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Demographic Nonsense

The debate over the demographic trends in the United States and other wealthy countries can be described a debate between those who care about our children and those who want more of them. This is apparent once a little bit of logic is applied to the tales of demographic disaster being hawked by those concerned about declining birth rates and greater longevity.

The basic story is that we are seeing a declining ratio of workers to retirees. This is supposed to mean that our children and our grandchildren will have an unbearable burden supporting us in our old age. In the United States the story is that we now have about three workers for each retiree. In 20 years this ratio is supposed to drop to two.

In countries like Germany and Japan the decline is somewhat greater, since they have lower birth rates, and in the case of Japan, less immigration. They also have somewhat more rapid gains in longevity.

This basic story has managed to make otherwise sane people seriously fearful about the country and the world’s future. A quick statistic that should alleviate the fears is that the ratio of workers in retirees in the United States was 5 to 1 back in the 60s, far higher than the current 3 to 1 ratio.

That’s right, boys ands girls, aging is not new. As a result of modern medical technology and high living standards, life expectancies have been increasing for a long time. And, just as no one now blames our current economic problems on the larger percentage of retirees in the population, there is no reason to believe that in 30 or 40 years that it will be an important factor depressing living standards.

The reason that we are on average much wealthier today even though we have a much larger population of retirees is productivity growth. Productivity growth has averaged over 2.0 percent annually over the last 50 years. (It has averaged 2.5 percent over the last 15 years.) If productivity growth averages 2.0 percent a year, then in 20 years workers will be on average be producing almost 50 percent more in an hour of work. In 40 years they will be producing 120 percent more in an hour of work. Such gains in output will allow our children and grandchildren to enjoy much higher living standards than workers today, even while supporting a larger population of retirees.

While no serious economist would dispute this basic arithmetic, the demographic scare pushers invariably come back with stories about labor shortages. This is a cheap trick. In a dynamic market economy there are always labor shortages in the sense that some businesses cannot profitably hire workers at the prevailing wage.

This is the reason that half of the U.S. workforce is not still employed in agriculture. Farm workers had better paying opportunities in the cities creating labor shortages on farms. As aging slows the growth in the labor force we may expect to see some tightening in the labor market (i.e. unemployment falls).

This means that workers can be more selective in the jobs they choose. Perhaps no one will want to work the midnight shift at convenience stores. This could mean that Wal-Mart will have to pay their clerks more and hotels and restaurants will have to offer higher wages for housekeepers, bellhops, and dishwashers.

Higher wages will be in part passed on in higher prices, which means that we might have somewhat fewer convenience stores, Wal-Marts, hotels and restaurants. The least productive jobs will go unfilled. This is what always happens in a dynamic economy. What is the problem?

In fact, measured productivity numbers are unlikely to pick up the fill gains that may be associated with lower populations. Large populations and crowding put enormous stress on the environment. Imagine having commute times cut in half if smaller populations eliminated rush hour congestion. This would not be picked up in productivity measures.

Similarly, increased access to desirable locations, such as lower prices for waterfront property, would not be picked up conventional measures of productivity. And of course the reduced pollution, including lower levels of greenhouse gas emissions, would also not be picked up in standard measures of productivity.

So, what’s the problem with low birth rates and declining populations? Well, for some people I just described it. The folks at the top don’t like to think of a world where workers can tell the manager at Wal-Mart to shove it. The idea of a world in which ordinary workers really do have serious job options (the one we used to know) is a nightmare.

Some of the demographic fear mongers are openly nationalist in the sense that they want the United States or their home country to be a great power in the world. The ability of a country to flex its economic and military power will depend on its level of economic development and also to some extent on its population.

For these belligerent nationalists, the problem is that there may not be enough children for future national leaders to be sufficiently powerful. In other words, the problem is not that our children and grandchildren will be suffering, but rather that their leaders will not be the big tough boys and girls that the demographic fear mongers idealize.

In short, there is no demographic problem facing wealthy countries. The only problem is that people with poor math skills and imperialistic designs hold positions of influence and power.

 

 

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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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