America’s Biggest Economic Challenge May Be Demographic Decline

For many years, American economists have spoken of Japan and Western Europe as places where the slow grind of demographic change — masses of workers reaching retirement age, and smaller generations replacing them — has been a major drag on the economy.

But it is increasingly outdated to think of that as a problem for other countries. The deepest challenge for the United States economy may really be about demographics. And our understanding of the implications is only starting to catch up.

A new report from the Economic Innovation Group, a Washington think tank funded in large part by tech investors and entrepreneurs, adds rich new detail, showing that parts of the United States are already grappling with Japanese-caliber demographic decline — 41 percent of American counties with a combined population of 38 million.

At the national level, slower growth in America’s working-age population is a major reason that mainstream forecasters now expect the economy to expand around 2 percent each year rather than the 3 percent common in the second half of the 20th century. As a matter of simple arithmetic, lower growth in the number of people working will almost certainly mean slower growth in economic output.

But demographic change doesn’t hit everywhere equally. Besides the inevitable effect of the extra-large baby boom generation hitting retirement age and stepping away from the work force, decisions by working-age people can accentuate or lessen the impact of that underlying shift.

Many younger workers move to bustling urban centers on the coasts, leaving smaller cities and rural areas behind. Immigrants bolster the labor force but also disproportionately go to those same big coastal cities.

“Dayton’s height of population was 1953, and we’ve seen stagnant growth for the region since 1990,” said Nan Whaley, the mayor of the Ohio city.

“A lot of people say this was just going to happen, that this is the way it is — I hate that comment,” she said, arguing that policy decisions had incentivized investment in coastal cities.

Over all, 80 percent of American counties encompassing 149 million people experienced a decline in the number of residents ages 25 to 54 between 2007 and 2017, according to the paper, which was written by Adam Ozimek of Moody’s Analytics and Kenan Fikri and John Lettieri of the Economic Innovation Group.

They project that the trends will continue, and that by 2037, two-thirds of American counties will have fewer adults of prime working age than they did in 1997, despite overall population growth in that period. (Their projections tried to take into account undocumented immigrants.)

Policies to encourage American families to have more children would help over the long run by increasing the supply of potential workers in the future. So could efforts to ensure that even struggling cities have the kinds of amenities young families desire, particularly good schools.

The population of different places is always fluctuating, and economists have traditionally viewed that as a mostly healthy process. Workers make their way to where they will be the most productive, enabling the overall economy to adapt and grow.

But people who study regional economies are increasingly concerned that some aspects of this wave of demographic change make the pain more severe for places left behind — which can get stuck in a vicious cycle.

“There’s a possibility that once local areas start on this downward spiral, it’s self-reproducing,” said Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research.

A shrinking supply of working-age people can prompt employers to look elsewhere to expand, making it harder for local governments to raise enough taxes to pay for infrastructure and education, and encouraging those younger people who remain to head elsewhere for more opportunity.

It raises the possibility that, if unchecked, these demographic trends might not merely reduce overall national growth rates in the decades ahead. They could also cause the left-behind cities to hit a point of no return that undermines the long-term economic potential of huge swaths of the United States.

The authors of the E.I.G. report suggest a potential solution: an immigration policy that would stop the vicious cycle. They propose that visas could be made available to skilled immigrants on the condition they go to one of the areas struggling with demographic decline. The idea would be to create growth in the working-age population in those places, increasing the tax base and the demand for housing, and giving businesses reason to invest.

“The real power of this is that it would start to change how investors, businesses and entrepreneurs view locational decisions,” said Mr. Lettieri, the president of the group. “They would know that there is this new pipeline for talent.”

Given hostility to immigration in large segments of the country, he said, places should be able to elect whether to make visas available to immigrants as part of an economic development strategy. It would have to be a “dual opt-in” approach in which both the community decides it wants more immigration, and individual immigrants elect to move there.

Dayton is the kind of place where that approach may just have some appeal. Ms. Whaley, the mayor, said a program called “Welcome Dayton,” intended to help immigrants move to the city, has been helpful in holding the population steady after a long pattern of losses.

Programs like that, she said, combined with a low cost of living and investment in community colleges to create qualified workers, can give smaller cities like Dayton the means to break out of demographic ruts.

Regardless of what one thinks about using immigration policy to try to arrest demographic decline, there’s a more basic point that everyone who cares about the United States’ economic future must wrestle with.

Demography may be the most powerful economic force of them all, and for much of the United States, the trend lines, for now, are pointing in the wrong direction.

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