The Foggy Exit

The aging of the Baby Boomers is not something that caught economists completely by surprise. That generation has been the subject of (academic) study going back to the surge in birth rates right after World War II. In economic terms, the challenges presented by the prospective retirement years for this cohort has been anticipated to some degree all along, particularly as the 20th century from which the demographics were born ended.

In November 2006, the Bureau of Labor Statistics in its Monthly Review magazine published a lengthy study that sought to quantify these aspects. Of specific interest was, since this was a BLS publication, any possible effects on the labor market. The labor force had expanded rapidly in the 1970’s due to both the Baby Boomers coming of working age as well as the rising participation of women. Thirty years later, conditions were projected to be much different:

With an annual growth rate of 0.6 percent over the 2005–50 period, the labor force is projected to reach 194.8 million in 2050. Peaking at 2.6 percent during the 1970s, the growth rate of the labor force has been decreasing with the passage of each decade and is expected to continue to do so in the future.

Using various statistical and regression-based models, the BLS figured that the Civilian Labor Force Participation rate would decline to 65.9% by 2010 from 66.0% at that time in 2005. By 2020, the participation rate would be 64.5% and ten years later just 61.7% as the bulk of the demographic retirement would have by then transpired.

There were considerable uncertainties and qualifications to these predictions, of course, as there always are trying to predict so far into the future (and using extrapolations of the past as the primary guide). Among them, the BLS listed immigration, further gains in the participation rate of women, or the young (it was the housing boom, after all, and construction work was plentiful at the time), but also the prospect of seniors themselves working longer. What wasn’t included as a possible trend-changer was a massive economic collapse caused by systemic monetary rejection that contrary to the very nature of recession meant a permanent alteration in the global economic system.

In the years since the Great “Recession”, economists and policymakers have feverishly tried to reconcile this difference. This is not to say that the BLS’ 2005 projections are the correct starting point for estimation, but they were much closer to consensus pre-crisis, an estimation that lasted several years into the “recovery.” It is the lack of it in the labor force that has gained so much notice and led to an enormous divergence about what it could possibly mean. If the gray dotted line above should have been closer to the actual track of the participation rate to more accurately reflect demographic changes, then there would have been no use at all for any but the first and maybe second QE (according to orthodox understanding; in reality, there was never much use for QE in any context).

Policymakers themselves remained far more sympathetic to the 2005 trajectory, and that is why they tried four QE’s in total lasting all the way to the end of 2014. A large gap between that prediction and reality meant cyclicality, a shortfall in “aggregate demand” (large output gap) which “stimulus” would alleviate given enough time. As Janet Yellen said in February 2013 just as QE4 (UST purchases) was really just getting started: