Outside the Box

Mind the (Expectations) Gap: Demographic Trends and GDP

August 7, 2013

For today's Outside the Box we have a very special research piece by Rob Arnott of Research Associates and his colleague Denis Chaves. Rob was with us at Leen's Lodge last week, and in the final evening discussion session he asked an interesting question having to do with demography and GDP growth. I was intrigued by it, but the group soon moved on without fully exploring Rob's idea; so I mentioned it to him again later, and he was good enough to send along the following paper.

Rob's description of their work, in an email to me this afternoon, gives us a pretty good synopsis:

[W]e show that the past 60 years—which we think of as “normal”— enjoyed a demographic tailwind which we can quantify.  It was worth about 1% per year, meaning that, if we think of 3% growth as normal, it’s really 2% growth plus a demographic tailwind of 1%. 

The coming decades—due to the rising support ratios from the aging boomers—will experience a demographic headwind of (very roughly—these will be wildly out-of-sample conditions) roughly the same 1%.  So, if 3% growth was normal, 1% growth (again, very roughly) becomes normal.  This is the reason behind my concerns regarding the legacy of monetary and fiscal experiments, and debt and deficits we leave our children.

One can see the potential for higher growth from new sources of ingenuity and the ongoing human experiment with technology, but the headwinds Rob talks about are very real and need to be factored into our analysis of the future structure of our portfolios.

Rob is one of my great friends, and we have spent a lot of time together over the years. We first met at the home of the late Peter Bernstein and soon found that we shared a great deal in terms of how we view the markets. Rob was then the editor of the Financial Analysts Journal. He has won no fewer than five Graham and Dodd Scrolls, awarded by the CFA Institute for best article of the year, plus lots of other honors. He is the largest outside manager at PIMCO, and he is the intellectual light behind the Fundamental Indexes I have written about so many times. He is simply one of the smartest guys on the planet and one of the most fun as well. What many people don't know is that he has one of the top three or so motorcycle collections in the world. His bikes don't just sit around looking pretty, either—they can all still go on the road. I don’t do motorcycles, not having a death wish, but Rob thinks riding them at 140 MPH (on a legal track) is entertaining. Quite the contrast to the conservative investor image he projects at meetings.

I am back in Dallas and catching up on a few things, but I'm still remembering the weekend. The fishing in our boat was the best Trey and I have had in seven years. We caught more fish the last morning than we had in an entire week in some previous years. We stayed busy pulling in one fairly large bass (catch and release!) after another. At one point we had three lines hit at the same time. Nothing fancy in terms of bait, just funny-colored plastic worms. Technically, I won on the most fish caught, after losing that contest for six years running, but Trey had me on the size of fish. He caught some monsters. And we enjoyed ourselves more than on any previous outing to Camp Kotok. The annual Maine fishing trip has become my gauge on Trey's growing up.

I stopped off to see my mother after I landed Monday evening. She will be 96 next week, and though she is now bedridden, she is mentally as sharp as ever. She is not sick or suffering, thank God, but her body is just slowly rebelling. None of her ten brothers and sisters ever got to 96 (although a number made it to 95), so every time I leave home there is a certain emotion in me that I don't really want to confront.

That old Jimmy Durante song from my youth kept playing in my head as I sat next to her:

Don't you know that it's worth
Every treasure on earth
To be young at heart?
For, as rich as you are,
It's much better by far
To be young at heart
And, if you should survive
To a hundred and five,

Look at all you'll derive
Just by being alive!
Now, here is the best part:
You have a head start
If you are amongst the very young ...
At heart.

Your never gonna grow up analyst,

John Mauldin, Editor
Outside the Box

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Mind the (Expectations) Gap: Demographic Trends and GDP

By Rob Arnott and Denis Chaves

A large body of research in psychology and economics shows that human beings tend to form their expectations by relying on past experiences—especially recent ones. Malmendier and Nagel (2011), for instance, talk about investors who live through long periods of poor stock market performance and how this experience affects their risk-taking propensities... for life. The most famous example…

Get Varying Expert Opinions in One Publication with John Mauldin’s Outside the Box
Every week, celebrated economic commentator John Mauldin highlights a well-researched, controversial essay from a fellow economic expert. Whether you find them inspiring, upsetting, or outrageous... they’ll all make you think Outside the Box. Get the newsletter free in your inbox every Wednesday.

