Megatrends and the U.S. economy, 1890-2040

61 Pages Posted: 29 Jan 2024 Last revised: 10 Jun 2024

See all articles by Joseph H. Davis

Joseph H. Davis

The Vanguard Group

Lukas Brandl-Cheng

Vanguard, Investment Strategy Group

Kevin Khang

The Vanguard Group, Inc.

Date Written: June 10, 2024

Abstract

Will we have a future of too-few jobs due to artificial intelligence (AI) or too-few workers due to demographic change? Is higher inflation inevitable in an aging society with rising fiscal deficits? In this paper, we provide answers to these questions with a framework that quantifies how four "megatrends"-technology, demographics, structural fiscal deficits, and globalization-have shaped U.S. real GDP growth, inflation, interest rates, and the stock market in the last 130 years, and how they will likely interact in the next decades. We generate these insights leveraging three novel features of our framework. First, we develop a new quarterly dataset starting in 1890 to capture the impact of slowmoving megatrends accurately. Second, we decompose trend and cycle components at the outset to jointly model the interaction amongst supply-side trends-such as labor productivity-and demand-side cyclical fluctuations-such as the output gap-in a unified structural Bayesian vector autoregression model. Third, a novel identification strategy using a combination of zero and sign restrictions provides a rich interpretation of how megatrends manifested throughout the 130-year history. Our model provides much-needed clarity on how megatrends have shaped the economy and financial markets thus far, and how they will likely shape the future of the economy in the next decades.

Keywords: Artificial intelligence, structural fiscal deficits, demographics, Bayesian VAR, stochastic volatility, structural identification

JEL Classification: E17, E32, E47, O33, C53, N11, N12

Suggested Citation

Davis, Joseph H. and Brandl-Cheng, Lukas and Khang, Kevin, Megatrends and the U.S. economy, 1890-2040 (June 10, 2024). Available at SSRN: https://ssrn.com/abstract=4702028 or http://dx.doi.org/10.2139/ssrn.4702028

Joseph H. Davis (Contact Author)

The Vanguard Group ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Lukas Brandl-Cheng

Vanguard, Investment Strategy Group ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Kevin Khang

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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