03/15/2019
January’s report on fertility from the CDC set off a new wave of speculation in the media about the alleged “fertility crisis.”
We continue to see headlines like Fortune magazine’s article “Americans Aren’t Making Enough Babies, Says CDC ” and we hear from experts in this Marketplace interview that replacement-level fertility, “is needed to sustain high living standards and a high quality of life.”
This latter sentiment takes us to the heart of the matter: when we hear about the fertility crisis, it is usually packaged as an economic crisis. That is, we’re told that standards of living will collapse if people don’t start to have more babies.
This argument, of course, should be noted as being distinct from other arguments— namely sociological, cultural, political, and religious arguments — in favor of higher fertility. Some of those are compelling.
I remain unconvinced, however, that a stagnant or declining population necessarily presents an economicproblem or a threat to the standard of living. The problems we were likely to encounter result from government programs and government spending — not from demography or markets themselves.
Fewer People Can Mean More Resources per Person
As Peter St. Onge has pointed out, zombie movies have dramatized the relative plenty that could result from a cataclysm that destroys population without destroying capital. We can, of course, also point to a real-life version of this in which a population decline led to a higher standard of living: the Black Death.
When the Black Death finally receded — having peaked around 1350 — the survivors found themselves in a world with a reduced workforce, but with most capital in tact. Thus, as historian Christopher Dyer notes, “Unskilled workers’ wages rose more rapidly than those of the skilled after 1349, a sure indication of a labour shortage, and confirming Thorold Rogers’s aphorism that the period was the ‘golden age of the labourer.'”
Historians Tine De Moor and Jan Luiten Van Zanden also note broad social implications of this shift. In the wake of the plague, the “booming labour market” meant “In the century and a half following the Black Death, young women and men were able to free themselves from parental influence through their high real earnings.” Family formation, marriage age, and the extended family all changed as a result of a declining population.
In societal terms, this wasn’t without its down side. Social and political upheaval followed, and that often ends poorly. But when we’re looking at strictly economic factors like labor and income, there’s little to suggest that the steep declines in population experienced during the plague were an economic problem for those who survived to take advantage of the wealth left behind by the dead.
Now, one could point out that this is not relevant to the current situation since populations began to grow again once the plague was over.
That’s true, although there’s little to “prove” that population growth is the essential factor in economic growth. The empirical research on the relationship between population growth and economic growth in other contexts hardly produces a consensus. Conclusions are highly varied depending on the population being studied, and the methods used. Historians continue to debate the matter because just establishing correlations simply isn’t enough.
Economic Growth Comes from Productivity Growth
Good economic theory does tell us, however, that economic growth is not primarily a function of the number of people. It’s mostly a function of capital accumulation and worker productivity. What matters is not how many people there are, but how productive each person is, thanks to investment in capital that makes each worker more productive. More productivity results from more access to capital per person — or per worker. Higher worker productivity, of course, can then drive more population growth as standards of living increase. But there’s little reason to believe things work in the opposite direction. If that were the case, India and China would be far wealthier than they are.
On the other hand, it’s certainly possible to imagine some scenarios in which standards of living — in the aggregate — significantly decline as populations decline. These would be situations in which the number of elderly retired people incapable of working outnumber productive younger workers. Older non-workers might consume capital faster than new younger workers can produce it. But, again, even this scenario depends heavily on how much worker productivity grows.
A Government-Created Crisis
The problem of retirees, however, becomes an enormous political problem once governments enter the picture.
So far, we’ve been considering the effects of population decline in a relatively unhampered marketplace. But what happens if there’s a government which mandates large transfers of wealth and income from current workers to retired workers?
Then, we see that population decline becomes a big problem for policymakers, and those who depend on government programs. As Nathan Lewis at Forbes writes:
The main problems are, in my view, related to existing government policies and programs, which are based, overtly or implicitly, on expanding population. Basically, they are Ponzi schemes, which need to grow or die. This includes public pensions (“Social Security” in the U.S.), existing healthcare programs, and patterns of government debt and deficits. Many of these were conceived in the late 19th century, and expanded during the mid-20th century. They may have been appropriate for 1960 or 1970, but are not appropriate today.
For example, a pattern of continuous government deficits and growing total debt can be sustained for some time if nominal GDP is also growing quickly. The “debt dynamics” allow debt/GDP ratios to maintain some semblance of sustainability, at least until a politician’s term of office is ended. Alas, this continuous-growth Ponzi doesn’t work well in an environment of population shrinkage.
In a more laissez-faire economic environment, workers would work longer — especially now that frailty and disability arrive for workers much later than they did when Social Security was invented in the 1930s. Also, in a world where retirees could not reliably fleece younger workers, those who fully retired would have to substantially cut their spending. This is just the natural progression of working life. In a functioning marketplace it’s unrealistic to expect to keep spending at the same rates that one did when one earned a full time income — unless, of course, one has substantial savings.
But for most people, they’ll have to cut back as they retire. In a world with a large number of politically active pensioners, though, retirees can continue to maintain a high level of consumption if they can use the power of the state to subsidize their standard of living.
This is where the problem gets big.
In a world of declining population — if older populations are more numerous than younger ones — the burden of maintaining the retirees’ standard of living would continually increase on each individual worker. The only way to keep up pension payments at a constant or growing level will be to increase the taxes levied on current workers. This could have disastrous results by gradually siphoning off more and more wealth from current workers to maintain the standard of living of retirees. The long term effects would be to reduce the ability of younger workers to save and invest in capital. In other words, the economy’s resources would be shifted from production (by younger workers) to consumption (by retirees). This would reduce capital, saving, and, ultimately worker productivity. (Unrelenting consumption by retirees would also keep consumer prices high for current workers.)
The results then would be a true crisis.
So, we find that a declining population is not necessarily an economic problem — but it is a big political problem. The crisis we’re facing now is not a result of some built-in demographic phenomenon. It is, rather, a problem with government pensions, entitlements, and transfers from productive workers to non-productive retirees.
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