Low borrowing costs are mainly a by-product of demographic stagnation

The alarmed voices of entrepreneurs and their hired economists are often heard in Lithuania.  

Oh, inflation will soon eat us alive ... Oh, look how many retirees are here, and there are few children born ... We should be urgently raising the retirement age to 100. We should be urgently transporting Ukrainian nationalists here so that they can wash our toilets for a minimum and start the revolutions called the Maidan. Oh, let's do something quickly ...  

And what is the reality?

"An aging population means fewer active workers per retiree, which raises some fiscal issues. But this problem is often exaggerated. Remember all the panic about how Social Security couldn’t survive the burden of retiring boomers? Well, many boomers have already retired; by 2025 most of the growth in the number of beneficiaries per worker caused by retiring baby boomers will already have occurred. Yet there’s no crisis.

There is, however, a different issue with low population growth. 

To maintain full employment, a market economy must persuade businesses to invest all the money households want to save. Yet a lot of investment demand is driven by population growth, as new families need newly built houses, new workers require the construction of new office buildings and factories, and so on.

So low population growth can cause persistent spending weakness, a phenomenon diagnosed in 1938 by the economist Alvin Hansen, who awkwardly dubbed it “secular stagnation.” 

The term and concept have been revived recently by Larry Summers, and on this issue I think he’s right.

Secular stagnation can be a problem, because if interest rates are very low even in good times there’s not much room for the Fed to cut rates during recessions. But a low-interest-rate world can also offer major policy opportunities — if we’re willing to think clearly.

For what we’re looking at here is a world awash in savings with nowhere to go: Households are eager to lend money out, but businesses don’t see enough good investment opportunities. (Bitcoin doesn’t count.) 

Well, why not put the money to work for the public good? Why not borrow cheaply and use the funds to rebuild our crumbling infrastructure, invest in the health and education of our children, and more? This would be good for our society, good for the future, and would also provide a cushion against future recessions.

What about the burden of debt, you ask? Well, federal debt as a percentage of G.D.P. is twice what it was in 1990, but interest payments on the debt are only about half as high. That’s what low borrowing costs — largely a byproduct of demographic stagnation — do."