Monday, June 30, 2008

Baby Bust

The NYT Sunday Magazine had a fascinating article this weekend on the pending baby bust confronting Europe over the coming century. They suggest that if current demographic trends continue, the continent will see its working age population decline by 30 million by 2050. Though this article doesn’t go into much detail on it, other articles in the Financial Times and the Economist last week pointed out another trend where Europe’s immigrants are heading home in record numbers. This may only be a temporary result of shifting world economics, but combined they suggest that Europe may be facing a perfect storm of declining birth rates, increased longevity and reduced immigration (if not emigration).

The NYT article covers any number of potential causes for the dearth of new babies in Europe, from growing secularism to family-job dynamics to government economic philosophies, but the more interesting question to me is what is the impact of a declining a population on society and the economy.

For almost all of history, we have faced growing world with ever more demand and ever more labor happy to fulfill it. This growth has created unending opportunities for creative upstarts to gain a foothold in the economy and redefine whole industries with their entrepreneurial ambition. But what happens when that growth dissipates and we face ever-lower demand and too much supply? Does that entrepreneurial energy similarly fade away?

At a minimum it will force us to redefine our metric of growth and prosperity, shifting from aggregate numbers that are pushed up greater numbers to per capita measures that may continue to inch upward even in the face of shrinking population. No one wants to see declining numbers, and we will quickly realize that aggregate numbers do not adequately reflect what is happening to our income and wealth.

In some respects the slowing and gradual reversal of population growth will be a welcome breather to the strained natural resources on our planet. The unending upward march of oil, food and other commodity prices could make anyone think we are approaching the limit to our consumption. Of course these kind of demographic trends are extremely long term and it will take generations to have any significant impact on global demand. On a local basis however the swings can be more dramatic, and the NYT Sunday Magazine article discusses a town in Germany that had a decline of population on the order of 25% and saw in it an opportunity. They began reclaiming their underused properties and expanded their nearby national forest helping to bring their natural areas into closer contact with the urban environment.

Not only will a declining population affect global demand, but also restrict labor, which will create its own problems. Already industries are grappling with shortages of skilled workers in less glamorous fields and this trend will only intensify. Undoubtedly the great industrial manufacturing base will turn to further automation as the cost of labor quickly rises, but pressure will also grow to improve automation in the services. The long-term consequence of this automation will be increased per capita wealth, but it may cause significant upheavals in the short term as skilled workers grapple with their newfound obsolescence. I do not doubt that automation will become the new boogeyman that free trade is in our current political environment.

Similarly, this labor shortage will have enormous consequences on the social insurance programs like Social Security and Medicare that are provided by governments in the US and Europe. As the distribution of population shifts ever more heavily towards retirees, government coffers will face increasing strain in extracting resources from a shrinking working base to pay out benefits to a growing pool of dependents. How our society will handle this situation is unclear, but some countries in Europe will begin playing out the drama in the not too distant future. Their heavily subsidized benefits and extremely low birth rates put them first in line for a collision.

Fortunately, the situation is entirely dire and suggests a mixed bag of good and bad consequences. Further, it is not even clear that a population bust will occur on a global scale. While Europe and Eastern Asia face extremely low birth rates, they remain high in Africa, South Asia and Latin American. The US has had its birth rate inching upward in recent years and has now returned to a rate of 2.1, which is considered the replacement rate for maintaining a population base. Combined with a healthy immigration flow, the US is expected to continue to grow hitting 400 million souls around 2050.

In the end, birth rates can change and the nations worst affected will have the option to immigrate their way out of any problems for years to come so it uncertain how this issue will play out. Still, shifting trends always are worth thinking about and no trend is more impactful on our society than the size and composition of our population.

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