The demographic effect

January 23, 2013

The populations of many countries are declining in a time of peace and prosperity. That unprecedented and basic change in society must indicate something, but what? The experience of Japan, where the trend is most advanced, provides some hints.

Until about 1950, Japan followed the once universal pattern of population increasing along with incomes. Then the birth rate began to decline. By around 1970, the birth dearth began; from then on there have been too few babies to keep the population constant. For the past two decades, roughly 140 children have been born to every 100 women. At that rate, each generation is about a third smaller than the last, although lengthening life expectancies kept the total Japanese population from falling until 2011.

One effect of this demographic transition is undeniable. It has sharply reduced the size of the dynamic core of the economy: the people who are starting their adult life. They bring ambition, flexibility and a strong desire for new housing and amenities. In Japan, this group, the people between 20 and 25 years old, is a quarter smaller now than in 2000, and is set to decline by another 15 percent over the next two decades. Demographic factors are not the only reason Japan’s GDP growth has been slow – 0.6 percent annual rate over the last decade – but they have played a major role.

Still, the top heavy age pyramid – far more old than young people – has not obviously crippled the Japanese economy. In the last decade, GDP growth per working-age person has increased at a respectable 1.1 percent annual rate. It is probably unrealistic to expect a much faster pace. Unlike the ageing societies of Korea and China, Japan cannot produce and invest more to catch up with the richest nations; it is already a world leader. In comparison to European nations with equally low birth rates, Japan has far fewer immigrants to contribute to GDP.

Indeed, the demographic surprise in the Japanese economy is probably not that growth has been slow, but that it has not been slower. The workforce might well be expected to become less productive and innovative as its ages and shrinks. But the only sign of that in Japan, and in Europe, is a loss of global market share in the fastest moving consumer-facing high tech sectors – and demographic stultification is not the only plausible explanation for that retreat. It seems that modern economies can work remarkably well with relatively few young people.

Modern financial systems may be another matter. Even before considering demographics, they are probably the weakest aspect of industrial economies: inefficient, costly and prone to explosions. The productive economy can easily shift from feeding babies to taking care of old people. For the financial economy, the corresponding shift could prove disastrous.

In Japan and many Western countries, giant pension funds have been built on the economic fiction that societies can pay pensions out of savings. In fact, the income of the elderly always comes out of current production. Supposed pension savings have already helped distort bond markets and government finances – pension fund purchases of Japan’s government debt have contributed to some of the lowest yields in the world, funding fiscal deficits which are among the world’s highest as a share of GDP. The time will come when there will be fewer young savers to buy bonds than old pensioners who wish to sell them. At that point, the distortions would reverse: yields rise sharply, provoking a massive financial crisis.

Bold and determined politicians could avert trouble by using their power to neutralise harmful financial instruments. However, great political leaders are rare these days – and I think the new generation gap contributes to the shortage.

In prosperous, ageing and shrinking nations there are too many voters who are well established and afraid to take risks, too few who are young and adventuresome, or have young children whose interests they wish to advance. I believe that ageing has already made Japanese politics more arthritic. Only in a rigid political environment could the plan of Japanese Prime Minister Shinzo Abe to move from basically flat prices to a 2 percent inflation rate be considered radical. Europe is similar. Progress on such ambitious projects as the euro and banking union would be much faster if there were more young Europeans and fewer old Germans and Italians.

The Japanese experiment with small families has lasted long enough to suggest that a low birth rate neither enriches nor impoverishes but does encourage financial fragility and political calcification. The negative effects should be enough to discourage even enthusiasts for fertility control and negative population growth. While individuals may like the freedom and the environment may be less stressed, demographic decline could prove impoverishing for society as a whole.


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You’ve done your homework well!

Yes, by definition, without population growth there are ever fewer children from ever fewer young adults, who you term “…the dynamic core of the economy…”. They still “…bring ambition, flexibility and…and amenities.”

It may be that “new housing” will be not a significant desire. Perhaps “comfortable housing”, downsized or upgraded from that existing, will be preferred. That would be good for the Earth, with the ever-growing “footprint” of civilization covering arable land slowing, coming to a halt, and perhaps even reversing.

With ever greater automation and utilization of the power of the computer OF COURSE “…modern economies can work remarkably well with relatively few…people…”. But the young in any modern work force are always the last hired and first fired because their limited experience following academic preparation still requires “on the job training” to do well what more experienced workers already know how to do efficiently.

“The populations of many countries are declining in a time of peace and prosperity. That…must indicate something, but what?” Well,, for one thing, in peace countries don’t need cannon fodder. In prosperity, given the availability of birth control, more and more people think long enough to reach the conclusion that maybe their life will be better if they don’t “invest” twenty years and a quarter million dollars in each child.

