What’s the policy response to an ageing population?

No, the answer does not have to be importing people. Even if ew do face a real problem:

The question is whether another consequence — that the ageing population will slow economic growth, not least because of a rise in the ratio of dependants to working people — can be avoided.

Will that effect, in and of itself, slow economic growth? Yes, obviously. But slow it from what underlying rate? That’s the thing.

So, what do we know about how to increase the growth rate? Well, that in itself means increasing productivity growth. Using the economic assets we’ve got better, to add more value to them.

Clearly, we’ve got an anchor on that currently. All this idea of going green and environmental. This is - whatever we think of whether we should or not - the process of including previously uncounted externalities into our measures of what we’re doing. We’re acknowledging costs we didn’t before - growth is simply going to be slower as a result.

But even with that, what do we know about raising that rate of productivity increase?

The answer is markets of course. Bob Solow’s work estimates that 80% of 20th century growth in the market economies came from this - total factor productivity improvements. As opposed to zero of that sort of growth in the Soviet, planned, economy.

From Baumol we also know that it’s markets and competition that promote innovation. Innovation being the flip side of that increasing productivity idea, the same thing viewed from the other angle.

Finally we know that it’s really only the 10% most competitive, most productive, producers who engage in international trade. Average mediocrity is available around any corner, it’s that efficiency which is rare after all.

So, we want to expose the British economy to those most productive competitors from around the world. Free trade improves our own efficiency and productivity over time. This maximises the growth rate.

Yes, the ageing population, the dependency ratio, will lower the growth rate from what it would be without that factor. But it’s still possible for us to adopt a policy set which increases economic growth even given that factor.

Free trade and markets are that answer. But then there are few economic questions to which free trade and markets are not the answer so that’s not exactly a huge surprise there.

Tim Worstall