Tuesday, October 23, 2007

You're not as old as you think....

As many of my students know, one of my pet concerns is the demographic transition that is affecting most of the developed world, and some of the developing world (China) as well. For the first time, we're facing a rapidly aging population, and in the fullness of time a shrinking population as well. This may have profound implications for asset markets (see, for example, this paper on the effects of demographics on real estate prices), aggregate savings, and therefore interest rates. Higher interest rates in turn may reduce investment, lowering the capital stock, and future economic growth. You can't get much more of a profound chain of events in economics than that.

The big unknown in all my doomsdaying is how our aging population will respond to their predicament. If people start working longer, and remain economically productive later in life, in principle this could offset a large part (or all) of the negative effects. And indeed, as marginal revolution and the Economist point out, this paper by John Shoven at Stanford suggests that there is room for some optimism on these fronts.

See the links for more....

1 comment:

Arun Ram said...

Prof. James

how Chinese foreign reserves of almost 3 trillion affect the US ?

Thanks
Arun Ram J
FT MBA, HKU

Ps : I am a regular reader of your blog and find it very insightful.Thank you