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Joanna Shelton

Stock market gyrations and China’s slowing economy have replaced Greek and eurozone travails as the latest headline grabbers. At the same time, America’s economy powered ahead in the second quarter, growing stronger (at a 3.7 percent annual rate) than most analysts had expected.

What are we to make of all this? Is America an island of stability in a sea of change and froth? Or are we likely to be swept up in the volatility and uncertainty circling the world?

This is a question being asked by investors, savers, pensioners, and others struggling to find ways to increase – or just maintain – returns on their savings and investments. It’s also a question that’s critical to businesses large and small, home buyers and sellers, people fortunate enough to have jobs, and people still looking for jobs in this post-recession economy.

All eyes are now on the Fed as our central bankers consider whether to raise interest rates for the first time in nine years at their Sept. 16-17 meeting. (I’m guessing they won’t – yet.) And while headline-grabbing events certainly enter into the equation, Fed decision-makers also look behind the headlines at trends and developments shaping the future path of our economy.

As Vice Chairman Stanley Fischer said Aug. 29 at a Fed symposium in Jackson Hole, Wyoming: “In making our monetary policy decisions, we are interested more in where the U.S. economy is heading than in knowing whence it has come.”

The challenge, of course, is knowing where the U.S. economy is heading. We’ve seen several years of overly optimistic forecasts from a range of normally credible sources, which suggests there may be changes taking place in our economy – and in economies around the world – that imply a “new normal” path for our growth and development.

For the United States, that “new normal” might mean slower growth than we’ve come to expect in much of the postwar period. Key factors that determine how fast our economy can grow  – the growth in our labor force, in our productivity (how efficiently we use our resources, including labor), and in our capital, or investment  – have slowed in recent years.

Will these growth drivers pick up in the months and years ahead? Or will they advance at their recent slower pace? The answer to this question is crucial to determining what policies are appropriate.

Let’s look at just one component of the bigger picture – changes in our population and labor force. Our society is aging, with the percentage of people age 65 and over expected to account for nearly 20 percent of the population by 2030, up from about 15 percent today.

At the same time, the percentage of people age 16 and over in the workforce has fallen steadily since the recession to under 63 percent in July, the lowest level in nearly forty years. That decline is due mainly to baby boomers hitting retirement age; discouraged workers dropping out of the workforce; and fewer young people entering the workforce (partly because they’ve opted to stay in school).

With our workforce shrinking as the number of pensioners increases, fewer workers are available to shoulder growing costs of Social Security and Medicare, putting more pressure on those programs’ finances. Increasing payroll taxes, even if politically feasible, could dampen consumption, one of the main sources of growth in our economy. Reducing benefits has likewise proven to be politically impossible to date.

In addition, retirees will draw down their savings, reducing the pool of money available for investment in our economy. And with fewer workers entering the job market, our businesses will have to rely more heavily on innovation and technology to maintain the same or higher levels of production and sales. Yet we’ve seen a slowdown in such productivity growth in recent years.

These trends seem to point to a slower path of growth than we’ve seen in pre-recession years; and that suggests lower levels of interest rates than otherwise. Combined with stagnant growth in Europe (our major export and investment market), a slowdown in China and other emerging economies, conflict in the Mideast and geopolitical tensions elsewhere, prospects for faster growth seem dim in the foreseeable future.

The U.S. economy has a more solid foundation for growth than many others, but the Fed is looking at a very mixed picture as it approaches its momentous decision on interest rates in September. The interconnectedness of the global economy also means many other countries are watching nervously to see what the Fed will do.

Perhaps we should add “tightrope walking” to Fed decision-makers’ job description.

Joanna Shelton was deputy secretary general of the Organization for Economic Cooperation and Development in Paris; held senior positions in the executive branch and Congress in Washington, D.C.; and teaches at the University of Montana. You can reach her through her website,

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