CEPR - Center for Economic and Policy Research

We Face a Huge Demographic Problem?

Dean Baker
PBS NewsHour, December 16, 2009

PBS NewsHour asked several economists and financial experts to look ahead to 2010 and answer one question: What is the economic conventional wisdom with which you most degree?  Here is Dean Baker's response.

There is a widely held view among people who are well enough educated to know better that the United States and much of the rest of the world faces a huge demographic problem due to falling birth rates. This view displays an incredible ignorance of basic economics and requires ignoring the world that we see in front of our face.

In the United States, the projections of deficit horror stories 30 or 40 years in the future are usually presented as a demographic story. All the baby boomers will be collecting Social Security and Medicare and there will be a relative smaller number of workers. In fact, it is easy to show that this is a broken health care system story. If U.S. healthcare costs were controlled, then the projected deficits would be easily manageable.

More generally we have been repeatedly warned that in Europe, Japan, and even China, lower birth rates are projected to lead to a crisis due to a shortage of workers. Okay, it's econ 101 time.

In market economies we don’t get shortages. Prices respond to market signals. In this case, the price of labor would be expected to rise. This means that ordinary workers will get more money as their wages are bid up. (Are you scared yet?)

Higher wages will price workers out of the least productive lines of work. We might not have all-night convenience stores open all night or greeters at Wal-Mart. We might have more cafeterias and fewer sitdown restaurants. Valet parking would be less common. Hotels would not change sheets every night for their guests.

The demographic horror story sounds great to me. In a world that is plagued by disastrous levels of unemployment, the image of a world where ordinary workers have their choice of jobs would be a huge step forward.

And, has anyone heard of global warming? As a first approximation, if we have 20 percent more people, we have 20 percent more greenhouse gas emissions. Countries that contained their population have done an enormous service for the planet. If only we had a policy elite that understood the most basic points of logic it would be a huge step forward.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.