speeches · March 7, 2005

Speech

William Poole · President

A Perspective on the Graying Population and Current Account Balances GlobalEconomicOutlook(GEO)Conference WestPalmBeach,Florida March8,2005 Sinceearly1998theU.S.currentaccount Althoughtheseareinterestingquestions,I balance has trended downward, a fact amnotheretoargueforaparticularscenariothat that has attracted much attention in the entailsspecificpathsforinterestratesand United States and elsewhere around exchangerates.WhatIwillfocusuponinsteadis the world. As a share of total output, the U.S. adimensionoftheadjustmentprocessthatIthink current account deficit has increased from hasbeenneglectedinpublicdiscussions.My topicisthepotentialeffectofdemographic roughly2percenttolevelsexceeding5.5percent changesonthecurrentaccount.Thedeveloped during 2004. As you can see in Figure 1, prior to worldhasbegunamajordemographictransition. recent developments, in the post World War II Overthenext30yearsthenumberofelderlyin period the largest U.S. current account deficit theUnitedStates,theEuropeanUnionandJapan was nearly 3.5 percent during the mid 1980s. willincreasesubstantially,likelybymorethan Thus, it is clear that today’s current account 100percent,whilethenumberofworkerswill deficit substantially exceeds those of recent his- increaseverylittle,likelybylessthan10percent.2 tory. Even if one examines a much longer time Suchalargechangeinthenumberofelderlyciti- period,thesizeoftheU.S.currentaccountdeficit zensrelativetothenumberofworkershasnumer- is large. One must go back to the 1800s to find ousimplicationsforalloftheeconomicdecisions a period of large deficits and, even then, the thatdetermineeconomicgrowth.Inaworldin deficits in the 1870s did not exceed 3 percent. whichfinancialcapitalflowsrelativelyfreely,it It is accurate to say that the size of the U.S. cur- islikelythatlargedemographicchangeswillbe rent account deficit is at a historic level.1 feltincurrentaccountbalancesthroughoutthe Basedoneconomictheory,itisalsoclear world. thatsuchadeficitcannotcontinuetoexpand Demographicchangeshavebeendiscussed indefinitely.Asaresult,theissueofsustainability extensivelyinthecontextofthechallengesfacing hasreceivedmuchattention.Manyhavewon- governmentalprogramsprovidingfundsforpen- deredhowmuchlargerthisdeficitwillbecome sionsandhealthcare.InarecentspeechIstressed beforeitisreversed.Thenatureofthereversalis thatthecombinationofincreasedlifeexpectancy alsoofutmostinterest.Willthereversalbeorderly andareducedbirthratehascreatedproblems ordisruptive? forSocialSecurityandMedicarethatmustbe 1 NotonlyistheU.S.currentaccountdeficitatahistoriclevel,butinarecentspeechAlanGreenspan(2005)arguedthatthecurrentinterna- tionaleconomicenvironmentisonewith“littlerelevanthistoricalprecedent”becauseofadvancesintechnology,improvementsintrans- portationnetworks,andchangesinfinancialmarkets. 2 ThefigurescitedarefromanarticlebyFehr,Jokisch,andKotlikoff(2003). 3 Thespeech,“WorldPopulationTrendsandChallenges,”waspresentedonOctober4,2004,atLincolnUniversity,JeffersonCity,Missouri. 1 ECONOMICGROWTH Figure 1 Figure 1 U.S. Current Account as a Percent of GNP, 1870-2003 (Annual Data) U.S. Current AccountasaPercent of GNP,1870-2003 (Annual Data) Percent 7 6 5 4 3 2 1 0 –1 –2 –3 –4 –5 –6 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year H NOTE:HistoricalseriesisfromInternationalHistoricalStatistics,TheAmericas1750-1993,4thEditionbyB.R.Mitchell. addressed.3Virtuallyalldevelopedcountriesare Iwillhighlightthepossibledevelopmentsin facingfiscalproblemsassociatedwiththeaging Japan,acountrythatisanexcellentexampleofa oftheirpopulations.Iwillarguethatthesedemo- developedcountryinthemidstofmajordemo- graphicchanges.Acompleteanalysiswould graphicchanges,whicharewithouthistorical