The Economic Consequences behind Our Disappearance

As the world contends with historically low birth rates, Professor Ignacio de la Torre examines the economic consequences of shrinking populations.

In a few decades, a phenomenon will take place that has probably not happened since the Black Death: the world’s population will shrink without having suffered a war. It will be a conscious decision. It is true that in the long run we all die, but the people, nation, or the civilization to which we belong, survive from one generation to the next until they are toppled by other peoples, nations, or civilizations that are more powerful. The famous historian Ibn Khaldun defined this ‘power’ as ‘social cohesion’. More backward tribes like the Barbarians were able to bring down an advanced civilization like the Roman Empire because they had a much higher level of internal cohesion. The other point is that the Barbarians had more offspring than the decadent, wealthy Romans of the 5th century.

Humans are programmed to reproduce, just as we are programmed to die, and over many centuries this has worked well in increasing the world’s population. However, over the last few decades, and possibly for the first time in history, the developed world is rapidly moving towards a period of shrinkage. As we know, a birth rate of 2.1 children per female is needed to replenish the current population. We currently stand at around 1.6, with prominent countries such as China and Spain (1.3), and South Korea (less than 1) underperforming. The USA, which in 1990 boasted a birth rate slightly above 2, has since fallen to a figure of 1.7. The trend is similar in emerging countries, which have experienced plummeting birth rates as per capita GDP has improved. Many countries, such as Brazil, have seen birth rates fall from levels above 5 to below 2 in just a few decades, and China only has a birth rate of 1.3 despite having eliminated the ‘one baby’ policy some years ago.

Without wishing to judge the causes of this unconscious collective decision which, in turn, is a conscious one at the individual level, it is worthwhile to analyze the potential economic consequences of this phenomenon.

The baby boomers have started to retire. This means future growth will be more than lackluster.

First, a population decline implies a decline in GDP. This is relevant because GDP is used to pay for pensions, health and education, among other items. It would be remiss of us to think that we have to wait for the overall population to fall in order for GDP to fall. It is simply enough for the labor force (the population willing to work) to shrink. And we are already there. The labor force in the main OECD countries (with the exception of the USA, mainly due to migration, which is coming to an end) and that of China, have been falling for almost a decade. GDP is growing because of the number of hours worked and the productivity of these hours. Since the performance of the latter has not lived up to expectations since the mid-1970s (with increases of less than 2%), we have used the baby boomers to explain the growth of the last 50 years. But the baby boomers have started to retire. This means future growth will be more than lackluster.

Second, it will be very difficult to maintain welfare spending. A social state must be examined horizontally and vertically. Horizontality implies establishing solidarity mechanisms in a nation or even in a monetary zone. Vertically, this solidarity must be sustainable for future generations. As of today, it is mathematically impossible to maintain both. If we give priority to the first over the second, applying horizontal solidarity at the expense of vertical solidarity (children and the nascituri do not vote), it will be interpreted in the future as the most selfish decision of our generations.

Third, a context dominated by an aged population to the detriment of an underrepresented young population tends to result in low interest rates (net of inflation) over a long period. This generates asset bubbles, such as in the housing market, which will paradoxically prevent the few remaining young people from buying a home. This, in turn, will possibly lead to even lower birth rates.

Aging societies are also likely to be less creative and less dynamic.

Fourth, labor shortages as baby boomers retire and are not replaced by young people will imply structural inflation. There are many reasons for the disinflation that began in the early 1980s, but one of the factors cited was precisely the sharp increase in the labor supply as the baby boomers entered the workforce. Now, we will see the opposite phenomenon taking place. In addition, aging societies are also likely to be less creative and less dynamic, which could have even greater repercussions on productivity.

Fifth, tension over immigration is set to increase. This will be especially acute at borders where there is a major difference in levels of GDP per capita. By way of illustration, one of the borders that is particularly noteworthy in this respect is Spain’s border with Morocco. There are countries that have decided to “disappear peacefully” without letting immigration in. Japan is a prime example. Its immigration policy is highly restrictive even though it loses around 200,000 Japanese every year because it does not give priority to growth but instead chooses its understanding of harmony. This is a coherent stance, though it is obviously debatable. In the West, we want to maintain the social state, which is financed by an expanding GDP, yet more and more people are against immigration. Neither position is sustainable.

Keynes once stated: “In the long run, we are all dead.”  We all die, and to philosophize is to learn to die, as Montaigne said. Yet, we also leave a future to the next generation, and that next generation tries to preserve it for the following generation by bequeathing a better legacy. The problem is that, for the first time in centuries, unless productivity springs a surprise, we will be handing down a disappearing world. In economic terms, that is not good. Nor is it fair.


A version of this article was published in Spanish in El Confidencial.


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