Let’s Talk About Sex: Why More Babies Means More Economic Growth
Maybe the problem is that the topic has something to do with sex. Fertility is always about sex, although sex is not always about fertility. Maybe that’s what makes everyone so tense when demographics is raised as a possible factor in the economic woes of the nation.
Or maybe it’s not sex at all: perhaps there’s something else which keeps economists and financial analysts (except for a small number of specialists) from talking about population issues when they look at economic growth and investment risk levels. After all, we don’t seem reticent about sexually-related topics the rest of the time. I seldom venture down into basic cable without finding quite a bit about sex. Sitcoms are about sex. Dramas are about sex: who will Don Draper have sex with this week? Reality shows are very much about sex, or about fighting about sex.
So maybe the reason we don’t want to talk about demography is that there is some political consensus that places it off limits. When I mention this topic in a speech occasionally, even to conservative audiences, I often sense a political correctness flinch. I have to keep reminding myself that before I talk about the problem of falling birth rates, I have to clear out the old fogs issuing forth from the Rev. Thomas Malthus in the 18th century who thought he discovered that people were the problem. It always surprises me that there is anybody out there who still imagines that the dire predictions of the Club of Rome (perhaps called a ‘club’ because it has been used to beat people about the head and make them babble incoherently) deserve any credence. Then I remember that most people have never heard of Julian Simon and his wonderful book, The Ultimate Resource. Most people just swallow what the professors spoon into their mouths.
But whether it’s prudery or PC-ness: demographics simply plays almost no serious role in the models of the people who talk about money and markets. And that is bad news for the people who depend on them for insight.
Let’s start with a few propositions to get things started:
By definition the economic output of a country has to be a result of two factors…the output per person, and the number of persons.
If you don’t increase the output per person and you don’t increase the number of people, you cannot increase the overall output.
Even if you increase output per person, but decrease the number of persons, you are likely to have stagnant or even shrinking output. Don’t believe me, ask Japan. The world can, and does, have fertility recessions.
The relationship between economic output and population is not an exceptional phenomenon. This pattern holds over very long periods of time.
It also holds over shorter periods of time.
Both data sets above show a relationship between population and GDP, but they both also show a split, in which some nations, particularly those with long histories of cultural and political hostility to commerce and economic freedom, lag behind the rest of the world. In these cases, population helps increase economic output, albeit less so than in the freer nations. Therefore, the best formula for growth is to add more people to the economy and to have each of them become more productive.
Societies which follow the above formula best and become accustomed to high growth face great difficulty when they abandon that formula of healthy demographics and economic freedom. They are forced to handle the transition when they inevitably lapse from prosperity into stagnation. Pension plans hollow out; immigrants don’t assimilate; managers lead their work forces through difficult retrenchments away from growth sectors. Downshifting from a high growth society to a zero growth society is like downshifting from 5th gear to 1st gear while driving on the Autobon – inherently dangerous.
Everything that I’ve said above becomes obscured when one fails to recognize an important demographic fact: in the short run, new people tend to lower economic output per person, because new people tend to be babies. You need babies for long-term economic prosperity, but in the short turn, they lessen that economic prosperity. This means that one of the two things most responsible for growth in the long run is emotionally and statistically associated with decreased standards of living in the short run. The failure of the economic development quasti-government industry to see that something which is essential to long run growth impedes at least one measurement of short term growth distorts the picture and leads to confusion.
Because of this, economic development literature, programs and models which center around GDP per capita tend to be hostile towards fertility. Unfortunately this has become the dominant view in the economic development field, and it tends to unduly idealize the northern European model of infertile, highly educated relatively pro-business welfare states. Genuinely good analysts with good intentions such as Swedish statistician Hans Rosling and Goldman Sachs economist Jim O’Neill have unfortunately succumbed to this infatuation with the Nordic model. But then again they aren’t the first men who have succumbed to the temptations of Nordic models.
Given the short term distortions which occur when one focuses exclusively on fertility rates, other metrics are needed to paint a fuller picture.
One can look at fertility rates on a twenty year delay, but that does not seem to improve the picture very well (perhaps due to the sad complications having to do with infant mortality in developing economies), but a look at changes in working age population paints a much more informative picture.
What they show is a clearly discernible positive correlation between growth in the working age population and growth in the economy. The relationship is backed up both by current (that is the past couple of decades) data and by modern (that is in the past couple of centuries) data.
All of this means that fetus-phobic countries face economic irrelevance, and when they add the additional toxin of socialism, the path to oblivion becomes even steeper and more slippery. One of the things which makes it so slippery is that the road down into the pit looks, for a while at least, like the path to prosperity. By the time all of those nations of dual-earners-one-kid realize that they’re about to become nations of dual-pensioners-one-earner, it’s already too late.
Article originally published on Forbes.com.