Thursday, October 30, 2014

When Fewer Is Better

LONDON – Is a shrinking population always a bad thing? Judging by the lamentations of some economists and policymakers in the advanced economies, where people are living longer and birth rates have fallen below replacement levels, one certainly might think so. In fact, the benefits of demographic stability – or even slight decline – outweigh any adverse effects.

To be sure, an aging population poses obvious challenges for pension systems. And, as economists like Paul Krugman have suggested, it could also mean that advanced economies face not only a slow recovery, but also the danger of “secular stagnation.”

With slower population growth, the need to invest in capital stock diminishes. Meanwhile, people planning for longer retirements may save more to ensure adequate pensions. If these savings exceed investment needs, they could lead to inadequate aggregate demand, depressing economic growth.

But the policy challenges associated with these demographic shifts are manageable. And, perhaps more important, the benefits of increased longevity and reduced fertility are considerable.

Rising life expectancy is the welcome product of medical and economic progress, and additional increases are almost certain. Indeed, the average life expectancy for children born in prosperous countries could soon exceed 100.

That implies an ever-rising ratio of those over 65 to younger cohorts. But as long as average retirement ages rise to keep stable the proportions of life spent in work and in retirement, the fact that working and retirement years are growing at equal rates has no adverse economic effect. There is, moreover, strong evidence that rising longevity can mean more years of healthy active life, not unhealthy dependency. Only bad policies, such as the recent German commitment to reduce retirement ages, can turn longer lives into an economic problem.

Declining fertility, including in some lower- and middle-income countries, such as Iran and Brazil, also reflects hugely positive social developments – particularly the empowerment of women. Wherever women have the right to an education and to choose how many children to have, fertility rates fall to or slightly below replacement levels.

Falling birth rates challenge pension systems more than rising longevity, because they imply a rising old-age dependency ratio even if retirement ages increase in line with life expectancy. But as long as birth rates are only slightly below replacement level, pension systems’ sustainability can be ensured by means of affordable increases in contribution rates. And lower birth rates deliver the offsetting benefit of lower child dependency ratios, reducing education costs or enabling increased investment in education per child.

Slower population growth might also reduce the increase in wealth-to-income ratios, and the resulting increase in inequality that Thomas Piketty recently highlighted. In many countries, the increase results primarily from the rise in real-estate prices relative to income, as more prosperous people devote a growing share of their income to purchasing property in desirable locations.

Continued population growth would intensify competition for such “positional goods,” which are not easily supplied in greater volume. A stable population, or actual decline, would reduce their importance somewhat. It would also make it easier to reduce carbon-dioxide emissions at an acceptable cost, and to preserve and enhance local environmental quality, which people increasingly value as their incomes rise.

For today’s advanced economies, a stable or slightly declining population would likely be optimal for human welfare. For the world as a whole, it is a desirable goal.

But it is also a distant goal. Indeed, population decline in the advanced countries remains far less of a problem than rapid population growth in many developing countries. The United Nations’ medium fertility scenario projects that the world’s population will rise from seven billion today to ten billion by 2050. Nigeria’s population could rise from 123 million in 2000 to 440 million by 2050, while Yemen’s could grow from 18 million to 42 million.

High fertility rates in many countries are partly a consequence of low income. But causation also runs the other way. High fertility rates stymie prospects for economic growth, because excessively rapid population growth makes it impossible to accumulate per capita stocks of physical and human capital at the pace required to drive rapid income gains.

That said, efforts to control population growth through measures like China’s compulsory one-child policy are both morally abhorrent and unnecessary. As examples like Iran show, even low-income countries can achieve dramatic fertility reductions simply by providing choice and education. But that does not change the fact that China’s rapid fertility decline played a major role in its extraordinary economic breakthrough.

Facile commentary often suggests the opposite: countries with high fertility rates supposedly enjoy the demographic dividend of a rapidly rising and youthful population. But, beyond some rate of population growth, jobs cannot be created fast enough to absorb the growing workforce.

Almost all countries with fertility rates well above replacement levels face economically and socially harmful youth-unemployment rates. Political instability in the Middle East has many causes, but among them is the lack of jobs for young people, especially young men.

Yes, demographic slowdown may, as Krugman and others have argued, increase the risk of deficient demand and below-potential growth. But if the problem is inadequate demand, the danger can be averted. Governments and central banks can always create additional nominal demand if they are willing to use all of the policy tools available to them, such as debt- or money-financed public investment. And if there are underused resources, additional real growth will result.

If aging populations lead to secular stagnation, the cause will be deficient policies. By contrast, the problems created by excessively rapid population growth are rooted in real and unavoidable constraints. The manageable challenges created by rising life expectancy and lower birth rates should not be allowed to obscure the huge benefits of greater longevity and population stabilization. And it certainly should not blind us to the adverse economic and social consequences of rapid population growth.

