An elderly man crosses the road on the Naples seafront. Last year, Italy recorded the smallest annual number of births since the Risorgimento and nearly a third of its population is over 60 © Kontrolab/LightRocket via Getty

Economics generally pays surprisingly little attention to demography, even though the ageing and shrinking of the population in so many parts of the world is a striking and new phenomenon in human history.

Take Italy. Last year the country recorded the smallest annual number of births since the Risorgimento of the mid-19th century and nearly a third of its population is over 60. There has been an absolute decline in the number of people in Italy since 2015, even accounting for net inward migration. It is an extreme case, but the rest of the west, most of eastern Europe and China will follow.

Yet in economics, humans are abstracted as “labour input”, substitutable by machines, while demographic trends occur beyond the time horizon of macroeconomic models.

The implication of modern economic growth models — that the real growth rate clearly depends on the number of workers, either through the ideas in their heads or the skills they deploy — is little discussed. So The Great Demographic Reversal by Charles Goodhart, a respected academic, and Manoj Pradhan, a former managing director at Morgan Stanley, is a welcome exception.

Changing World Demographics

What are the implications of this unprecedented natural experiment — which I once heard Axel Weber, the former Bundesbank president, describe as future generations deciding not to be born? Goodhart and Pradhan contrast the accelerating ageing and shrinking of the global labour force with the conditions that have arisen as a result of the big increase in global labour supply from China’s entry into the world economy overlapping with the baby boomers being at the peak of their powers around the turn of the century. Given that the “China shock” has been identified as a major cause behind everything from the hollowing out of middle-class jobs in the west to the financial imbalances driving the 2008 crisis, this is a big moment.

They make some strong predictions. The old, at their late stage in the life cycle, don’t save, but spend, so savings “gluts” of the kind thought to have paved the way for today’s low interest rates will vanish as populations age. Nominal interest rates will rise and so will inflation — mainly because of labour shortages and wage pressures.

Rather than secular stagnation — stubbornly low growth resulting from low investment compared to savings — the world economy will experience secular stagflation, as productivity and real growth will continue to be much slower than in the past yet with prices rising faster. That means living standards will at best continue to grow slowly, and for many will be eroded further by inflation.

It is brave to forecast a future so different from the immediate past, so the authors’ predictions may soon prove right or wrong. But they omit other forces driving economic change, so it is probably wiser to think of the book as a thought experiment rather than a forecast. It acknowledges technological change but does not engage much with the scope for a turnround in productivity growth, nor with the deflationary tendencies clearly associated with technologies as they bring down prices of many goods and services.

A bigger gap is a lack of engagement with political economy issues. The book makes the assumption that there will be no change in social safety nets and retirement ages, and so it can ignore what might happen in the world outside economic models. Yet there are many countries where the female participation rate could increase — including in the US — especially post-pandemic.

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Policies such as maternity pay and pre-school provision affect women’s employment and indeed birth rates, although of course it takes another 20 years for this to increase labour supply. Retirement ages may rise further. And welfare and pension provision are likely to be limited in ways that increase saving by younger workers even as pensioners start to dis-save. It certainly seems possible that the shrinking number of young people will draw the line at supporting their elders at current levels, not least given all the other massive generational inequities they are facing.

Another question I would like to have seen addressed is the puzzle of the very long run decline in real interest rates. A heroic archival effort by Paul Schmelzing, published by the Bank of England, suggested that global real rates have been falling for five centuries. This finding is a challenge to any theory of future secular trends, whether stagnation or stagflation.

Still, it is a good sign to want more, rather than less, of a book. The Great Demographic Reversal is packed with informative charts and tables. It presents a powerful, well-argued challenge to the “mainstream” view that low growth, inflation and nominal interest rates are here to stay. Above all, its message that everyday economics needs to take demography seriously is surely correct. Whatever its implications, the demographic reversal has started.

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, by Charles Goodhart and Manoj Pradhan, Palmgrave Macmillan, RRP£22.99, 260 pages

Diane Coyle is Bennett professor of public policy at the University of Cambridge

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