Demographics, again (and why you should read The Curmudgeon’s Attic…
…in a word, because you can be apprised of social and economic trends before even the chattering classes begin to notice them, in this case, the trend of acknowledging the foundational importance of demographic trends to economic performance.)
The Wall Street Journal has an article by somebody named Jonathan V Last on its opinion pages today (February 3, 2013) titled America’s Baby Bust. It explains the impact declining fertility rates in the US portend for economic growth.
Had you been all along reading TCA, you would have already known pretty much everything Last described in his article, which was derived from his forthcoming book “What to expect when no one’s expecting: America’s Coming Demographic Disaster”. Here’s his conclusion, from the article:
Forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate.
Here’s some of what I’ve concluded, after years of research and observation on the real drivers of economic growth, in an article posted on January 31, 2011, Seven Billion and Counting, National Geographic explores demographics…:
…From Keynes to Friedman, economists have always just assumed that economic growth, which is in turn dependent on population growth, was the natural state of economic systems. The policy prescriptions for virtually every economist today turns on the assumption that economic growth is to be desired as the natural extension of properly-applied economics. What if the growth assumption is proved invalid, as it appears the impending end of human population growth implies? What will happen in Japan, for example, when by the time the world population reaches nine billion, it is in a demographic death spiral, with mountains of debt growing unsustainably higher on a per capita basis with each passing year? How will deficit spending by governments during times of economic contraction be justifiable considering that each dollar per person borrowed today becomes a greater burden for the citizenry in each succeeding year? Long-run demographic realities might finally put Keynes in the grave.
In truth, this reality is already lapping at the shores of Western economies and Japan, perhaps South Korea and others. This is the essence of deflation–debt becoming more valuable per person even as aggregate demand declines. The demographic realities faced by the US, Western Europe and Japan are the true cause of the world-wide financial system crisis. Because of aging and declining populations (or at least a subset of them in the US), aggregate demand could not keep up with aggregate credit creation, and something had to give. Demographic forces pushed demand downward while credit grew to the sky, and it was all finally resolved on the balance sheets of central bankers across the developed world. The next such disjunct between aggregate credit and aggregate demand might be impossible to so easily resolve.
As has been said many times, demography is destiny. It’s difficult for to understand why economists and central planners seem oblivious to the reality. Perhaps it is their inherent bias to believe that the future will be like the past. Perhaps it is that central planners and macro-economists are so confident in their policy prescriptions for growth that they fail to realize the premises upon which their prescriptions are founded might be invalid. Of course, demographic forces care not a whit about central planners or macro-economists. They just are, a truth that is likely to be driven home again and again in the coming decades as world population growth levels off and then begins declining.
Here’s more, from What does declining (or zero) Mexican immigration, coupled with declining American fertility rates, mean for long-term American economic performance? posted on April 26, 2012:
Even at below-replacement rates and net zero migration, the US population will continue to feebly grow for a few more years, but it will age precipitously, and finally, when the aging turns to dying, will begin declining.
The Economist recently published an article, Demography: China’s Achilles heel that attempts to explain that the fatal weakness in China’s economic strategy relative to the US is its looming demographic implosion. Yet the article uses outdated fertility rates for the US, putting the US fertility rate at 2.08, whereas the rate in 2009, according to the NCHS (first sentence of second paragraph, above) was only 2.007 per female (2,007 births per 1,000 women). In other words, the US, in aggregate, is already below replacement, which is considered to be approximately 2.1 children per female. Had The Economist used accurate fertility rates for the US, things would not have looked as good relative to China.
China does indeed face a more immediate demographic impact to its economic growth prospects than the US, and China has yet to get rich, or as the demographers like to say, “China will grow old before she gets rich”. By comparison to the US, China looks marginally worse demographically. But that’s not to say America enjoys the rosy prospect, such as she fancied herself manifestly destined at her founding, of growth unto eternity. Because China isn’t yet rich, she ought to be able to continue to expand aggregate economic activity through much of her demographic demise. America is already rich, but her demographics can support growth for a bit longer than can China’s. On balance, I believe neither to be much better off than the other, so far as the prospect for aggregate economic growth goes.