requiresimilarworkonothercountriesandexplo- precedent,haveimportantimplicationsforthe rationofthesignificanceforworldcurrentaccount courseofcurrentaccountbalancesthroughout balancesandcapitalflowsofdemographicdiffer- theworld.Despitethefactthattheconnections encesacrosscountries.Mypurposetodayisto betweenpopulationaging,pensionsandhealth- createinterestinthissubject,byshowinghow care,andinternationalcapitalflowshavereceived largetheeffectscouldbeforasinglecountry, increasedacademicattentioninrecentyears,I Japan. thinktheconnectionbetweendemographic Beforeproceeding,Iwanttoemphasizethat changesandinternationalcapitalflowsdeserves theviewsIexpressherearemineanddonot evenmoreattentionfromacademicsandpolicy- necessarilyreflectofficialpositionsoftheFederal makers.4 ReserveSystem.Ithankmycolleaguesatthe Toillustratethepotentialimportanceofdemo- FederalReserveBankofSt.Louisfortheircom- graphicchangesforacountry’scurrentaccount, ments—especiallyRobertH.Rasche,seniorvice 4 RecentresearchbyBrooks(2003),Fehretal.(2003),Börsch-Supanetal.(2004),andMcMorrowandRoeger(2004)providegeneralequilib- riumanalysesthatshowtheconnectionbetweenagingandinternationalcapitalflows. 2 APerspectiveontheGrayingPopulationandCurrentAccountBalances presidentanddirectorofresearch,andCletusC. anddollarsarepaidwhenU.S.individuals,firms Coughlin,vicepresidentintheResearchDivision, andgovernmentsbuyforeignassets.Asistrueof whoprovidedspecialassistance.However,I currentaccounttransactions,capitalaccount retainfullresponsibilityforerrors. transactionshavemanydifferentmotivations. Asinanymarket,equilibriumintheforeign exchangemarketrequiresthatthenumberof dollarssoldequalsthenumberofdollarsbought. SOME BALANCE OF PAYMENTS Dollarsareboughtforbothcurrentandcapital ACCOUNTING account,andsoldforbothcurrentandcapital Tosetthestageformysubsequentdiscussion, account.Consequently,acurrentaccountsurplus, Iwillspendafewminutesdiscussingsomecon- whenreceiptsexceedpayments,necessarily ceptsfrombalanceofpaymentsaccounting.A meansthattheUnitedStates,onnet,isacquiring country’sbalanceofpaymentsisasystematic assetsabroad.Thatis,equilibriumintheforeign accountofalltheexchangesofvaluebetween exchangemarketrequiresthatacurrentaccount residentsofthatcountryandtherestoftheworld surplusbematchedbyacapitalaccountdeficit. duringagivenperiodoftime.Thus,theU.S. Similarly,whenU.S.paymentsexceedreceipts, currentaccountsummarizesalltransactions ashasbeenthecaseinrecentyears,foreigners, involvingflowsofgoods,services,income,and onnet,areacquiringassetsintheUnitedStates. unilateraltransfersthattakeplacebetweenU.S. Thecurrentaccountdeficitisthenmatchedbya andforeignentities,whichincludeprivateindi- capitalaccountsurplus.Itisalsoimportantto notethatU.S.capitalinflows,whichreflectfor- viduals,businesses,andgovernments.Thecur- eignsaving,areequaltothedifferencebetween rentaccountbalanceissimplythedifference investmentinphysicalcapitalanddomestic betweenU.S.receiptsfromtherestoftheworld savingintheUnitedStates. andU.S.paymentstotherestoftheworldasa Finally,althoughacurrentaccountdeficit resultofthesetransactions. necessarilyinvolvesacapitalaccountsurplus, U.S.receiptsarisefromexportsofgoodsand andviceversa,itisnotcorrecttoviewthecapital services,capitalincomereceivedbyU.S.owners accountasfinancingthecurrentaccountother ofassetsabroad,thereinvestedearningsofthe thaninanaccountingsense.Wecouldequally foreignaffiliatesofU.S.corporations,andgifts wellsaythatthecurrentaccountdeficitfinances totheUnitedStatesfromforeignresidentsand thecapitalaccountsurplus.Thecurrentand governments.Conversely,U.S.paymentsresult capitalaccountsaresimultaneouslydetermined; fromimportsofgoodsandservices,capitalincome causationdoesnotflowinanysimplewayfrom