Economic Impact of Fertility Rates Below Replacement

The golden rule of free enterprise economy seems to be that everything that contributes to economic growth is good, while anything that detracts from the same is bad. The rationale behind this is that as the population grows, the economy has to accommodate the growing population in order to maintain or improve the standard of living. I have argued against this reasoning before, especially as it relates to long-term planetary sustainability (see Economic Growth and Problems With My Sourdough Bread blog Feb. 11, 2013 and the series of blogs surrounding it). The previous argument was based on the idea that continuous economic growth inevitably comes at the expense of the deterioration of the physical environment, with climate change as one of the major impacts. The argument there was that for the long term (again, my standard is 1000 years) with stabilized population, the only justified economic growth is for homogenizing the economic structure to ensure that everybody can afford a decent living.

This perspective agrees with the recent quote from Dilama Rousseff, the President of Brazil, in an email correspondence with Nicholas Lemann of the New Yorker: “The main aim of economic development must always be the improvement of living conditions,” she told him. “You cannot separate the two concepts.”

The conclusion I reached in my most recent discussion was that in order to be successful going forward, we must learn to shift the paradigm of the holy grail of economics from growth to stability. Here I would like to shift the focus to economic consequences of decrease in population that results from fertility rates consistently below replacement. Since, as I have mentioned in a number of recent blogs, more than half of the world’s developing countries and the majority of its developed countries currently live with below replacement fertility rates, the economic consequences need not be deduced from long term extrapolations. They should start to be visible now – indeed, we are already starting to see some of the impacts.

The issue recently gained some attention due to some comments made by Larry Summers in a short speech that he gave at a research IMF conference to honor Stanley Fischer (President Obama’s recent nomination to serve as Vice Chairman of the US Federal Reserve Bank). A key paragraph is given below:

It is a central pillar of both classical models and Keynesian models that stabilization policy is all about fluctuations – fluctuations around a given mean – and that the achievable goal and therefore the proper objective of macroeconomic policy is to have less volatility.  I wonder if a set of older and much more radical ideas that I have to say were pretty firmly rejected in 14.462, Stan, a set of older ideas that went under the phrase secular stagnation, are not profoundly important in understanding Japan’s experience in the 1990s, and may not be without relevance to America’s experience today.

The term “secular stagnation” is reintroduced here from its original use in the mid 1950s. The stagnation itself and the responsible driving forces are still controversial, but the demographic shift is a very likely contributor.

One important reason for the recent discussions rests on an apparent anomaly in the statistics of the recovery from the last recession. The unemployment rate is shrinking quickly, but this actually corresponds less to the addition of new jobs, and more to the increasing number of people leaving the workforce. If people are leaving the workforce because they don’t believe that they will be able to find work, it indicates an unhealthy economy that needs to be fixed. If, however people leave the workforce because they choose or are forced to retire because they have reached the retirement age, it’s a different issue. The baby boomers (born after the 2^nd World War) are now starting to reach the retirement age and the economy needs to accommodate them. This is a demographic transition that is coming about because of changes that took place in the demographic pyramid caused by events that took place more than two generations ago.

The relative weight of the demographic changes compared to cyclical job availability, is a controversial issue, loaded with political arguments across the political spectrum. The dynamics (and the politics) hold similarities to the debate about climate change: i.e. whether the causes are anthropogenic (caused by humans) or “natural.” It is much more likely the two components both play important roles; attempts to differentiate between the two show up periodically across this blog.

A related discussion (and political debate) has now opened around the new healthcare law in the US (Obamacare). It has recently been projected that the law will lower the labor force by more than two million toward the end of the decade (people will not need to go to work simply to guarantee health insurance). Opponents of the law immediately started trying to brand the law as a job killing legislation. Supporters, meanwhile, have maintained that the law allows people the freedom to choose whether and how much they want to work.

A recent piece in the Economist (January 4^th – 10^th 2014) describes an interesting dynamic with a new building site in Battersea, London. The site is being built as a retirement village. Its 112 flats are available only to buyers over 65. It will include restaurants, gym, a swimming pool and a care home. It describes the background:

Britain’s population is ageing fast. The number of people older than 85 is expected to double by 2030. Yet Britain’s elderly are badly served by the housing market. Although 71% of people over the age of 65 own their homes outright, lots still live in large family houses, paying dearly to heat empty bedrooms and struggling with too-large gardens, broken boilers and council tax bills.

It’s bad for the old people and contributes to Britain’s housing shortage:

According to data from the English Housing Survey, roughly 49% of owner-occupied homes have at least two more bedrooms than the government deems necessary. Among those who rent—either privately or from the state—the figure is just 13%. Neal Hudson, an analyst at Savills, a big estate agent, estimates that there are almost 1.2m inefficiently used homes in London and the south-east alone.

Demographic changes have major impacts on everything that we do. We need to learn how to accommodate those changes. If our population is shrinking, with older generations outnumbering those that must care for them, it is imperative that we learn how to manage and redistribute essential goods and services. This goes double for when we take into account climate change and the resources that will be available in the times to come.