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There’s a devastatingly simple explanation for America’s economic mess

Stashed in: Economics!, Young Americans, Awesome, America!, Freakonomics, Demographics

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Demographic change grinds slowly but can't be reversed.

The Baby Boomers have an oversized effect on everything:

The biggest drag on the economy has been the aging and retirement of America’s baby boomers, the researchers say. The boomers are by far the largest American generation on record, with 76 million people born between 1946 and 1964. They are substantially more numerous than the 47 million members of the Silent generation that preceded them, as well as the 55 million Gen Xers, the 66 million millennials and the 69 million post-millennials, according to Pew Research Center.

Three contributing factors: fewer kids, lower interest rates, more capital than labor:

But the boomer generation also ended up having fewer children than their parents did. And as they aged and retired, they left fewer people in the American workforce, and that reduced the country’s economic output.

The aging and retirement of the boomers also put downward pressure on America’s interest rates, the economists say. Interest rates that stay low for a long time are a problem in that they indicate an economy in which growth is slow and there is little willingness to invest. Low interest rates also leave central bankers with little capacity to stimulate growth in the future by cutting interest rates.

The retirement of the baby boomers has meant that what economists call capital — machines, factories, roads and buildings — has become relatively abundant compared to labor. That has depressed the return investors receive for investing in capital, and led to our era of lower investment. And that in turn led to a fall in the interest rate. In line with their model, the real interest rate in the United States rose through the 1960s and 1970s, peaked around 1980s, and has gradually declined since then, the economists say.

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