paidtoforeignownersofU.S.assets,therein- oneaccounttotheother. vestedearningsofU.S.affiliatesofforeigncor- porations,andgiftsfromtheUnitedStatesto foreignresidentsandgovernments. PERSPECTIVES ON THE Enumeratingthecomponentsofthecurrent CURRENT ACCOUNT BALANCE accounthighlightsanumberofimportantfacts. First,thereceiptsandpaymentsencompassmuch Becausetheperspectiveonthecurrent morethanthemovementofmerchandiseacross accountbalancethatIwanttoencouragediffers nationalborders.Second,thecurrentaccount somewhatfromcommonperspectives,Iwill reflectstheinteractionofnumerousdecisionsby spendafewminutessummarizingthesemore individuals,firms,andgovernmentsbothinthe commonperspectives.CatherineMann(2002) UnitedStatesandabroad. hasidentifiedthreedifferentperspectivesfor Dollarsarealsoreceivedandpaidoncapital analyzingtheU.S.currentaccountbalance.Using account.Dollarsarereceivedwhenforeignindi- herterminology,thethreeperspectivesareas viduals,firmsandgovernmentsbuyU.S.assets, follows:1.adomesticperspectivebasedonthe 3 ECONOMICGROWTH nationalincomeandproductaccounts,2.an deficit.Arecentdemonstrationofthisfactisthat internationalperspectivebasedontradeflowsin inthelate1990stheU.S.federalbudgetmoved goodsandservices,and3.aninternationalper- fromdeficittosurpluswhilethecurrentaccount spectivebasedonflowsandholdingsoffinancial deficitwidened.Itwouldtakemetoofarafield assets.5Iwilldiscusstheseperspectivesinorder. toexplorethisissuefurther,butthemainpoint Thedomesticperspectiveofacountry’scur- isthatthebudgetdeficitisagrosslyinadequate rentaccountbalancebasedonnationalincome summarymeasureoffiscalpolicy,whichhas andproductaccountsfocusesonhowpatternsof importantandcomplexeffectsonrelativeprices, domesticsavingandinvestmentareconnected incentivesandratesofreturnoninvestment tothetradeandcurrentaccountbalances.The whichinturnaffectbothcurrentandcapital connectionfollowsfromtheaccountingidentity transactionsintheinternationalaccounts. thatacountry’sdomesticproductionmustequal Asecondcurrentaccountperspectiveisbased itsspendingplusitstradebalance.Thisidentityis oninternationaltradeingoodsandservices. onethatIwilluselaterwhenIexaminepotential Herethefocusisoneconomicgrowthandchanges currentaccountchangesinJapan.Afrequently inrelativeprices.Anincreaseinforeigngrowth highlightedidentityisthatthesumofthetwo increasesacountry’sexports,whileanincrease mainsourcesofsaving—privatedomesticsaving indomesticgrowthincreasesacountry’simports. andtheforeigncapitalinflow—mustequalthe Meanwhile,exportsgrowfasterwhentheprice sumofthetwomainsourcesofdemandforfinan- ofexportsfallsrelativetocompetinggoodsand cialcapital—privatesectorinvestmentandthe servicesintheforeignmarketandimportsgrow governmentbudgetdeficit. fasterwhenthepriceofimportsfallsrelativeto Ifwemaketheassumption—whichIdonot domesticgoodsandservices. necessarilywanttomake—thatdomesticprivate Thisperspectivesuggeststhatbothfaster savingandinvestmentareroughlyequalortend growthintheUnitedStatesrelativetoothercoun- tochangebysimilaramounts,thegovernment triesandarealappreciationofthedollarshould budgetdeficitthenmirrorsthecurrentaccount tendtoincreasetheU.S.currentaccountdeficit. deficit.Inthe1980sthesimilarmovementof Ontheotherhand,fastergrowthofforeigntrad- thesetwovariableswascharacterizedasthetwin ingpartnersrelativetotheUnitedStatesanda deficitsandtheargumentwasthatthegovern- realdepreciationofthedollarshouldtendto mentbudgetdeficitcausedthecurrentaccount decreasetheU.S.currentaccountdeficit.This deficit.Notonlydidthesevariablesmoveina perspectivesuggestsarelativeslowingofU.S. similarmanner,butitwasarguedthattheywere growthaswellasadepreciationoftheforeign drivenbythesamepolicyfundamentals.Expan- exchangevalueofthedollarisrequiredfora sionaryfiscalpolicy,reflectedinlargegovernment shrinkingoftheU.S.currentaccountdeficit. budgetdeficits,stimulateddomesticspending