Doubts about demography (crossposted at CT)
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.