The demographic effect
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.