Athirdcurrentaccountperspectivefocuses ongoodsproducedbothintheUnitedStatesand oninternationalflowsoffinancialassets.Differ- abroad.SuchspendingpropelledU.S.growth entialratesofreturn,adjustedforrisk,inconjunc- andU.S.imports.Atthesametime,thefiscal tionwithinvestors’desiredportfolioallocations deficitinconjunctionwithtightmonetarypolicy ofwealtharethedrivingforcesforinternational keptinterestrateshighandattractedforeigncapi- capitalflows.Theverylargesizeofinternational tal,whichresultedindollarappreciation. financialflowsrelativetogoodsandservicesflows Theargumentisplausible,atleastunder raisesthepossibilitythatthecurrentaccountis somecircumstances.Thereis,however,noempiri- drivenprimarilybyinternationalcapitalflows calregularitythatacountry’sgovernmentbudget ratherthanthegoodsandservicesflow.Clearly, deficitmovessimilarlytoitscurrentaccount financialmarketsintheUnitedStatesprovide 5 SeePoole(2004)foranothersummaryofthesethreeperspectives. 4 APerspectiveontheGrayingPopulationandCurrentAccountBalances numerousfinancialinstrumentsofvaryingrisk When,overall,apopulationcanbecharacter- andtimehorizons.Moreover,theU.S.marketfor izedasmiddleaged,thentheeconomyshould mostfinancialinstrumentsishighlyliquid.In tendtohaveahighersavingratethanwhenit thecurrentcontext,animportantissueiswhat canbecharacterizedasold.Thus,asthepopula- happensifinvestorsdecidetoreducetheirover- tionofacountrymovesfrombeingcharacterized allexposuretoU.S.creditandcurrencyrisk.In asmiddleagedtoold,itisreasonabletoexpecta otherwords,howwilltheadjustmentprocess country’ssavingratetodecrease.Unlessthe proceed? country’sinvestmentratemovesidentically, Alltheprecedingperspectivesarepotentially thenforeigncapitalflowsandcurrentaccount usefulinexaminingthechangesintheU.S.cur- balanceswillbeaffected.Exactlyhowdepends rentaccount.However,theyaremissingan onthechangeininvestment. importantdimensionofhowrationaleconomic Thedeclineinthenumberofworkersassoci- decisionmakersthinkbecausethestandardper- atedwithanagingpopulationtendstodepress spectivesmisstheintertemporalconsequences investmentdemandrelativetoacaseofno ofthedifferentdemographiccircumstancesacross declineinworkers.Eventually,thedeclinein countries.NowIwillattempttoconvinceyouof savingwillexceedthedeclineininvestment, thisassertion. whichwillcauseacountry’scurrentaccountto decrease.However,itisnotobviouswhether agingwouldimmediatelycauseinvestmentto A DEMOGRAPHIC PERSPECTIVE fallmoreorlessthansaving.Itispossiblethat domesticinvestmentfallsmorethansavingini- ON CURRENT ACCOUNT tiallybecauseofpersistenceinsavinghabits. BALANCES Thekeypointisthatthesaving-investmentbal- Theconnectionbetweendemographic ancesofindividualcountriescanevolveincom- changesandinternationalcapitalflowsfollows plexways. directlyfromthelife-cycletheoryofconsumption Thiscomplexityiscompoundedbytheinter- andsavingdevelopedbyFrancoModiglianiand nationaldimensionsofthisissue.Theimpactof RichardBrumbergintheir1954paper(1980). agingonnationalsavingrelativetoinvestment Theargumentisstraightforward.Basedonthe willnotnecessarilybethesameforeverycountry. generalpatternoflifetimeearnings,arandom Atthegloballevel,thesumofcurrentaccount sampleofhouseholdsrankedaccordingtoincome balancesmustbezero.Thus,whatmattersisnot levelwouldshowadisproportionatelylargenum- thefactofagingforaspecificcountry,butrather berofmiddle-agedpeopleattheupperendof howitisagingrelativetoothercountries. theincomedistributionandadisproportionately largenumberofyoungandelderlypeopleatthe lowerend.Boththeyoungandtheoldhouseholds A DEMOGRAPHIC PERSPECTIVE haveahighaveragepropensitytoconsume.In ON THE JAPANESE CURRENT fact,manyconsumemorethantheirincomes ACCOUNT BALANCE and,asaresult,dissaveratherthansave.The youngborrowagainsttheirfutureincome,while