Home > Economics - General > Doubts about demography (crossposted at CT)

Doubts about demography (crossposted at CT)

November 10th, 2006

Tyler Cowen launches another round in the long-running EU vs US productivity debate. As regards the productivity issues, I don’t have much to add to this piece from a couple of years ago.

But there’s one point on which Cowen lays a lot of stress in this post from the Sheri Berman seminar – the fact that Europe has low birthrates and therefore, on average, is likely to have lower output per person in the future. As he says, this is an issue on which I and CT commenters have been conspicuously silent.

Yet family life gets plenty of attention here, and it’s certainly an issue I take seriously. So why did I and others ignore this aspect of the argument?

First up, I (and most others at CT, I think) take a libertarian line on fertility. It’s a matter for families to decide for themselves, and government policy should be focused, as far as possible, on making it easy for people to follow the path they prefer. Of course, there’s no meaningful sense in which government can be ‘neutral’; one way or another policy settings will have implications for family choices. But the idea that fertility rates should be a target of government policy seems profoundly mistaken to me*.

If you accept that position, then it should be obvious that the response to any argument that low (or high) fertility rates is bad for measures of GDP should be “so much the worse for measures of GDP”. As all economists know, GDP is a lousy measure of economic welfare, and this is particularly true if you compare populations with different age structures.

In any case, most claims about economic implications of demographic change are overblown. A recent conference held by the Reserve Bank of Australia deflated a bunch of claims about asset price meltdowns and so on.

It’s true that, if you’re a government official in charge of a pay-as-you-go pension system, a declining birth rate is a big problem. On the other hand, there are some big demographic dividends from declining birth rates, which may not have the same salience but are important nonetheless. For example, if you have a rapidly growing population, a substantial amount of investment has to be allocated to housing, and if savings rates are low, that produces a current account deficit that is at least as problematic as a domestic budget imbalance associated with social security obligations.

To sum up, I didn’t respond to the demographic argument because, without having looked at it closely, I think it’s a furphy. Feel free to convince me otherwise.

* I’m talking about developed countries here. I don’t want to get into a debate on population policy in developing countries, but I’ll agree there’s an arguable case for policy aimed at speeding up the demographic transition from high death rates and birth rates to low death rates and birth rates.

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  1. November 11th, 2006 at 03:20 | #1

    Its remarkable the frequent coincidence through history of the association between a decline in the birthrate (and/or immigration) and economic stagnation. Some have linked it to a decline in housing investment demands. For excample Brinley-Thomas elaborate theories of how housing cycles were linked to immigration and changes in relative prosperity of the Atlantic economies.

    To take 3 widely different illustrative scenarios think of (i) the decline in population growth in the US in the 1920s in the period prior to the great depression because of restrictions on labout mobility; (ii) the relative strength of the US economy in recent years with its high population growth compared to European slow growth with slow population growth and even (iii) the dismal performance of a regional economy like the Sydney area in recent years where population growth has slowed.

    Of course there is causation working in both directions – people are attracted to areas of high growth (hence the exodus to WA and Qld recently). Also the massive emigrations from Ireland in the nineteenth century were driven by economic deprivation rather than a cause of it.

    In the past the link between high population growth and prosperity was that having lots of kids created lots of demand but only added to supply a bit. Mum and dad provided at most two pairs of ‘hands’ but if they had two kids then four mouths were provided that had to be fed.

    Where demand isn’t a problem (notably China today) this explanation doesn’t seem to work though anti-Malthusian writers such as E. Boserup have long argued that high population growth drove technical innovation in patterns of agriculture.

  2. conrad
    November 11th, 2006 at 07:19 | #2

    I’m not sure what you mean by not targeting fertility rates directly and then saying that there is no neutral position a government can take. I don’t really see how you can’t directly target them if you believe the amount of money etc. a family has affects fertility rates (excluding the most direct definition of direct).

    I might note too here that there is a big difference between the potential possibilities for the English and non-English speaking countries, as most English speaking countries believe (quite possibly incorrectly) that they will be able to have a large pool of decent immigrants (educated etc.) that can supplement their population over the long term. This is a lot different to European countries, where the choice is far worse, and is surely one of the reasons some of those countries do bascially target fertility (France for instance).

