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.