Toillustratemorevividlythedemographic theelderlyreducetheirpreviouslyaccumulated perspectiveforanalyzingacountry’scurrent wealthtoconsumebeyondtheircurrentincomes. accountbalance,Ihavedonesomerelatively Incontrast,middle-agedhouseholdsexhibita straightforwardcalculationsforJapan.Thepro- relativelyloweraveragepropensitytoconsume. jectionsIgenerateshouldnotbeviewedasfore- Duringmiddleagethesehouseholdsarepaying casts,butratherassuggestiveofhowdemographic backearlierdebtsorsavingforoldage.These changescanaffectacountry’scurrentaccount. ideasareeasilyextendedtotheentireeconomy. Admittedly,mycalculationsdonotrelyona 5 ECONOMICGROWTH generalequilibriummodeloftheworldeconomy; Inthiscaseimportswillexceedexportsandthe however,myexampledoesprovidestrongreasons currentaccountbalancewilltendtoshowa thatsupportmyargumentadvocatingincreased deficit.Ofcourse,thedeficitcanonlyariseifthe useofthedemographicperspective. countrycanborrowabroadorrundownassets Tosetthestageformycalculations,Iwill abroadaccumulatedatanearlierdate. spendafewmomentsprovidingtheunderlying Panel1ofFigure2illustratesthedemographic foundation.Therearethreeforcesdrivingthe transitioninJapan.Totalpopulationgrowthhas currentaccountofaparticularcountryinthe slowedoverthepast25yearsandasof2002was longrun:1.demographics;2.thegrowthoflabor barelypositive.TheJapanesepopulationispro- productivity;and3.thegrowthinpercapita jectedtostartshrinkingbeforetheendofthe domesticdemandforgoodsandservices.The currentdecade.Therateofcontractionisbelieved importantaspectsofdemographicsarethesize togrowsteadilythroughthemiddleofthecen- ofthetotalpopulation,thesizeoftheworking tury,approachingonepercentperyear.6In agepopulationandthefractionoftheworking additiontotheshrinkageofthetotalJapanese agepopulationthatisemployed.Thesethree population,thepopulationisaging.Asaresult elementsdeterminethesizeofthelaborforcethat thegrowthrateoftheworkingagepopulation, isavailabletoproduceoutputintheeconomy. definedhereaspersonsages15to64,turned Theamountoflaboravailablemultipliedbyout- negativealmostadecadeagoandisprojectedto putperworkerdeterminestheamountofgoods shrinkatafasterratethanthetotalpopulation andservicesthatcanbesuppliedfromdomestic throughthemiddleofthecentury.Hence,as production. seeninPanel2ofFigure2,thefractionofthe Totaldomesticdemandforgoodsandserv- populationofworkingagedeclinessteadilyover ices,includeshouseholdconsumption,private theprojectionperiod. investmentinnewcapitalgoodsandgovernment Thefinalpieceofthedemographicpictureis purchasesforeitherconsumptionorpublicinvest- thefractionoftheworkingagepopulationthatis ment.Thetotalofthesedemandsissometimes employed.Panel2ofFigure2showsthatthis referredtoasabsorption.Thegrowthinpercapita fractionwasquitesteadyinthe1970-80satabout absorptionisonemeasureoftherateofincrease 70percent.Intheearly1990sthefractionroseto inthestandardoflivinginaneconomy. around74percent,whereishasremained.There Percapitaabsorptionmultipliedbythesize arenoofficialprojectionsoftheratioofemployed ofthetotalpopulationdeterminesthetotaldomes- toworkingagepersons,soforthisillustrationI ticdemandforgoodsandservices.Anydifference havekeptthefractionconstantat74percent. betweendomesticdemandandtheamountof Thesecondelement,laborproductivity outputthatcanbeproducedwithintheeconomy growth,isshowninPanel3ofFigure2.The willgenerateacurrentaccountbalance.Ifdomes- annualgrowthofoutputperworkerinJapanhas ticdemandislessthanthegoodsandservices beenquitevolatilesince1980.From1990through producedintheeconomy,thentheexcesscanbe 2002,aperiodofslowgrowthintheJapanese soldabroad.Inthiscaseexportswillexceed economy,theaverageannualrateoflaborpro- importsandthecurrentaccountbalancewill ductivitygrowthwas1.26percent.Forpurposes showasurplus.Ontheotherhand,ifdomestic ofthisillustrationIhaveprojectedaconstant demandexceedstheproductivecapacityofthe annualgrowthofoutputperworkerattheaver- domesticeconomy,thentheonlywaythatthe agerateoftherecentperiod. excessdemandcanbesatisfiedisthroughpur- Panel3alsoshowsthatoutputpercapita chasesofgoodsandservicesproducedabroad. willgrowmoreslowlythanoutput-per-worker. 