number of things we would expect
                  that would not have been imaginable a decade ago.        to see if secular stagnation has been taking hold
                  Rising generations look to live in sparsely furnished    in recent years. First, a high supply of savings and
                  apartments rather than large homes.                      a low level of demand should mean low interest
                     Many argue that monopoly power has                    rates. Indeed, real rates by almost any measure have
                  increased—at least in the United States—tending          been trending downward over the last 20 years,
                  to discourage new investment. And increasingly           even as budget deficits have increased. This is what
                  promiscuous distribution of the veto power has           we have seen with real-term interest rates negative
                  slowed public infrastructure investment, which           in the industrial world despite major run-ups in
                  on a net basis is running in the United States at        government debt.
                  less than half of previous levels.                          Second, one would expect that difficulties in
                     The upshot of all these developments is that          absorbing savings would lead to reduced growth
                  investment demand has been substantially reduced,        and difficulty in achieving target inflation. This
                  regardless of interest rate levels.                      is what has been observed. At present markets do
                                                                           not expect any country in the industrial world to
                  The savings glut                                         hit a 2 percent inflation target. Despite unprece-
                  At the same time that investment demand has fallen       dentedly low interest rates and deficits at record
                  off, a number of factors have combined to increase       levels after more than a decade of recovery, growth
                  saving. A larger amount of income is accruing to         has been tepid. Notably—contrary to the views of
                  higher-income people who have a greater propensity       those who explained low rates after the recession
                  to save. Increased corporate profitability, coupled      by pointing to “headwinds”—central banks have
                  with lower interest rates, means more corporate          found it impossible to raise rates and still count
                  retained earnings.                                       on the momentum of recovery.
                     Increases in uncertainty associated with growing         Third, disappointing growth has coincided
                  doubts about government’s ability to meet pension        with inflation’s surprising again and again on the
                  obligations and more risk of future tax increases also   downside. Economists teach beginning students
                  raise saving. Similarly, reductions in expected future   that reduced quantity and reduced price suggest
                  income growth increase the need for future saving.       a decline in demand. If, as many suggest, the
                     Strengthened financial regulation and its legacy      dominant reason for stagnation is disappointing
                  mean households find it more difficult to borrow         productivity performance, we would expect to see
                  and spend, leading to an increase in aggregate           prices rise rather than fall. Absent extraordinary
                  saving. This can happen either because of con-           policy settings, deflation might be setting in.
                  sumer protection—as when, for example, higher               Fourth, a period of slow growth and deflation
                  down payment requirements reduce mortgage                has also been a period of asset price inflation.
                  borrowing—or because of regulatory burdens on            US stock markets have risen fourfold since the
                  financial intermediaries, through, for example,          crisis, and real housing prices are almost back
                  higher capital requirements.                             to previous peak levels. This is as one would
                     So structural changes in the economy have oper-       expect with secular stagnation, as abundant sav-
                  ated both to raise saving and to reduce investment.      ings pushed into existing assets, increasing, for

18   FINANCE & DEVELOPMENT | March 2020
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