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  1. CommentedYamin Benshrif

    The key is causality. Statistical genetic studies have shown that most places in e.g. Europe were populated with a group of only a few thousands. Likewise the US probably grown into 300 mln out of a limited pool of people of less than a million, regardless of social norms/status of women. Populations tend to grow when they have the required level of resources, the reverse never happens.

    I do not believe policy makers or, more broadly groups, can, from a supply-side, limit or otherwise control their demographic growth through any mechanism, like they (somewhat) control the supply of money, investment, labour etc. The sheer diagonal diversity of countries with limited birth rates (Iran, Korea, Brazil, Italy, Ukraine, Thailand, Spain and even Saudi Arabia barely has above replacement rates) suggests that demographic growth is not sensitive to birth control/gender-targeted policies/Women nor to the degree of social liberalism of a certain country. The strong correlation is with the perception of -real- economic growth, outlook and the collective well-being expectations of a given group.

    We shouldn't be making arguments that simply assert that because women have more control of their destiny then that means less children/woman. This is a limited masculine view that may stem from an impression that it is mostly men who make the decision of having children. This is simply not the case, and there are many places where emancipation of women, did not necessarily lead to lower birth rates. For example, Iran at the time of the morally liberal Shah had a higher fertility rate relative to the more conservative rule of the Islamic revolution. Or, in certain poor neighbourhoods in the US where women tend to be more economically powerful, the fertility rate is higher relative to conservative Christian families with stay-at-home moms and working dads. In post-Soviet eastern Europe, fertility rates fell even-though the policies of the successor governments were less dogmatic about the necessity of women working or gender issues in general. Traditionally conservative and Family-oriented Italy/Spain/Portugal (including immigrants) have a lesser fertility rate than France, which is perceived as more socially-progressive and has less immigrants per capita than Spain.

    The demographics issue is clearly more complex than what we'd think. But is few better? Maybe that is the case, if we could, as a group, actually control the level of the population according to our standards of living targets. But in reality, we're on the receiving end; people tend to decide on having children based on an economic assessment that is, at best, limited to a 5-yrs span. We can't anticipate economic growth/Technological innovation/Wars etc over 15 or 25 yrs (typical time required for a newborn to enter the job market) and when people get it wrong (which is most of the time) they are either faced with massive unemployment (and the ensuing social and economic ills) or they fill in the need with immigration to sustain their growth (like it happened in the 30-yrs that followed WWII in Europe or for decades in the US)

  2. CommentedNichol Brummer

    Nice article: we clearly don't need an overpopulated earth. Rich countries, and China have shown that no large problems are caused by low population growth, it can even be very beneficial. But clearly life with change: education will change, with possibly more demand for people to be educated further for another job later in life. A new policy priority will be to make sure that also older people can remain active in productive jobs, and move on to different (types of) work. It will indeed be due to deficient policies if people do not have opportunities to have a useful occupation, and a cared-for end of life.

  3. CommentedStamatis Kavvadias

    Unfortunately, this article of Sir Adair Turner, is an exemplary manifestation of western economists' denial that besets our times. Economists do not even suspect that the need for perpetual growth, inherent in our monetary system and the motivating power that turns savings to investment, contradicts obvious natural facts, like the need to attain a stable or slightly declining population, in developed economies and/or globally.

    Economists are in denial of the possibility of insufficient (prospects of) growth (even when discussing the possibility of secular stagnation!). Here is an example:
    "[..] as long as birth rates are only slightly below replacement level, pension systems’ sustainability can be ensured by means of affordable increases in contribution rates."

    Obviously, this is not sustainable, unless one precludes *adequate* growth. In fact, even that will not suffice, if growth is not in some sense socially fair (also called inclusive). Too few comments in this last direction by Sir Turner, and, certainly, no insight on whether and with what side-effects for the poor and "middle-class," current distributions of income in developed economies allow for increased pension contribution rates.

    More generally, because capitalism views work as a marketable service, continuous optimization of the supply side is linked, in a negative feedback loop, with the capacity of the demand side to consume and with total "real" spendable income that does not become an increase in savings or in investment in naturally scarce assets (e.g., locationally specific housing). That is because people with high income spend only a small fraction of it.

    The total "real" spendable income is increasingly nibbled by supply-side optimization. Although this recently became a well accepted fact by many economists, even some as socially responsible and broad minded as Sir Turner, tend to forget to assess its magnitude, highlighting a lethal sin in the economics profession, one of preoccupation with old-fashioned capitalism.

    Now, consider the fraction of income of high income earners, which is turned to savings or invested on naturally scarce assets. When turned to *increased* savings, to be recycled in the economy, these require *increased* demand for investment, which requires improvements in income distribution or increased-and-inclusive growth. If the rest is turned to investment in naturally scarce assets, it results in bubbles, which redistributes insufficient incomes to interest for excessive credit creation; this, in general, deteriorates inclusiveness, and our current experience is it leads to stagnation.

