Get used to zombie economics

July 10, 2013

Zombies are neither really alive nor fully dead. Moviegoers know that, but the idea is also useful in demographics and economics. Although economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms.

The demographic trends are well known. For the past three or four decades in most developed economies, the number of children born has been too low, often by a wide margin, to keep the population constant. Japan is the leader in this decline. Indeed, the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health.

Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. But as in a horror film, the nation’s life-force is waning. Over the last decade, the number of Japanese people aged between 20 and 25 years old has declined by 22 percent. Since there is almost no immigration, the demographic future is easy to predict: another 22 percent drop over the next 20 years.

By comparison, the euro zone decline looks modest: a 5 percent fall in the size of the 20 to 25 age group in the past decade. Some parts of Europe have relatively high birth rates, and immigration keeps the numbers up. Still, the region overall can look forward to almost certain demographic decay.

The United States has resisted the zombie curse. The number of 20 to 25 year olds is 12 percent higher now than a decade ago. A dip is likely in the next few years, thanks to the lingering effect of the sharp decline in family size after the post-World War Two baby boom. But thereafter, the native-born young population should stay almost stable. With immigration, it will probably keep rising, although more slowly than in the past.

Economic zombification does not necessarily make people poorer. Wealth depends on the productivity of the economy, not the number of people or their ages. But it does have consequences.

The most obvious is much slower recorded GDP growth. The decline is larger than simple comparisons of total populations or workforces would suggest. In zombification, the young people who would join the economy if the birth rate were at or above the replacement level go missing. It is a significant gap, because young adults start new households.

Household formation requires a lot more than clothes and bedding. In developed economies, new families need houses, cars and the other infrastructure which makes modern life so comfortable: power stations, cables, roads, computer servers and airports.

Infrastructure requires capital investment, so family-starters are the most GDP-intensive portion of the population. When the young cohort is growing, massive investments are needed just to keep consumption steady. Where the group is shrinking, national disinvestment can go along with increased consumption.

That has been happening in Japan and perhaps in Europe. I believe this infrastructure zombification explains as much of the seemingly weak recoveries from the 2008 recession as financial entanglements and poor labour-market policies. In reality, the recoveries are not that weak, adjusted for the zombie effects.

The demographic shift also puts severe pressure on the fiscal system. Governments have to turn to a shrinking workforce to find the funds for pensions and healthcare for a larger generation of retired people (who are also on average living longer than their parents did). Deficits, which amount to a hidden tax, are hard to avoid.

The imbalance of savers and spenders may also affect asset prices, but the evidence is inconclusive. More certain is the trouble that comes when monetary policymakers don’t grasp the new reality. Unrealistically high growth expectations support dangerously stimulative monetary policies.

Logic might suggest that the demographic shift would be good for employment, as more people leave the workforce than try to join it. Reality, however, has been different. Unemployment is a worse problem in almost all rich countries now than when their populations were increasing strongly.

My explanation for this is that the last five years or more of disorder in the fiscal and monetary systems has destroyed too many jobs and delayed too many retirements. There might be something else going on, but economists pay little attention to zombification, so there is little research addressing the issue.

The professionals also do not discuss whether the decline in a nation’s life-force leads to economic stagnation. It’s a plausible notion – if the generational imbalance is large enough, the caution of old people could well smother young people’s new ideas.

For now, there are few unequivocal signs of such serious damage in Europe or Japan. But zombification has only begun. There are 17 percent more Japanese in their 40s than in their 20s. In a decade, there will be almost 40 percent more. Expect a rough transition.


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In effect you have less demand for products, as noted, but also less demands for new jobs. The GDP will shrink in countries where the populace continues to decline, but only in countries where a minimum wage is implemented will you really feel the burn. Imagine being forced to raise your prices because you have to pay your workers more, but less of your products are selling because there are fewer consumers. That will cause more companies to lay off people, which I believe will further increase the lack of demand for products (due to lack of consumer money). It is a self feeding cycle which could result in an economic collapse. Any government policies made now need to consider the shifting workforce, global economic environments and the increasing dependence on welfare systems.

Posted by NorthernLight | Report as abusive

”There might be something else going on,”

Thought provocative, from another viewpoint, we can interpret fiscal, monetary, technological… and other forces as forces of liberation.

Natural answer for ongoing reinforcement of structural failures.

Posted by satori23 | Report as abusive

As usual, a perceptive and thoughtful look at the “new normal”.

Our societies are learning how to do what must be done with fewer and fewer people. It is for our economists to figure out how the END of most forms of “growth prosperity” can translate into less environmental damage and perhaps maintain (and eventually improve) the “standard of living” in modern economies.

Certainly in a world of SEVEN BILLION humans it is time for ALL nations to eliminate fiscal incentives for large families and encourage a better life for those already here. The challenge of today’s “Digital Revolution” is easily as significant as was those of the Industrial Revolution.

We live in interesting times!

Posted by OneOfTheSheep | Report as abusive

Remarkable article, which further illustrates the madness in the extreme and experimental monetary policy adopted by the Fed.
Continuous, strong stimulation may work on a healthy young person, to some extent, but it’s much less likely to achieve miraculous results on a middle aged or elderly person, while being more likely to create irreparable damage to them.
Ask your doctor about it…

Posted by reality-again | Report as abusive

This has happened before. In late Imperial Rome, population declined radically. Lots of reasons have been advanced- from lead poisoning to onerous taxes but a likely cause of modern declining birth rate is the cost and complexities of modern child rearing. In any case, the ramifications are huge.. fortunately by then I will be dead.

Posted by VenerableBill | Report as abusive

An article that shows some original thought – refreshing. I do question the point about the young being ‘infrastructure intensive’ – all the roads, houses, airports, power stations and cables are already in place – cars and servers are comparatively cheap. If anything, a zombiefying economy should have a surplus. I believe the real issue is one of inability for the ‘haves’ being the so called 1% – the land owners to transfer wealth to the younger generation – this is why the jobs of the young do not pay enough to (say) buy a house when in the 1950’s, they did. It is a controversial idea, but I part of me believes the long term solution is to introduce a 90% estate duty – the duty must not go to the government but into the broader economy. This would allow the good of capitalism (innovation, individual contribution) to go on without its downside – inequality between the young and the old, the 1% and the 99% and so on.

Posted by BidnisMan | Report as abusive

The article raises some issues concerning demographics, but is entirely speculative (no empirical basis) with regards to the economic effects. Economics is remarkable in showing us that seemingly plausible speculations can be completely wrong when it comes to reality. Nevertheless, I would suggest that having Social Security kick in at given “full retirement” age is problematic in terms of changing demographics. Speculatively speaking, perhaps “full retirement” for Social Security should be percentage based – only the oldest x% of the work force. This would eliminate much political theater in periodic fixes to Social Security.

Kudos @OneOfTheSheep for adding an interesting twist to the issue.

Posted by QuietThinker | Report as abusive

This problem is greatly exacerbated by the huge student loan debt, further delaying the economic stimulus from new families.

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Than you for thought provoking an well written article. My two cents have already been covered.

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