6 ThesedataarethemediumvariantpopulationprojectionspreparedbytheNationalInstituteofPopulationandSocialSecurityResearch. Theycanbefoundathttp://www.ipss.go.jp/index-e.html. 6 APerspectiveontheGrayingPopulationandCurrentAccountBalances Panel4:JapaneseTradeBalanceasPercentofGDP 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 1980 1990 2000 2010 2020 2030 2040 2050 7 tnecreP Employmentratio=.74(2002value) AssumedGrowthofAbsorptionpercapita=1.26percentper year. AssumedGrowthofProductivityperworker=1.26percent peryear(averageratefor1990-2002) OurProjections HistoricalData Panel5:JapaneseTradeBalanceasPercentofGDP 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 1980 1990 2000 2010 2020 2030 2040 2050 tnecreP Panel2:JapanAnnualData 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Employmentratio=.74(2002value) AssumedGrowthofAbsorptionpercapita=1.05percentper year. AssumedGrowthofProductivityperworker=1.26percentper year(averageratefor1990-2002) OurProjections DekleTable3 HistoricalData noitcarF workingpopulation/pop. employment/workingpop. Panel3:AnnualGrowthRateofJapaneseOutput 7 6 5 4 3 2 1 0 1981 1991 2001 2011 2021 2031 2041 -1 -2 tnecreP Panel1:JapanesePopulationGrowth 1.5 1 0.5 0 1974 1984 1994 2004 2014 2024 2034 2044 -0.5 -1 -1.5 -2 ProjectedatAverageGrowthRatefor 1990-2002 GrowthofOutputPerPerson GrowthofOutputPerWorker raeYreptnecreP Figure 2 PopulationGrowthRate WorkingAgePopulationGrowthRate ECONOMICGROWTH Thisfollowsdirectlyfromtheagingofthepopu- ios,andthereisasubstantialuncertaintyabout lationandapotentiallaborforcethatisshrinking thesizeofthelong-termprojecteddeficitinthe relativetothetotalpopulation.Theaverage Japanesecurrentaccount.Neverthelessthecon- growthrateofoutputpercapitaovertheprojec- clusionthattheJapanesecurrentaccountwillbe tionperiod(2003to2050)isonly0.84percent drivenintoadeficitintherelativelynearfuture, peryear.IftheJapanesecurrentaccountwereto andthatthisdeficitwillbechronicandincreas- remainbalancedovertheprojectionperiod,this ingisdifficulttodismiss.Thelogicoftheargu- wouldbethelimittoaveragegrowthofabsorp- mentisprettysimple.Japanhasanaging tionpercapita. populationandhasaccumulatedsubstantial Growthofpercapitaabsorptioncanbe assetsabroad.Whyshouldn’tweexpecttheeld- increasedabovethatofdomesticproductionby erlyJapanesetousesomeofthoseassetstosup- usingthepastaccumulationofclaimsontherest portconsumptioninexcessofthegoodsand oftheworldtopurchaseforeignoutput.Asan servicesthatcanbeproducedbytheshrinking Japaneselaborforce? example,assumethatJapanweretoimporta sufficientamountofgoodsandservicessuch thattheaveragegrowthofabsorptionpercapita equaledthegrowthrateofdomesticlaborproduc- CONCLUSION tivity.Undertheseassumptions,theJapanese Mymodestgoaltodaywastoconvinceyou currentaccountwouldturnnegativebeforethe thatexaminingcurrentaccountbalancesfroma endofthisdecade,falltoabout–10percentof demographicperspectiveispotentiallyveryuse- GDParound2025andthendeclinesharplyfur- ful.Theintertemporalapproachtocurrentaccount therafter2035,asshowninPanel4ofFigure2. balancesiswell-groundedineconomictheory. Asyetanotheralternative,considertheimpli- Savingandinvestmentbehaviorarethekeysto cationofsustainingthegrowthrateofabsorption theevolutionofacountry’scurrentaccount.Itis percapitamidwaybetweenthegrowththatcan exactlythesebehaviorsthatthedemographic besupportedbydomesticproductionandthe perspectivehighlights.Moreover,thefactthat