Maine’s Demographic Winter has an Economic Price

Maine’s Demographic Winter has an Economic Price

May 12, 2011 Posted by J. Scott Moody - No Comments

A new study, “Demographic Changes, Financial Markets, and the Economy,” does not paint an encouraging picture for the future growth of Maine’s economy now entering Demographic Winter (where an aging population can no longer support itself).  From the study:

It seems natural that the shifting composition of a nation’s population ought to influence GDP growth and perhaps also capital markets returns. Entrepreneurialism, innovation, and invention tend to be associated with young adults. Accordingly, GDP growth should perhaps be best when there is a preponderance of young adults in a population. Investing for retirement is associated with middle-age, with a shift in preferences toward bonds with late-middle-age. So, stock and bond returns might be best in populations with growing rosters of these age groups, respectively. Our data—spanning over 60 years and 22 countries in our main tests and roughly 175 countries in out-of-sample robustness checks—support all of our priors . . .

Children are not immediately helpful to GDP: they don’t contribute to it. Nor do they help stock and bond market returns in any meaningful way: their parents are likely disinvesting to pay their support. Young adults are the driving force in GDP growth; they are the sources of innovation and entrepreneurial spirit. But, they are not yet investing as they are overspending against their future human capital. Middle adults are the engine for capital markets returns; they are in their prime for income, savings, and investments. And senior citizens contribute to neither GDP growth nor stock and bond market returns, as they disinvest to buy goods and services that they no longer produce. [emphasis added]

The chart below shows why this is a problem for Maine.  According to data from the Maine State Planning Office, Maine’s population peaks around 2018 at 1,327,070 and falls thereafter to 1,307,181 in 2028 (the last year of their projection).  More troubling, the number of Mainers aged 65 and over will grow to 25.7 percent in 2028 nearly double the level of 14.4 percent in 2003.

Therefore, according to this study, Maine is in its demographic prime of middle adults.  However, the demographics will soon start to dramatically shift to the 65 and older crowd which means, at best, a stagnation in GDP growth or, at worst, negative GDP growth.

Maine needs to find a way to keep or get some younger blood in the state ASAP before Demographic Winter begins to eat away at the economy–not to mention state and local government revenue.

ME_Demographic_Winter