Quotulatiousness

February 4, 2013

Everything is cyclical — Baby Boom to Baby Bust

Filed under: Economics, USA — Tags: , , , , , — Nicholas Russon @ 09:56

In the Wall Street Journal, Jonathan Last looks at the demographic changes on tap for the United States as the fertility rate continues to drop below replacement:

The fertility rate is the number of children an average woman bears over the course of her life. The replacement rate is 2.1. If the average woman has more children than that, population grows. Fewer, and it contracts. Today, America’s total fertility rate is 1.93, according to the latest figures from the Centers for Disease Control and Prevention; it hasn’t been above the replacement rate in a sustained way since the early 1970s.

The nation’s falling fertility rate underlies many of our most difficult problems. Once a country’s fertility rate falls consistently below replacement, its age profile begins to shift. You get more old people than young people. And eventually, as the bloated cohort of old people dies off, population begins to contract. This dual problem — a population that is disproportionately old and shrinking overall — has enormous economic, political and cultural consequences.

For two generations we’ve been lectured about the dangers of overpopulation. But the conventional wisdom on this issue is wrong, twice. First, global population growth is slowing to a halt and will begin to shrink within 60 years. Second, as the work of economists Esther Boserups and Julian Simon demonstrated, growing populations lead to increased innovation and conservation. Think about it: Since 1970, commodity prices have continued to fall and America’s environment has become much cleaner and more sustainable — even though our population has increased by more than 50%. Human ingenuity, it turns out, is the most precious resource.

Low-fertility societies don’t innovate because their incentives for consumption tilt overwhelmingly toward health care. They don’t invest aggressively because, with the average age skewing higher, capital shifts to preserving and extending life and then begins drawing down. They cannot sustain social-security programs because they don’t have enough workers to pay for the retirees. They cannot project power because they lack the money to pay for defense and the military-age manpower to serve in their armed forces.

Update: Kelly McParland on the plight of some older workers: “If they’d never worked at all, and gotten by on social assistance, they might still have a financial lifeline.”

It would be cruel (and maybe unfair) to say they made their own beds, but it remains the fact that a great deal of the trouble they face results from the refusal to brook a more prudent approach to public finances for so many years. Programs that were unaffordable were pushed through time and again, paid for by more and more borrowing. When crises developed, the borrowing increased while spending was only rarely curtailed. The curse of deficit financing is its snowball effect: annual shortfalls pile up, pushing up the carrying costs, creating a self-perpetuating ever-expanding spending crisis. When a recession inevitably arrives, there are no reserves to deal with it, and even more borrowing ensues.

After so many decades of pretending it could go on forever, without there being a reckoning, the generation that created it is discovering how wrong they were. Not only is it destroying the retirement dreams of so many near-seniors, it’s preparing a poisoned legacy to hand to the next generation, and perhaps the one after that, unless they recognize the need for greater discipline and finally accept the pain that will necessary to put the process back on a sustainable track.

Canada is fortunate that it faced up to its debt crisis 15 years ago and is still benefiting from that fact, but the public memory is short and there will always be pressure to turn a blind eye to debt, and legislate for today. No wonder people get more conservative as they get older. They understand the price that has to be paid for putting costs off to tomorrow.

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