Discuss This


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Charles Adams 41473

Aug. 11, 2013, 10:53 p.m.

That is a fascinating article. I would love to be able to copy it to my friends in my retirement community, but while I can read the graphs, they are of such poor quality that they are illegible when printed.

Please, please, please John bump up the visual clarity of the graphics, please John.

Daniel Kennedy 94695649

Aug. 10, 2013, 9:28 p.m.

Given the technology-based productivity changes rapidly arriving over the next say 40 years is it more likely that availability of capital for investment will have a greater impact on GDP growth rates than will demographics? Consider manufacturing for example - what is happening there looks like what happened in agriculture in the 20ith century – e.g. more food was produced in the US in 2000 by 2% of the population than was produced by 40% of the population in 1900. In fact the value of labor is declining and the rate of decline is increasing.


Aug. 8, 2013, 8:50 p.m.

The 2% “normal” + or - 1% “demographic effect” insight helps make sense of the past four decades of economic activity.  Well done.

There is another insight I heard in the late 70’s, that I have not seen in print.  That is “If you trade with them, you get like them.”  For example, if we trade with a country in south America who produces vegetables during our winter, we become more alike in that we have vegetables during their summer and they have some of our money.  The same goes for oil and other raw materials.  Most of the time this has been a good thing.  Since we have been trading with low-wage industrial China, our middle class workers haven’t fared very well.  John, is there any chance of getting an article on this topic?

Brian McMorris 46364174

Aug. 8, 2013, 7:23 a.m.

Beautiful sentiments on aging, John.  I am right behind you with parents in their late 70s and early 80s.  Every time I leave after visiting them, I wonder if it will be my last time to be with them.  Getting older is tough, but much better than the alternative!

Monte Kinard

Aug. 7, 2013, 5:42 p.m.

It was great to see your young at heart lyrics.  My dad is 88 and sings it from memory to anyone who will listen.  I think it is one of the secrets to his longevity!  Treasure the moments.


Aug. 7, 2013, 4:53 p.m.

It is nice to see an analysis that acknowledges boomer contribution to growth rather than focusing just on the boomer-bashing projected future health care needs.  We were taught to respect our elders, but few have a kind word to say about boomer health care needs.  I remember sharing a desk in some 50+ student elementary schools classes.  I hope they don’t expect us to share hospital beds.

John Sloan

Aug. 7, 2013, 4:19 p.m.

absolutely agree with authors’ views on current and future demographics and impact on economy.
But they are wrong about their Phase1 being a steady state demographically. They need to read David hackett Fischer’s great book - The Great Wave to learn about the huge demographic shifts that took place in Europe since 1200 and their impact on economic conditions. And most any history of Rome to learn about significant demographic changes that impacted Roman social - economic history.
best wishes
john sloan


Aug. 7, 2013, 3:14 p.m.

This is a brilliant article. The question of how demographic changes effect the economy have been on my mind for some time. What I didn’t see discussed is whether Arnott & Chaves see the demographic system as open or closed (i.e. whether his analysis includes the probabilities of immigration and emigration). It seems to be that the demographic question involves the following variables: Birth control, abortion, immigration & emigration. Mr Mauldin has reminded me many times that productivity is the product of working population times devices that increase output by the individual worker. So, what is the average age of “undocumented workers” and at what rate will they continue to immigrate or emigrate? How important is the debate over the revision of Immigration Law?

It also seems to me that as baby boomers retire and begin to consume their retirement savings there will be a bias in favor bonds over stocks in order to provide the required liquidity.

Under any circumstance, I believe that the authors are correct in anticipating slower secular economic growth



Aug. 7, 2013, 2:45 p.m.

personal for JohnM

your reference to the ‘industrial revolution’, in the above newsletter of August 7th, reminded me of a statement made in one of your earlier newsletters a few weeks ago, as part of an article with conclusions re the economy, to the effect that the industrial revolution ‘started in the USA’.

As your researchers may be aware, the industrial revolution started in Europe 25 years before it reached the USA.

Otherwise great observations or conclusions which reference some factual matter or assumption can lose their credibility if even one of the assumptions, or in this case just a ‘factual’ aside, is seen to be innacurate. The question then arises for the non-professional reader: how many other facts or assumptions leading to the conclusion might also be innacurate?

You have a great and very informative newsletter, for which I thank you.