Stagnation Celebration

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Dean Baker
American Prospect, July 19, 2006
CBSNews.com, July 19, 2006

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Even the most casual consumer of elite American commentary knows about the looming demographic crisis. The drumbeat of warnings that the United States and (more acutely) Europe face some sort of catastrophe due to stagnating or even declining populations has been steady and loud for years. Here in the United States, the defeat of the GOP’s push to privatize Social Security has done little to crack the pundit consensus holding that our aging population will exert a crushing burden on the American work force in the future, through seniors’ demands for entitlements and services.

Happily, we have nothing to fear but the fear mongers themselves. A simple look at the data shows that the much-feared specter of the baby boomers’ retirement doesn’t in fact portend any kind of fiscal or economic crisis. Indeed, one can go further: the prospect of declining populations (due to individuals’ choice, not mass murder or coerced abortions) is actually great news.

Here in America, the story is that the retirement of the baby boomers will lower the ratio of workers to retirees from close to 3 to 1 at present down to just 2 to 1 in 30 years. While this fact is supposed to scare people, a bit of simple economics shows there is no real basis for concern.

Starting with the basic ratios, the rising portion of the population that is over age 65 will be at least partly offset by a declining portion of children in the population. The Social Security trustees project that the share of the population that is under age 20 will fall from roughly 30 percent in 2005 to less than 25 percent in 2035, offsetting close to one-quarter of the growth in the share of elderly. This means that to some extent, we will be simply shifting some of the resources from the young to the old.

But this shift is the less important part of the story. The more important part is productivity growth. We know that, barring an economic catastrophe, workers will be far more productive in 2035 than they are today. Technology will continue to improve, computers will get better, workers will be more educated. Even if productivity growth were to fall back to its slowest pace on record (1.5 percent annually), workers in 2035 would still be producing 50 percent more on average than workers do today. This means that two workers in 2035 would be as able to support a retiree as three workers are today. If productivity grows at the same rate as it has over the last decade (and during the period from 1945 to 1973), then workers will be almost twice as productive in 2035 as they are presently. In this scenario, two workers would be far better able to support a retiree in 2035 than three workers are today.

Even setting aside the productivity factor, the basic scare story of a labor shortage never made any sense to begin with. In Econ 101 we teach that when there is more demand than supply, the price (in this case wages) goes up. Rising wages will not frighten most people. (In fact, rising wages will pull many older workers back into the labor force.)

Of course, if wages rise, then some jobs will disappear. Workers will leave the least productive forms of employment and move to jobs where their labor will be more productively employed. Currently, 15 million people work in the retail sector -- just over 11 percent of the work force. If labor becomes relatively scarce, then stores will have fewer retail clerks on the floor. Convenience stores might keep shorter hours. Are you scared yet?

More than 11 million people are employed in hotels and restaurants -- approximately 9 percent of the work force. If labor becomes scarce, people will be able to afford fewer restaurant meals, and many sit-down restaurants may be replaced by cafeterias. Hotels might clean rooms less frequently and thoroughly. Are you running for the tranquilizers yet?

For anyone who bothered to think it through, this is what a labor shortage means -- fewer people working at low-wage jobs and, therefore, fewer convenience stores, restaurants, dry cleaners, casinos, amusement parks, and nannies. The looming nanny shortage may terrify policy elites in Washington, but a future where most workers won’t take those jobs because they can find higher-paying employment probably looks pretty good to most people.

All told, there is simply no real problem here. In fact, in many ways the country and world will benefit from slower -- or even negative -- population growth.

Fewer people means less pollution and less crowding. Think of global warming. The basic problem is that we are spewing too much carbon dioxide into the atmosphere each year. We can hope to reduce the amount of carbon dioxide we emit each year by both improving technology and also changing our habits. But cleaner technology will take time and carry a price, and people resist changing their habits in ways that impinge on their lifestyles. If the population is smaller, or doesn’t increase as much as is projected, we can achieve the same reductions in greenhouse gas emissions with less conservation.

It is not just global warming that will be affected by the size of the U.S. and world populations. All forms of pollution increase or decrease roughly in proportion to the size of the population. Similarly, the drain on natural resources is also proportionate to the population. For example, the water shortages that are afflicting many western states will worsen if their populations continue to grow rapidly. Land itself is also in limited supply. As the U.S. population grows, the price of prime real estate increases and a larger percentage of the population will find itself living in less desirable areas and saddled with longer commutes to work.

Japan, which is the poster child of those hawking the declining population horror stories, is already demonstrating some of the benefits of its slow population growth. Thirty years ago, the Tokyo subway system was notoriously over-crowded, with the city paying people to shove commuters into subway cars. While the city remains congested, it is considerably less crowded today. Land prices have also plummeted (partly due to the collapse of a real estate bubble), so that middle-income families are increasingly able to afford reasonable-sized apartments that do not require lengthy commutes to their jobs.

Fewer people doesn’t just mean shorter commuting times, it also opens up access to desirable land for recreation and vacation purposes. Martha’s Vineyard, Cape Cod -- such desirable sites are inherently fixed in supply. The consequence of a rising population is that a smaller share of the population will be able to enjoy those sites unless they can be opened up in ways that will accommodate more people while making them less attractive to everyone (think of Ocean City, Maryland). The same principle applies to any area of natural or historic interest. If you’ve been overwhelmed recently by the crowds at a national park, museum, or national landmark, it should be easy to understand some of the benefits of a declining population.

In short, pundits may spell doom, but we can rejoice in the knowledge that they're spellbound by a delusion. There is Santa Claus, there is the tooth fairy -- and there is our looming demographic crisis.