It looks like we’re about to leave. Bond market investors expect inflation to moderate in a few years. Despite misfires in China, global supply chains seem to be recovering from the pandemic shock. The Fed is raising rates quite furiously and the last vestiges of huge demand-side fiscal stimulus cycles are fading, reducing personal savings. Job growth is slowing.

The problem is that the new normal will lead us back to some version of the hole we’ve found ourselves in: a quagmire of shrinking labor and low investment, stagnant wages and endemic inequality that have blighted prosperity for decades. years.

The crucial economic question – where does growth come from? – will become even trickier if energy remains expensive and China stops growing as an emerging market and starts to slow as a developed market.

Unlike episodes of inflation – a problem the Federal Reserve and other central banks have learned to manage by raising the policy interest rate – the post-inflation scenario is difficult to diagnose, let alone solve.

Aging is reducing the size of the working population, increasing dependency ratios not only in rich countries but also in China.

This dynamic is at the heart of many of our woes, holding back economic growth. It is a key driver of the so-called “secular stagnation”, which before Covid-19 was considered the main economic challenge of our time: a combination of high savings and lackluster investments that gave us stubborn growth. low alongside stubbornly low inflation and stubbornly low real interest rates.

Stagnation looks likely to stay with us. Olivier Blanchard, former chief economist of the International Monetary Fund, notes that workers who expect to spend more time in retirement will spend less and save more. Falling fertility rates work in the same direction, reducing the future labor force relative to the pool of retirees.

It would be difficult to solve this puzzle even if everyone agreed on its characteristics. Trying as it did to inflate the economy by buying up long-term debt, the Fed fell short of its inflation targets for years. Growth disappointed for a decade following the financial crisis and interest rates remained at rock bottom.

Some economists have suggested that much more government spending could help support demand. But that argument is unlikely to win out, after major fiscal stimulus packages in 2020 and 2021 contributed to an unchecked surge in inflation not seen in four decades.

Moreover, there is nothing close to a consensus on the diagnosis. Other related factors are also at play: income inequality has likely lowered spending and increased saving; the same goes for corporate concentration. A heightened perception of risk — due to everything from pandemics, geopolitical upheaval and lengthening supply chains to perhaps regulatory uncertainty — also likely weighed on investment. And deglobalization, if it persists, will likely push prices up and economic growth down further.

People can’t even agree on how aging will play out in the future. Some IMF economists say that just as the population bubble produced by baby boomers kept inflation relatively low for 40 years as they worked and saved for retirement, it will increase inflation when they leave. the job market and spend their savings.

Charles Goodhart of the London School of Economics points roughly in this direction. The period of low inflation since around 1980 was a historical aberration, he said, mainly produced by the increase in the labor pool, particularly due to the incorporation of China’s vast labor force into the global markets. This demographic dynamic is in the process of being reversed, leading to weak growth and higher prices.

What do policy makers do with all this? A wildcard that could soften the blow is raising the retirement age. But the politics of this is not easy. (See “Macron, Emmanuel.”) Faster productivity growth would help. Somewhat surprisingly, Daron Acemoglu and Pascual Restrepo of MIT found that companies that age faster experience higher growth, possibly due to greater investment in automation.

However, as measured, productivity growth is far from spectacular. The rise during the pandemic looks unlikely to last, says John Fernald of the Federal Reserve Bank of San Francisco. As exciting as innovations like CRISPR and Tesla may sound, technological advancements seem somewhat stalled compared to the more distant past.

Raghuram Rajan of the University of Chicago, a former head of the Reserve Bank of India, suggests a change in perspective. If monetary policy has failed to reinvigorate growth and fiscal stimulus has given us explosive inflation, perhaps the solution is more Build Back Better and less American Rescue Plan: Government spending is not aimed at stimulating demand, but to build the physical and social infrastructure that can pull America back. get out of the doldrums and bring it closer to the frontier of productivity.

It might even help national politics. While that opportunity may have slipped away for now, it may not be lost for good. “Maybe when we’re back to low inflation,” he said. It might not be too far.

More other writers at Bloomberg Opinion:

• Are interest rates neutral? The markets hope so: Mohamed El-Erian

• Powell cleverly swears not to be guided, but then hands some out: Jonathan Levin

• Do you think the Fed hasn’t done enough? Think Again: Nir Kaissar

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost”.

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