growthrateoflaborproductivity,1.05percent manycountries,especiallythoseinthedeveloped peryear.Theprojectionofthecurrentaccount world,areexperiencingmajordemographic forthisscenarioisshowninPanel5ofFigure2. changessuggeststhatadditionalfocusfromthe Thecurrentaccountdeficitasashareofgross demographicperspectiveiswarranted. domesticproductfallstoroughly5percent ThedemographicperspectivethatIhavedis- around2015,recoversabitrelativetogrossdomes- cussedcanbeusedtocalmsomeoftheanxiety ticproductthroughtheearly2030s,andthen aboutthehistoricallylargeU.S.currentaccount declinessharplytomorethan10percentofgross deficit.AsIemphasizedpreviously,mycalcula- domesticproductbythemiddleofthecentury. tionsforJapanshouldbeviewedasillustrative Afewyearsago,RobertDekle(2000) ratherthanpredictive.ItisclearthatJapanand addressedthequestionofthelong-termimpact Europefaceimminentdemographicchallenges. ofdemographicsontheJapanesecurrentaccount Thus,itisnaturalthattheyaccumulateclaims usingamodelwithexplicitmicroeconomicfoun- againstacountrythathasfinancialmarketsand dations.Hisprojectionsofthecurrentaccount economicgrowthprospectsofsufficientmagni- deficitareindicatedbythediamondshaped tudetofacilitatetherequiredadjustmentprocess. pointsinPanel5ofFigure2.Itisclearthatthe Acasecanbemadethatthecurrentaccountsur- projectionsfromDekle’salternativemodelarewell plusesofthesecountriesaswellasthecurrent approximatedbythesimplemodelIhaveused. accountdeficitsoftheUnitedStateswillbe ObviouslythescenariosIhavechosento reversedinthefutureastheseagingeconomies highlightareonlysomeofmanypossiblescenar- drawontheirclaimsagainsttheUnitedStates.I 8 APerspectiveontheGrayingPopulationandCurrentAccountBalances donotknowwhethersuchascenariowillbe Greenspan,Alan.“CurrentAccount.”Presentedat playedout;however,IdoknowthatIlookfor- theAdvancingEnterprise2005Conference,London, wardtoadditionalresearchanddiscussionon England,February4,2005. thistopicfromademographicperspective. Mann,CatherineL.“PerspectivesontheU.S.Current AccountDeficitandSustainability.”Journalof EconomicPerspectives,Summer2002,16(3), REFERENCES pp.131-52. Börsch-Supan,Axel;Ludwig,AlexanderandWinter, Joachim.“Aging,PensionReform,andCapital McMorrow,KieranandRoeger,Werner.TheEconomic Flows:AMulti-CountrySimulationModel.” andFinancialMarketConsequencesofGlobal DiscussionPaperNo.64-2004,MannheimResearch Aging.Berlin:Springer-Verlag,2004. InstitutefortheEconomicsofAging,August2004. Modigliani,FrancoandBrumberg,Richard.“Utility Brooks,Robin.“PopulationAgingandGlobalCapital AnalysisandAggregateConsumptionFunctions: FlowsinaParallelUniverse.”International AnAttemptatIntegration,”inAndrewAbel,ed., MonetaryFundStaffPapers,2003,50(2). TheCollectedPapersofFrancoModigliani. Volume2:TheLifeCycleHypothesisofSaving. Dekle,Robert.“DemographicDestiny,Per-Capita Cambridge:MITPress,1980,pp.128-97. Consumption,andtheJapaneseSaving-Investment Balance.”OxfordReviewofEconomicPolicy, Poole,William.“APerspectiveonU.S.International Summer2000,16(2),pp.46-60. CapitalFlows.”FederalReserveBankofSt.Louis Review,January/February2004,86(1),pp.1-8. Fehr,Hans;Jokish,SabineandKotlikoff,Laurence. “TheDevelopedWorld’sDemographicTransition— Poole,William.“WorldPopulationTrendsand TheRolesofCapitalFlows,Immigration,and Challenges.”PresentedatLincolnUniversity, Policy.”WorkingPaperW10096,NationalBureau JeffersonCity,Missouri,October4,2004. ofEconomicResearch,November2003. 9

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APA

William Poole (2005, March 7). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20050308_poole

BibTeX

@misc{wtfs_speech_20050308_poole,
  author = {William Poole},
  title = {Speech},
  year = {2005},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20050308_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}