We know the economy is growing- slowly. And, we have a President elect who swears he will increase jobs and manufacturing in the US. (Just so you know- from his mouth to God’s ears. Except there is a vast chasm between this man’s statements and fact. But, I digress.)

There are several problems with our economy. We can start with the easiest problem. It is too damned easy for companies to pick up and leave America, produce their products elsewhere, sell them here, claim the profits belong to some third world country (or Ireland, among other tax havens), and never bring the money they earned in the US back.

I will be discussing my taxing solution  tomorrow (again). And, no, my plan doesn’t involve an increase in tax rates- but a decrease. But, I won’t lie. (I am not running for office; I have no need to do so.) Almost every multinational firm will be paying more money to the US Treasury. Because they owe it. (My tax proposal will lower the bill for domestic-only firms.)

The second problem with the economy is the claim that productivity is not increasing in the US. So, companies fear upping production. Productivity is defined as the rate at which production inputs get converted to outputs.

What are production inputs? Labor, capital equipment (machines, buildings), and intermediate inputs (materials, business services). Both labor and capital add the value to the intermediate inputs, basically they are the compensation for the use of either. And, when companies don’t invest in new equipment or more modern buildings, then it becomes really difficult for the value multiplier to increase. After all, if corporations won’t upgrade equipment, get faster production lines, etc, there’s not much workers can do to increase productivity.

When companies operate this way, it  is called ‘secular stagnation’; where novel processes or faster equipment is not obtained.  Because companies don’t invest, productivity will only increase when and if  someone can figure out how to condense 60 minutes into 50… Yeah, I thought you’d recognize that fallacy.

Some economists (mostly in the Dallas office of the Federal Reserve Bank) also consider the fact that as we become more and more of a service economy, there is yet another phenomenon.  Right now, much of the US effort is enmeshed in research, development, and other high value, early stage in the production scheme items. Given that these items are extremely labor intensive (and have never really demonstrated any productivity improvements), the overall economy will demonstrate lower overall measured productivity.

All of the above are issues that we need to address to improve our economy. But, there is probably another factor that confounds the actions that we may be contemplating. The age (or aging) of our workforce.

Developed countries (especially the US) have aging populations. And, when we input aging, life expectancy, and family composition into our economic models, the results uniformly demonstrate the low growth that seems to be the norm lately. That may actually explain the low growth we’ve experience this century (i.e., since 2000).  It may not be totally due to the economic crises we’ve experienced, but is simply a result of aging populations.

It’s a little more complicated than just the fact that we are getting older. It means that the experienced workers are leaving their posts just as the economy is picking up steam. (Or, maybe crawling just a little faster.)

For example, Boeing is probably going to lose 10,000 qualified mechanics in short order. Given the fact that Boeing changed the contracted work conditions 2 years ago- to the detriment of workers- and ensured there would be no further increases to the pension folks could earn, it’s pretty certain the employees will leave as soon as they are eligible.

Overall, the US total shortage (due to retirement) is expected to be 3.5 million manufacturing jobs- just to replace those retiring, not to handle any potential economic growth. Unless US manufacturers restructure their thinking, they won’t be attracting many millennials to their ranks, so that “loss” is expected to be around 2 million unfilled job vacancies.

And, then, there’s the research of Dr. James Feyrer (Dartmouth) in Aggregate Evidence on the Link Between Age Structure and Productivity (Volume 34; Population Aging, Human Capital Accumulation, and Productivity Growth [2008], pages 78-99) . Dr. Freyer studied a slew of countries and determined that the higher the ratio of folks who were 40somethings, the faster the economy increased its output per hour of work. (His data indicated that when there was a 5% increase in the percentage of 40somethings in the population, productivity improved an additional 1 to 2% per year.)

The good news is that our 40something cohort is finally on the increase. And, while many dismissed Freyer’s research when it was first published, the CEA (Council of Economic Advisors) supports this concept now;  it considers it related to the balance of experience and creativity that seems to abound in folks of that age.

And, that means good news for the US economy. Because you can see from the graph above that this cohort is about to explode in our economy.