When free peoples with choices refuse to stay with the “old ways”, those whose living is made from “reading the tea leaves” of the past to deduce the future are suddenly blind. But isn’t it well known that birth rates always decline with increasing prosperity? So isn’t it time to figure out an economic structure that produces ever increasing prosperity and reducing the adverse effects of humanity on our Earth?

A society that is more automated and efficient need not become less productive and innovative as it ages and shrinks. It becomes MORE than just a “workforce”. America is already experiencing “…financial fragility and political calcification” and the cause isn’t our falling birth rate. There is no reason whatsoever that a smaller, shrinking human population become increasingly “impoverished” with fewer mouths to fill and more time to think and innovate.

But we need both optimists and pessimists. The optimist invents the airplane and the pessimist invents the parachute! It’s all good.

Posted by OneOfTheSheep | Report as abusive

Wow… this is one of the more, I am not even certain what to call it, interesting articles I have read. You speak of growth being at about 1.1% a year… All most all of the growth is due to deficiet spending.

You are so confusing the shift in demographics with continued health to the prosperity of the country. In point of fact the country is actually on the verge of taking some fairly extraordianry measures to correct what is seen as the 2,00 lb gorilla in the room, the debt.

I am simply shaking my head as I read this. The are dying a slow death, which cannot be made apparent yet and you write this article? Wow… I am trying to see if there is any kind of clue as to your credentials to not have been questioning WHY the economy had managed to continue it’s slow and steady growth but instead of coming to some of the most obvious conclusions, that Government interferenece is creating a false growth rate you instead draw a whole differnet set of conclusions.

Anyway… wow…

Posted by Innocentious | Report as abusive

There is really nothing new here. So, the Japanese have a problem. So do the Germans. We’ve known that for decades. But in the USA we’ve got plenty of children. Probably more than we need. The real trick is to give them a helping hand, not saddle them with mountains of debt or let them rot in poverty.

Posted by DrWhoWho | Report as abusive

What are we to do with you Mr. Hadas?

You keep babbling incoherently about things about which you know absolutely nothing.

Japan is the exception that proves the rule — only a tightly organized homogeneous society like Japan could possibly survive as well as it has under the circumstances.

THAT is the lesson to be learned from Japan.

You state in conclusion, “The Japanese experiment with small families has lasted long enough to suggest that a low birth rate neither enriches nor impoverishes but does encourage financial fragility and political calcification. The negative effects should be enough to discourage even enthusiasts for fertility control and negative population growth. While individuals may like the freedom and the environment may be less stressed, demographic decline could prove impoverishing for society as a whole.”

Your conclusion is deeply flawed for at least two serious reasons:

(1) Aside from the obvious fact that the earth is already straining its resources with its present population, you and other wealthy morons seem to think that there are no limits to growth (which is the fallacy capitalism is based upon).

(2) Countries with rapidly growing populations are HIGHLY unstable, which “could prove impoverishing for society as a whole” as we begin to seriously run out of resources and resource wars begin.

We need to understand that the basis of our global problems are due to excess population, and begin to do something about it before we end up as just another extinct species that refused or was unable to change.

Posted by PseudoTurtle | Report as abusive

Come on you slaves, birth some more fodder for the meat grinder.

Posted by brotherkenny4 | Report as abusive

Mr. Hadas. The Opinion piece is excellent and though provoking. I don’t agree with your conclusions. Our current economic model is based on perpetual growth. The author that is blatantly advertising on this site via comments has pointed out many times that population in not very well considered in our economic models. I agree with him on that. I think Pete also suffers from the forest and tree syndrome with population control being his specific tree.
In this piece, I thought you were about to come to the conclusion that basing everything on “growth” is a very risky model. Works great on paper but not when human livelihoods are attached to it. In other words, the consequences become unbearable for real live people. Why can we not design an economic system that prepares for the future? One that does not require all people to work “full-time”. One that keeps the playing field even both during periods of growth and the average “idle” time. As long as we depend on growth the vast majority will continue to suffer for a long, long time.
I hope you will consider upgrading your web site to allow commenting or other means of discussion. This site is not a safe forum for commenting any longer. Or could you indicate another forum in next piece (without irritating Reuters of course)

Posted by tmc | Report as abusive

Is the decline in population growth related to fertility of the Japanese people. I read that low Hormones levels would affect fertility levels ref erone.html

So all could be explained by low Testosterone levels in Men leading to a severe fluctuation in aging population.

Would appreciate your feedback.

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