    A final point to note is that whilst there might be some benefits to a declining population, this certainly isn’t going to be the case at the extremes, and this is the problem that many countries in Europe face.

  3. jquiggin
    November 11th, 2006 at 08:02 | #3

    Conrad, if policy has effects on fertility, it almost certainly has effects on the relative sizes of different religious denominations. But (I hope) we’d all agree that the latter shouldn’t be a target of policy – the aim should be to allow free choice for everyone.

  4. melanie
    November 11th, 2006 at 11:37 | #4

    Conrad, targeting fertility reinforces gender inequality. If you make payments to people who have more babies you’ll end up with poor women having more babies, thereby reducing their opportunities in other areas. Of course, China has had more direct fertility targeting than that – resulting in 126 boys being born for every 100 girls and a large increase in trafficking of women into China (for marriage).

  5. conrad
    November 11th, 2006 at 11:40 | #5

    I’m not sure how religion got into the conversation, but yes, I agree that everyone should have both free choice of religion and free choice of family planning, and I would hope that almost everyone else would believe that also. However, I don’t see this as orthogonal to direct targeting via government policy.

    I was just commenting that it isn’t clear in what you write what you actually meant by not directly targeting fertility rates (or perhaps I’m just completely missing the point here). If I work in France, for instance, and happen to have 2 children (possibly conceived via free IVF treatment), I will pay almost no income tax, get good quality free education, good health care for my children etc., but its hardly even worth me working there if I don’t have children (monetary wise at least). That seems like a pretty direct targeting of fertility rates to me (since I know I can have children without the monetary hardship I might have if I had to pay for them completely, which I assume is a libertarian position), and I am sure the government would admit that (in fact, some of these policies were deliberately made to increase the fertility rate — which was successful), even though I’m completely free not to have children.

    One could argue (and I’m sure the French government might if it hasn’t already), this seems like good policy given the demographic problems of all the surrounding culturally similar European countries (like Spain and Italy), and the fact that it is hard to find well educated French speaking migrants in the numbers that you would need if birth rates were around 1.3 per woman or less as they are in surrounding countries.

  6. conrad
    November 11th, 2006 at 11:54 | #6

    Melanie,

    if you can provide evidence that greater levels of family support payments leads to greater gender inequality, I’ll be impressed, as I’m sure would many Northern Europeans.

  7. November 11th, 2006 at 12:49 | #7

    If there are benefits from having a larger population than private couples would seek there is a case for a subsidy. This has been much argued about.

    Its interesting how things change. 30 years ago we were being challenged by the ‘population bomb’ -these days Mr Costello is telling us to reproduce. Its actually been this way through history. The mercantilists wanted a larger population so they could fight wars and sieze other countries. Indeed they took the size of population as an index of wealth. But even the ancient Greeks saw instances of overpopulation as a curse on resources which decreased welfare.

    The key issue is how well the environment is managed. If it is carefully priced anfd regulated we should leave couples to decide their habits without taxes or subsidies and have liberal immigration policies. But if we cannot manage the environment – and in Australia that means particularly water – we should not be so keen to expand population.

  8. derrida derider
    November 12th, 2006 at 18:25 | #8

    I agree that the economic effects of population aging are massively overblown in Australia, though maybe less so for continental Europe, Japan and for some developing countries. It’s no coincidence that it is overblown in Oz though – this happens to coincide with some conservative (in both parties) political interests and with the financial interests of the superannuation lobby.

    That said, while it’s reasonable to take the line “if it lowers total GDP, so much the worse for total GDP” IMO it’s less reasonable to say “if it lowers GDP per capita, so much the worse…”. What I worry about with aging populations is a slowing in innovation – old people are not fond of creative destruction. If G=Af(K,L) it’s the reduction in delta A, not L, that concerns me.

    Apart from material living standards, I’m not sure that I’d like living in a static society run by old men (even if I’d be one of them myself). I’d miss the vibrance of youth.

  9. November 13th, 2006 at 00:33 | #9

    melanie, France experience just proves your point wrong.

    As for government as pointed out there’s no “neutral” policy. IMHO a good target could be to make having children vs not having children approximatively revenue neutral for households with a working mother. Which is more or less what the current french system does with the (unsurprising) result of a sustainable birth rate and no particular social problem on this respect.

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