Why no babies? This is truthfully the $64,000 question, and really, no one knows the answer. Declining fertility rates are highly correlated to the increasing incomes that come with industrialization and economic modernization. Why women (and make no mistake, it is always the case that the women are the final arbiters of how many babies their bodies will bear) decide to have fewer babies as economic development obtains, incidentally, exactly the opposite of what Malthus predicted would happen, is a great mystery. But like all economic activities (and if you don’t believe raising a child is an economic activity, then you’ve never had any), the perceived benefits of childbearing and rearing must be something more than their perceived costs for the transaction to be undertaken. Apparently, for women in developed, and some developing countries, the marginal cost of raising children roughly equals the benefits to be gained thereby at about two children, and no more. In my estimation, while there are any number of factors that play into the child/no child calculus, primary among them is that as development proceeds, the expectation that every child will survive until adulthood is greatly enhanced, while the opportunity cost of bearing children increases dramatically, as industrialization and mechanization makes it possible for women to compete with men for jobs. Women no longer need to leverage their wombs to survive as industrialization renders male advantages in size and strength irrelevant, so women have only the children they wish to have, just enough to succor their maternal instincts and no more. In essence, children have become luxury goods, but ones that have a steeply diminishing marginal utility.
Would the economic demise that population demographics portend operate to reverse the trend? That’s hard to say, because there are very few societies (if any) that, having seen the decline in fertility due to economic development, suddenly reversed course to become less developed and modernized economically. But the experiences of Russia, with the demise of the Soviet empire, and Japan, with its decades-old economic stagnation, perhaps offer insight as to whether total fertility rates might climb above replacement once economic growth stalls. According to the CIA World Factbook, Japan’s 2012 total fertility rate is still well below replacement, at 1.39 births per female, and Russia’s is not much better, at 1.43 births per female. In both countries, demographic demise has already begun—Japan and Russia’s populations are actually now declining, not just experiencing a decrease in an otherwise positive rate of growth.
Whereas China’s Achilles heel may be its rapidly aging and dying population, at least she has not yet achieved a sufficient level of wealth that her citizens expect the state to care for them in their dotage. The US long ago did (along with other developed-world countries, particularly in Western Europe), which is America’s own Achilles heel. The Social Security Trustees’ recently released report explains that the Social Security Trust Fund faces depletion earlier than it had previously imagined, by 2035, and the portion of it exclusively devoted to disability insurance faces depletion even earlier, by 2016. Medicare fares little better, its trust fund is expected to be depleted by 2024, but it already fails the “long range test of close actuarial balance”, meaning that general revenues have been necessary to supplement Medicare since 2008, and will continue to be needed indefinitely, if current trends continue.
Not a single economic thinker considered that long-term economic growth might be permanently forestalled by the failure of human populations to grow. Everyone from Keynes to Hayek to Friedman devised their theories of how to achieve continual economic growth predicated on the assumption that human populations ceaselessly grow. No one paid any mind to simple mathematical and biological principles. No creature ceaselessly grows. The 21st century challenge for the developed, and much of the developing, world will be to devise economic strategies, (like paring down debt instead of continuing to pile it high), that enhance the ability of aging and declining populations to nonetheless survive and thrive for so long as they are able.
Wall, in his WSJ article, wraps the demographic implosion in the flag, as if the only economic system that matters is the US, and the only country experiencing a demographic implosion is America. I don’t much care about how important babies are becoming to keeping America strong. I don’t much care whether America remains the economic giant of the world. Much like the women making individual procreative decisions, I care about the welfare of me and mine. So I don’t see the demographic implosion as of overwhelming importance to the economics of my life. Economic decisions take place at the individual level–aggregate economic numbers are an artifice. With fewer people in aggregate there will definitely be less economic activity, but I don’t see that as a tragedy. I care what happens at the individual level. Japan, for example, as bad as her aggregate economic growth has been over the last two decades, the metric that matters–per capita income–has held steady and even increased a bit.
The first takeaway here is that demographics drive everything. There are no fiscal or monetary answers capable of engineering economic growth in the face of declining demographics. In fact, fiscal and monetary answers of yore that seemed to engineer economic growth at the time owed their perceived successes more to favorable demographics than to any brilliance in their design and application.
The second takeaway is that anyone could have figured this stuff out. Quit buying the nonsense emanating from ethically conflicted Ph.D’s looking for headlines, and start thinking for yourself. I did, and it led me to the conclusion that there will be no sustainable, robust aggregate economic growth into the teeth of the demographic headwinds.
The third takeaway was mentioned first–all you had to do was read TCA to already know what the chattering classes have finally come around to (brilliantly!) recognizing.