Can demographic force determine demand side or supply side economic policy?

By Shahab Sabahi – Energy and Environment for Development – Research Group

Developed countries once praised themselves for creating robust economic growth. They pronounced that their success had stemmed from innovative monetary and fiscal policies. They encouraged other nations to adopt their ideas through IMF (international monetary fund). In reality, it turned out that socio-economic system did not really work out the ways policy had desired (e.g. Asia crisis in the 90s). Socio-economic system is a complex dynamic system. Its emergent property always manifests that planning can do little for taking the system in a desirable trajectory.  For example, in developed countries, the Great Recession was primarily caused by the collapse in economic demand as 80 million “baby-boomers” born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s. In the US, the government tried to resuscitate this demographically shrinking demand with spending $7.6 trillion on Keynesian demand-side stimulus over the last five years. With only 23 million born between 1995 and 2012, this population is just too small for demand-side stimulus to revive the economy. Now the government faces high unemployed people with a budget deficit, and further needs to fund the baby-boomer’s retirement. Under this circumstance, will really demand-side stimulus work?

Our world today is different from the time of the Great Depression. To tackle the great depression, politicians borrowed the idea of Keynesian “demand-side” economics from Great Britain. Demand-side economics argues that in the “short-run” productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy). Therefore, governments set a demand goal through targeted spending, that has led to short-term growth since 1948.  

Studies demonstrate that 50% of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics. Spending tends to peak as families grow and people reach their mid-30s to mid-50s. Then spending declines rapidly after the mid-50s.

In the 80s when the US switched to supply-side economic policy, the first baby-boomers born in 1946 were just turning 35 years old. By the time those first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth stocks had risen 2600%, from 190 to over 5000. As the boomers hit 55 and begin to retire through 2019, only 30% as many generation members will replace them in the work force.

Leftist politicians advocate demand-side economics, as they get to look busy spending lots of money creating “demand” for the crony capitalism system. But as we have been observing, governments have been at the edge of bankruptcy cliff long before politicians can “create” enough demand to replace the shrinking consumption spending as the baby-boomers continue to rapidly retire. On the other hand, rightists try to promote a supply-side economics, since these sorts of policies believed once to encourage long-term economic growth.

Now developed countries are either relatively in national debt and recently suffered a credit downgrade (like the US) or suffer low growth. Also, in the theoretical sphere, there is no policy option but supply-side, therefore governments tend to return to supply-side economics to encourage growth. Perhaps governments can encourage population growth policies.