“For decades we have known that the retirement of the baby boomers would be a monumental event for the economy,” wrote two former staffers at the federal Office of Management and Budget in last Friday’s New York Times, “but now that it’s happening, many fiscal policy makers are … turning a blind eye to how the boomers’ aging changes how we should approach economic policy.”
In particular, argue Kenneth S. Baer, now of the Harbour Group, and Jeffrey B. Liebman, now at Harvard’s Kennedy School of Government, the demographic shift must inform our understanding of our two most pressing policy issues: the federal deficit and unemployment.
Government spending, which has averaged 21 percent of gross domestic product (GDP) over the past four decades, is rising and will reach 24 percent of GDP by 2022 if current policies continue. While voices from both parties have called for capping or rolling back the increase, these proposals, the authors say, “ignore the simple fact that you cannot repeal the aging of the boomers.” The rising expenditures are driven mainly by spending on Social Security, Medicare and Medicaid as the baby boomers age and retire.
The same demographic blind spot, according to Baer and Liebman, affects perceptions of employment trends. Because of boomer retirements, running 200,000 a month, “the rule of thumb that the economy needs to add 140,000 jobs per month to keep up with population growth no longer holds,” they say.
Today, a more realistic number is 100,000 net jobs – which is why job creation at the 150,000-a-month level has brought the unemployment rate down, if slowly. Similarly, the employment-to-population ratio will trend downward regardless of the economy; the fact that it has flattened out should be taken as a positive sign.
These points, beyond the bumper-sticker slogans of opposing political blocs, are worth considering. There is little doubt that economists and policymakers, though nominally aware of the impact of the baby-boom demographic bulge, have repeatedly underestimated its real impact – for example, on labor markets and productivity as boomers entered the primary workforce, and on housing as they passed through their life cycles. One of the article’s claims is perhaps discouraging, the other hopeful: the deficit is even more intractable than it may seem, but we are doing better than we may think on employment.
And both points support arguments that AIM has been making for some time. We have long regarded control of health care costs, at the state level and nationally, as our most important economic policy priority, because it is ultimately the only way to control the spending that busts budgets in the public and private sectors. We have also stressed the challenge of replacing the highly-skilled but aging workforce, particularly in our manufacturing sector, that has been a foundation of our competitiveness – the focus of the Staying Power II report by Prof. Barry Bluestone and his team at Northeastern University.