Why Worry About Population Decline? NewsWire

NewsWire: 10/1/21

Please tune in TODAY (Friday, October 1) at 12:30pm EST for a LIVE Q&A SESSION that I am hosting in response to last week's GLOBAL DEMOGRAPHY REVIEW.

Nearly every time I do a global Q&A, I hear one or more people ask me this: Neil, why are most nations so bent on population growth? What's the matter with population decline? Can't a society decline in number while still enjoying rising living standards?

It's a great question. I've written a lot about it. There is no one simple answer. Rather, there are a number of answers that various economists, historians, political scientists, and geopolitical experts have offered over the last century. Let me try to summarize at least some of them here.

I'm also going to try to answer this question along with others in my call today.

In case you're interested, I spelled out most of these arguments at some length in Chapter 3 of a book I co-authored with Richard Jackson back in 2008, The Graying of the Great Powers: Demography and Geopolitics in the 21st Century. So you can get more detail there.

So again, here's the question: Couldn't living standards, in theory, rise just as rapidly if a country's population is falling rather than rising?

My answer would be, yes, in theory and from a narrow microeconomic perspective, they could. If the number of consumers and producers shrank together, nothing would change. Indeed, if your capital stock no longer has to grow and you no longer have to invest in children, you could even be better off--less investment and savings, and more consumption.

But here are the two main arguments in favor of demographic growth. The first argues for advantages of absolute size (what you get by having grown). And the other for the advantages of a positive rate of change (what you get by growing).

Main Pro-Growth Argument #1:

Absolute Size Argument. A higher population growth rate means, over time, a larger population and GDP in absolute terms. And absolute size matters.

1. Economies of scale--from Hoover Dam to the US Postal Service--come with large absolute size. (It accounts e.g. for 20% of 1929-82 US output per hour, according to Edward Dennison.)
2. Larger internal markets lead to greater division of labor and denser innovation networks--one reason why cities are such centers of invention. They often force new and innovative methods of organization. (See research by Ester Boserup and Julian Simon).
3. Size enables nations to become "great powers" and gain status in the world system. It thus enables them to influence friends or intimidate rivals. (E.g. Taiwan vs. PRC). Or, for the US: the ability to make the international rules and create and manage the world's reserve currency. Size increases cultural and diplomatic influence, i.e., "soft power."
4. Status, in the end, sometimes rests upon the importance of size when global conflicts break out. Here we're talking about "hard power." Historically, countries with a larger population and a higher output-per-capita nearly always defeat their rivals in war (given the same degree of motivation to win).

Main Pro-Growth Argument #2:

Rate of Change Argument. A rising population over time leads to economic and social dynamics that tend to be pro-growth.

1. Stagnant GDP means less (or no) capital broadening. That's a good thing in one sense (less investment is needed). But it also means an older capital stock and less innovation through "learning by doing" (see research by Paul Romer). This disadvantage grows as the pace of tech innovation rises.
2. Since the number of senior dissavers is rising faster than the number of young adult/midlife savers, the savings rate may decline as fast as the investment rate, leading to no investable excess.
3. More seriously, since dependent (often retired) consumers are rising in number relative to workers, average living standards will not grow as fast as productivity. AND since these are funded through third-party transfer payment programs, they lead to higher tax rates and the inefficiencies of high taxation.
4. Change in product mix from products (more demanded by young adults) to services (more demanded by seniors), makes GDP less amenable to productivity improvement. (See William Baumol's widely accepted "cost disease" hypothesis.)
5. There is also the link, first identified by J.M. Keynes and Alvin Hansen and recently resurrected by Larry Summers, between demographic stagnation and "secular stagnation."
• Loss of "growth mentality" for firms across industries once the average market size, in a typical year, is no longer growing. Half of firms will be in shrinking industries, with excess capacity and zero marginal costs of production. Huge temptation for price wars, cartelization, and protectionism.
• Loss of "growth mentality" for workers across industries for the same reason. In a typical year, half of all industries will require fewer workers--leading to layoffs. Unlike a growing economy, the industry cannot adjust simply by hiring fewer new workers. Workers will join push for less labor flexibility, cartelization, protectionism, and job guarantees.
6. Aging of workforces. With zero demographic growth, the average worker age rises. In general, this translates into less risk-taking, less entrepreneurship, less flexibility/mobility, less ability to learn new skills and adapt to new technologies and lifestyles. There is a large literature on the decline in "fluid intelligence" past age 40. 
7. Aging of families. Aging societies have more grandparents, fewer children, and relatively more "only" children. There will be a greater temptation for families to protect privileges of their own (smaller number of) children and grandchildren than to work to keep the system open.
8. Cycle of negative reinforcement. Historically, many of these changes--less productivity growth, less investment, less innovation, more rent-seeking, higher dependency, higher fiscal burden--have a tendency to exacerbate each other. They also tend to encourage less growth-oriented public policies and undermine underlying demographic growth drivers: e.g., lower fertility rates, higher emigration, less immigration.

I hope you can us on the call today!

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