    How is any of this improved by "Slower population growth". Sir Turner tells us, it "might also reduce the increase in wealth-to-income ratios". Reduce the increase.... How will that help the economy? It will just reduce the rate of deterioration! Supposedly, the 1% will go towards becoming a larger fraction of the population!!!! This is typical of economists using statistics to make non-existent arguments. I hope there is something else behind Sir Turner's argument, but, clearly, it is not mentioned in the text!

    Supply-side optimization does not only negatively affect median and "real" spendable income. It also has contributed for long in a deterioration of quality of essential goods, for regular income workers, like food of good nutritional quality. A friend, professor at the University of Texas, publicly commented during a conference in Greece, that in the US they do not have a certain "fruit" that we have in Europe; we call it tomato, he said! Similar things can be said for prevalent industrial chicken products and farming products, when compared with those of small farms.

    These two facts, make the need for a method or a set of policies for "natural" (or, at least, sensible) regulation that creates a balance between finance available for investment on improved supply and finance for incomes available for basic need consumption, the most pressing one of our times. Allow increased credit intensity, only if basic income is fully financed (by banks, effectively, to productive businesses!), and include public finance of basic income for the unemployed. Reversely, enforce commensurate reduction of credit intensity when basic income is not financed. If this was in place, no financial crisis would be able to hit the real economy! Banks are outside capitalism; make them socially responsible!

    Thinking of growth as a prerequisite instead of as a potential result is thinking reversely. Credit intensity should not be linked to growth. Policy targets should not be two-faced and disingenuous. Instead, banks should have double criteria: creditworthiness for individual loans, and overall basic income financing. Now, with increasing possibilities of secular stagnation, is a a secure chance for rationalizing economics.

  4. CommentedAndré Fonteyne

    If you put in parallel this aging/declining population with the impact of technology that destroys jobs, especially the ones requiring low or average skills, it might be a good thing if countries are able to invest in their workforce in the correct way. As for poor countries experiencing - mostly in Africa and the Middle East- an explosive demography, the problem is that millions of them will want to emigrate, and try the Spanish or Italian routes. Unless we stop them our countries will be flooded. The most likely out come is that these regions, unless they decide to take theirdestinity into their own hands, will descend further into the kind of regression that we are now witnessing already in many places, like Congo, Mali, Lybia, Irak,...

  5. CommentedDouglas Costello

    Everyone still seems to be hung up on the need to maintain birthrates at or above replacement levels to ensure economic growth. The correlation e have drawn is based on historical data which ignores technological development, health/longevity increases. Current trends of below replacement birthrates doesn't indicate that this will remain the pattern for the future.

    I suspect part of our problem is that while half our population remains discriminated against even though we have made great strides for equality, research shows that women are still not treated equally regarding pay, retention in retrenchment is not equal and women who take time off to have a child and participate in its raising are seen as being a lesser being we will continue to see birth rates below replacement. Until we confront and address this issue of the value of child bearing and rearing in society our population levels will continue to decline. But that doesn't mean economic stagnation.

  6. CommentedNathan Weatherdon

    As a counterargument: technological innovation is a function of population.

    However, the counter-counterargument has already been made, that with fewer children per adult, we can invest more in higher quality education for each of them, which would also positively contribute to technological innovation if things are working remotely properly in the education system.

    Choosing between just below replacement and, say, 4-5 children per mother should be pretty easy, imo. The greatest threat could be nationlist inclinations, and extending our hearts from the national tribe to the global community could be a prerequisite step to ensuring that everyone is willing to get on board. If not everyone's on board, then perhaps it's harder to get everyone else on board, if you know what I mean.

    Also, I think a decent social safety net could help a lot. In particular some credibly long lasting basic pension would make it easier for parents to decide to have fewer children in low income countries. But among those countries, there are many places where today's promise will not resonate very strongly for the notion that a basic pension amount would actually be received, say, 40 years down the road.

      CommentedDouglas Costello

      Birth rates decline as education levels rise particularly of women in developing countries as they begin ti realise the options open to them. Also improving health services and increases in life expectancy also contribute to declining birth rates. What is the point of having six, seven eight children if half die before the age of five.

  7. CommentedSeamus O'Brien

    It seems to me that economists obsess about economic growth in terms of GPD, but not in terms of GPD/Capita. If we look at it those terms economic growth for the US economy over the past 20 years isn't as impressive as Japan's growth.
    So maybe having an aging population isn't such a bad thing. Even though most economist claim that younger cohorts are more economically dynamic, I suspect this phenomena is overblown. A lot of older folks are still willing to take risks and have the chutzpah to do it.

  8. CommentedVelko Simeonov

    Finally, a sensible comment on the subject. No doomsday predictions and the usual cry for increased immigration, which will somehow save Europe, despite the significant unemployment rates in most EU member states.

  9. CommentedJoseph Jaroszek

    which puts all the aid - both at state and international level - and charity galore into perspective: people should be encouraged and motivated not to have large families, instead of being conditioned to rely on help and resources to sustain their bloated ones.