Matt Yglesias comes to the defense of David Brooks’s hand-wringing column about declining global birth rates and the burgeoning elderly population (and, by the way, someone should send Brooks’s column to Pat Buchanan – I’d be curious to see how his “legal abortion and birth control” explanation for Japan’s very low birthrate explains collapsing total fertility rates in Iran, Turkey, Saudi Arabia, etc.):
I think it’s worth emphasizing that the problems exist independently of the organization of public retirement programs. Let’s think about Singapore, which has both low birthrates and a semi-privatized retirement system organized around forced savings. How is it that today’s Singaporeans are able to stockpile resources for the future when tomorrow’s Singapore may be a shrinking society? Well the answer is that Singapore is small, and the Central Provident Fund is able to invest in foreign resources. This is one reason why countries like Japan and Germany run such large persistent budget surpluses. Normally people save for the future by (indirectly) channeling present income into the construction of big long-lasting physical structures that will be usable in the future. But the projected decline in Japanese population implies extremely low returns in making investments in Japanese structures. So you want to invest outside of Japan, which means that Japan needs to export more goods and services than it imports. This is all fine as far as it goes but if we talk about an entire world of declining population then you run up against the old adding-up constraint. No matter how many times Angela Merkel implies otherwise, we can’t all be net exporters. The same problem impacting Social Security impacts a private system.
But I’m not sure you need to look at trade surpluses in this light, exactly. If Japan runs a trade surplus, that means the current labor force is forgoing consumption in favor of producing goods for foreigners, so that it can invest the surplus abroad to get higher returns in foreign currencies. If Japan didn’t want to run a trade surplus, its currency would appreciate steadily, which would make the low return of domestic savings more attractive in terms of the ability to buy foreign-produced goods.
This just brings us back to Karl Smith’s point that if the population is static or shrinking, then investment returns go very low – and, in a crisis, real interest rates go negative. (Real interest rates are driven by expectations of future real growth; real growth is basically growth in the labor force plus growth in productivity.) But I think all this implies is that a world of declining populations requires a cashless economy. If you had an all-electronic economy, then nominal rates could go as low as you like, and if nominal rates can go as low as you like then you don’t have to worry about negative real rates trapping a country at well below full employment. And a cashless economy – at least in the developed world – is very much within reach.
Even if we did that, of course, you’d still have the problem that you can’t support a larger percentage of dependents without either higher productivity, more working hours, or a lower standard of living.
But the problem isn’t aging per se; it’s a shrinking labor force as a percentage of the population. And it doesn’t matter why the percentage of the population that’s employed is dropping. Suppose, over a twenty-year period, the age structure and retirement practices of the population remain static, but the average person spends two more years in school at the end of the period than he or she did at the beginning. The labor force will shrink because of the two years “lost” to schooling – and the smaller labor force will need to be more productive to make up the difference. (Presumably, the point of being in school is to achieve just that increase in productivity – but perhaps the schools themselves have become less productive, or perhaps the rising student population has more deficits, such that the schools at the end of the twenty-year period need two more years to educate students to the same level that was achieved at the beginning.)
Even a baby boom initially diverts resources away from the labor force toward providing for the needs of children not yet in the labor force. This won’t lead to an economic boom as the kids grow up if the birth rate remains high because you are continually diverting resources downward. It does lead to an economic boom if the birth rate then declines – because when the demographic bulge moves into the prime working years, you’ve got a whole lot of productive activity relative to your population size. (This is what happened to South Korea in the 1980s, and it would probably be happening to Iran now but for the effect of economic sanctions and poor economic policies by the regime.)
On the assumption, then, that Japan remains resistant to immigration (pretty certain) and that even if its total fertility rate rises it won’t rise enough to make a dramatic difference (also pretty certain), Japan will solve the problem of its demographic imbalance in some combination of three ways. Either it will achieve dramatic improvements in the productivity of the labor force, probably through advances in robotics technology. Or it will accept a somewhat lower standard of living for retirees relative to their prior expectations. Or nominal retirees will make a greater contribution to Japan’s GDP, effectively rejoining the labor force to some degree. I suspect all three will happen to one degree or another – but, again, that “decline” in living standard would be relative to expectations, not an absolute decline. In any event, if there is any country on earth that I would expect to rise successfully to these particular economic challenges, it’s Japan.
Meanwhile, a declining population means more real resources per capita for the rising generation. Less crowded subways. More runs per day on the ski slopes. Japan is a very crowded country. It doesn’t need to get more crowded.
None of this is to suggest that there’s something inherently anti-feminist about worrying about fertility rates. I find Amanda Marcotte’s and Pat Buchanan’s arguments on this subject to be equally unconvincing mirror-images of each other. As I argued before, I think there are perfectly good arguments in favor of making childbearing and childrearing easier that have nothing to do with some putative social “need” for more workers or more innovators and do not depend on assumptions about the “proper” role of women. Most people – men and women – want children, and that want is very fundamental. If the social and economic system makes satisfying this profound desire more difficult than it needs to be, we can do something about it, and call that a gain for human welfare and for freedom, without getting into any conversation about demographics.
Wild demographic swings – in either direction – put big stresses on society, but I don’t see why an aging population is more to be feared than a too-rapidly growing one. Afghanistan and Yemen, Somalia and the Democratic Republic of Congo, all still have really high total fertility rates (and disastrous economies as well – which means labor force growth will badly lag population growth). I am far more worried about the consequences of that fact than I am about the consequences of low fertility rates across the developed (and much of the developing) world.