IN THE late 1930s economists trying to explain how a depression could drag on for nearly a decade wondered if the problem was a shortage of people. “A change-over from an increasing to a declining population may be very disastrous,” said John Maynard Keynes in 1937.* The following year another prominent economist, Alvin Hansen, fretted that America was running out of people, territory and new ideas. The result, he said, was “secular stagnation—sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.”

A year ago Larry Summers of Harvard University revived the term “secular stagnation” to describe the rich world’s prolonged malaise. Weak demand and excess savings were making it impossible to stimulate growth with the usual tool of low short-term interest rates, he argued. Demographics may play a central role in the ailment Mr Summers described—indeed, a more central one than in the 1930s.

An ageing population could hold down growth and interest rates through several channels. The most direct is through the supply of labour. An economy’s potential output depends on the number of workers and their productivity. In both Germany and Japan, the working-age population has been shrinking for more than a decade, and the rate of decline will accelerate in coming years (see chart). Britain’s potential workforce will stop growing in coming decades; America’s will grow at barely a third of the 0.9% rate that prevailed from 2000 to 2013.

All else being equal, a half percentage-point drop in the growth of the labour force will trim economic growth by a similar amount. Such an effect should be felt gradually. But the recession may have accelerated the process by encouraging many workers to take early retirement. In America the first baby boomers qualified for Social Security, the public pension, in 2008, on turning 62. According to several studies, this can probably explain about half the drop since then in the share of the working-age population either working or looking for work, from 66% to below 63%. (This echoes the experience of Japan, which slid into stagnation and deflation in the 1990s around the same time as its working-age population began to shrink.)

The size and age of the population also influences how many customers and workers businesses can tap, and so how much they will invest. Keynes and Hansen worried that a falling population would need fewer of the products American factories made. Contemporary models of economic growth assume that firms need a given stock of capital per worker—equipment, buildings, land and intellectual property—to produce a unit of output. If there are fewer workers to hire, firms will also need less capital.

See an explanation of In a research note, Eugénio Pinto and Stacey Tevlin of the Federal Reserve note that net investment (gross investment minus depreciation) is close to its lowest as a share of the total capital stock since the second world war. This is partly cyclical, since the recession led businesses to curtail expansion plans. But it is also secular. Growth of the capital stock slowed from 3.1% a year in 1994-2003 to 1.6% in the subsequent decade. The economists attribute about a third of the deceleration to slower growth in the workforce, and the rest to less innovation. In other words, businesses are buying less machinery because they have fewer workers to operate it and fewer technological breakthroughs to exploit.

A borrower’s world

The third means by which demography can influence growth and interest rates is through saving. Individuals typically borrow heavily in early adulthood to pay for education, a house and babies, save heavily from middle age onwards, and spend those savings in retirement. Coen Teulings of Cambridge University has calculated what various countries’ collective savings should be given their demographics. Higher population growth and shorter retirements require less saving; older populations more.

For America, the required stock of savings equalled -228% of GDP in 1970: households should have been borrowers rather than savers since their relative youth and lower life expectancy meant they had ample future income to repay their debts and finance retirement. But as the population aged, its growth slowed and time in retirement lengthened thanks to increased lifespans, the required level of savings rose to 52% of GDP in 2010. For Japan, required savings went from -176% to 119% of GDP in the same period, Germany’s from 189% to 325%, and China’s from -40% to 86%.

The simultaneous effort by so many countries to save for retirement, combined with weak investment, slowing potential growth, fiscal retrenchment, corporate cash hoarding and inequality (which leaves more of the national income in the hands of the high-saving rich) is depressing the “equilibrium” interest rate that brings investment and saving into balance. There is, however, at least one obvious policy fix. “A higher retirement age reduces saving,” Mr Teulings and Richard Baldwin of the Graduate Institute in Geneva write in a recent e-book. “There simply is a limit to the extent to which we can save today in exchange for leisure and high consumption tomorrow. Somebody has to do the work tomorrow; we cannot all be retired by that time.”

Moreover, at some point, an ageing population starts to use up the savings it has accumulated. Charles Goodhart and Philipp Erfurth of Morgan Stanley note that the ratio of workers to retirees is now plunging in most developed countries and soon will in many emerging markets. Japan is already liquidating the foreign assets its people acquired during their high-saving years; China and South Korea are starting to do so and Germany will soon. This, they predict, will drag real interest rates, which are now negative, back to the historical equilibrium of 2.5-3% by 2025.