Demographics and Debt Hang Over Long-Term U.S. Growth

Once the Covid-19 pandemic passes, the U.S. will have to contend with weaker population growth and the drag of high debt

By Greg Ip

The 1918 flu pandemic was followed by a plunge in births. A recent report found the Covid-19 pandemic could reduce births by 300,000 to 500,000 next year. / PHOTO: JOHN MINCHILLO/ASSOCIATED PRESS

If you’re worried about the short-term economic outlook, I have bad news: the long-term outlook is worse.

That’s what emerges from the latest long-term budget outlook released by the Congressional Budget Office last week. It contained this sobering number: the agency expects annual economic growth to average just 1.6% over the next three decades—down by about a quarter of a point from its forecast a year ago—and just 1.5% by the 2040s. 

The U.S. hasn’t had trend growth that low since the 1930s. Only a bit of this is because of the pandemic. Most reflects longer-lasting forces, namely demographics and productivity.

Of course, all economic forecasts are essentially educated guesses, especially those that extend so far into the future. Many of the assumptions underlying such projections will turn out to be wrong. The CBO in particular is required to assume certain things that probably won’t happen, for example that all of President Trump’s personal income tax cuts will expire, as required by current law, in 2026.

Yet it’s still a useful exercise because the CBO systematically combines everything we know today about the factors driving growth into an internally-consistent story about the future.

That story is influenced surprisingly little by the pandemic-induced recession. CBO expects this year’s steep contraction will be followed by faster growth in subsequent years, leaving growth over the coming decade barely changed.

It’s in subsequent decades, though, the picture darkens. A big reason is demographic developments already under way today. In a recent report, Melissa Kearney and Phillip Levine, economists at the University of Maryland and Wellesley College respectively, cite research showing births decline predictably when unemployment rises. 

They also say uncertainty and anxiety associated with the 1918 flu pandemic coincided with a plunge in births the next year. In both cases, births aren’t merely postponed; women end up having fewer babies. Combining these results, they think the current pandemic and recession could reduce births by 300,000 to 500,000.

This is similar to the CBO’s projection that total fertility—the number of babies a woman is expected to have over her lifetime—will drop to 1.6 next year, the lowest in at least a century and well below the 2.1 rate at which each generation exactly replaces itself. Those births translate into fewer people entering the labor force 20 years later, and fewer new parents.

The U.S. could make up for falling fertility with immigration, but the CBO notes that coronavirus-related travel restrictions, reduced visa-processing capacity and fewer foreign entrants without legal status have already reduced immigrant inflows. It expects 2.5 million fewer immigrants in the coming decade than it said last year as a result.

The net result is fewer Americans: 374 million in the year 2046, 10 million fewer than what CBO thought last year and 34 million fewer than in 2012.

The CBO has had to revise down estimated population repeatedly in recent years and may have to again. It sees the fertility rate returning to 1.9 by 2026, but Ms. Kearney disagrees: “Even if there is a rapid recovery and no lingering Covid effect on birthrates, the fertility rate has generally been trending downward.” 

And while falling fertility strengthens the economic case for immigration, it doesn’t necessarily make voters more receptive, as the backlash of recent years in both the U.S. and Europe has shown.

Not only will the U.S. have fewer workers than previously projected in coming decades, they’ll be less productive: CBO has sharply revised down growth in output per worker between 2031 and 2050. Several factors are at work. One is that a smaller workforce by itself leads businesses to invest less. The CBO also thinks an aging population will want less housing and this reduces future investment and growth.

The elephant in the room is the national debt. Conventional economic models like the CBO’s say government debt soaks up saving and thus crowds out private investment, and the U.S. is about to have a lot more debt. 

CBO thinks the federal debt will soar from 79% of gross domestic product last year to 189% of GDP in 2049 compared with its forecast of 144% a year ago thanks to pandemic-related borrowing and congress’ increase in discretionary spending and elimination of the tax on high-cost health insurance.

The “crowding out” model hasn’t fared well in recent years: steep deficits have coincided with ultralow interest rates. 

This is probably because investment has been persistently weak globally relative to saving. 

Perhaps interest rates will stay low, allowing government debt to grow indefinitely with no ill effect. But in that scenario U.S. investment and productivity growth would likely be even weaker than the CBO now sees—not a future to be embraced. 

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