Is A Shrinking Population Always A Bad Thing?

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.

[vision_pullquote style=”3″ align=””] 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. [/vision_pullquote]

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.

[vision_pullquote style=”3″ align=”right”] Efforts to control population growth through measures like China’s compulsory one-child policy are both morally abhorrent and unnecessary. [/vision_pullquote]

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.

© Project Syndicate

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