Why is growth so slow? Tim Lee has a good run down of eight theories including one suggested by myself, demographics:
Americans are having fewer babies than they did in the past, and this has had two related effects: The population as a whole is growing more slowly, and the average age of the population is rising.
There’s reason to think that both trends are bad for economic growth. Younger people are more likely to pursue new ideas, take risks, and start new businesses. So an aging population is likely to lead to a less dynamic economy.
Slower population growth can also be a source of economic stagnation in its own right. A rapidly growing population means rising demand for products of all kinds — new homes, restaurants, shopping malls, and so forth. So more businesses will be started in general, which means more opportunities for experimentation. Successful stores, restaurants, and other businesses can be expanded or franchised to other metropolitan areas, allowing good ideas to spread quickly.
In contrast, in a country with a more stagnant population, starting a new business requires replacing an existing business. Even if a young person has an innovative idea for a new company, the practical difficulties of getting the business started might be too great for putting the idea into practice. And so change can only happen by convincing existing business owners to change their behavior — an inherently slower and more difficult process.
A just-released NBER working paper by Nicole Maestas, Kathleen J. Mullen and David Powell provides some new evidence for this hypothesis by looking at the US states:
Population aging is widely assumed to have detrimental effects on economic growth yet there is little empirical evidence about the magnitude of its effects. This paper starts from the observation that many U.S. states have already experienced substantial growth in the size of their older population and much of this growth was predetermined by historical trends in fertility. We use predicted variation in the rate of population aging across U.S. states over the period 1980-2010 to estimate the economic impact of aging on state output per capita. We find that a 10% increase in the fraction of the population ages 60+ decreases the growth rate of GDP per capita by 5.5%. Two-thirds of the reduction is due to slower growth in the labor productivity of workers across the age distribution, while one-third arises from slower labor force growth. Our results imply annual GDP growth will slow by 1.2 percentage points this decade and 0.6 percentage points next decade due to population aging.