Get used to zombie economics
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.