Monday, October 13, 2008

Long-term growth prospects

On Saturday, David Leonhardt provided a circumspect discussion of the prospects for long-term growth in the U.S.

One of his points, which although not new certainly bears repeating, is that the aging of the U.S. population will create considerable strain on the federal budget over the medium term, mostly through increased Medicare spending.

While this is certainly a challenge, it is most definitely not a challenge unique to the U.S. Among industrialized nations, the U.S. has one of the rosiest demographic futures there is. This is due to our relatively high rates of fertility and immigration, both of which will supply workers to the future economy. Even China, a large developing country, has a much bleaker demographic future owing to the one-child policy, which will place a significant strain on public transfer systems.

In short, while increased U.S. debt in the face of population aging is worrisome in an absolute sense, it is not cause for much alarm in a relative sense. The outlook for U.S. growth remains in pretty good shape because of immigration, fertility, and of course the magic ingredient of innovation.