2010-02-23

Random thoughts on population decline, economics and the Islamic hordes

One of the greatest errors made in modern studies of demography and economics is the assumption that population decline and an ageing population is somehow disastrous.

Behind this assumption are two further assumptions - that taxes are somehow bad and that a decline in GDP is bad.

It is true that many western nations will have a declining population by 2050. Many of these nations have old age pension systems funded by tax revenue, so the retired and aged people living in these countries will be supported by these taxes.

But of course the assumption is that increasing these taxes are bad. They're not. And the reason is that when a population declines, a country is spending less money in the following areas:

  • Property: Less people means less demand for property.
  • Infrastructure: Less people means less need for new water, electricity and telecommunications infrastructure to be built.
  • Education: Less people at the younger age spectrum means smaller schools and colleges.

So for all the doctors and nurses and administration staff that is needed to support an ageing population, there will be a drop in demand for constructions workers and teachers to compensate for it. In other words, an increase in welfare spending on the aged is matched by spending decreases in other areas of the economy.

Ah, I hear you say, but constructions workers and teachers are essential for economic growth whereas nurses and doctors looking after retired people are a drain on the economy. Not necessarily - they are all producing goods and services. What you're worried about is GDP.

An increase in GDP is not necessary for good economic conditions. Economist Robert Solow's exogenous growth model proves that the natural state of an economy without any growth inputs is one of stabilisation. In other words, it is quite possible to have a stable state economy that provides workers with full employment.

Of course, when a population declines the effect upon the economy is negative. Yet that is not necessarily a bad thing. If an economy is in decline as a result of a population decline, the trick is not to aim for growth, but to focus on GDP per capita. In other words, so long as GDP per capita increases, total GDP can continue to fall. Another way of looking at it is to ensure that GDP decline is slower than population decline: If GDP declines by 0.5% in a year while population declines by 1% over the same period, then you have a good thing happening.

There is one final problem with people worried about population decline - they do not seem to understand basic demographics. "Populate or Perish" is one catch cry that sums it up - we must increase our population or else our nations will die out.

That's rubbish.

Take the USA. In 2009, the USA had just over 309 million people. If the population in the US begins to decline such that there would be 209 million people by 2109, is that such a bad thing? Population decline won't wipe a country off the map - no one is going to "perish". Unless, of course, people somehow think that Moslems will continue to have lots and lots of babies and take over the world - a common semi-racist belief amongst many. It is racist because it is based mainly upon ethnic assumptions and because it assumes that such ethnicity will not change. The reality is that many Moslem nations have exhibited a substantial drop in fertility rate over the last ten years.

Demographers have pointed out that when you take into account things like infant mortality rates, accidents and other conditions, the average woman must have 2.1 children in order for the population to remain stable (ie 10 women producing a total of 21 babies). If the average woman has less than 2.1 children there will be (eventual) population decline, while if they exceed 2.1 there will be (eventual) population growth. Of course, many western nations have fertility rates of 2 and below, which indicates population decline. But here is a list of nations with predominately Moslem people who are near or below 2.1:
  • Bahrain: 2.29
  • Lebanon: 2.21
  • Kuwait: 2.18
  • Indonesia: 2.18
  • Turkey: 2.14
  • Iran: 2.04
  • Tunisia: 1.93
And all of those nations have declined from higher fertility rates in the past. This proves that there are Moslem nations that are not breeding children to take over the world, which means that Moslem nations which are having lots of children can also drop down to low birth rates.

In summary, population decline is not an economic problem, it will not cause economic and social chaos and it will not allow a horde of Moslems to take over the world.

10 comments:

BLBeamer said...

If Solow's model demonstrates it is "quite possible" to have a stable state economy that provides workers with full employment, why haven't we seen one?

Wouldn't it be more accurate to say that Solow demonstrates theoretically how, given a certain set of assumptions, it is possible to have a stable state economy that provides workers with full employment?

BLBeamer said...

Regarding population decline and decreased GDP: May I assume that the Black Death epidemic in 14th Century Europe was a net positive, then? ;)

One Salient Oversight said...

This is interesting:

Prior to the Black Death, the economy was saturated. The buyer or entrepreneur and what they were willing to offer determined wages, prices and rents. With the Black Death, came a huge vacuum in the workforce. Suddenly, workers and their goods were in much higher demand, enabling those who survived to be in a much better position for negotiation. "The economic performance, was profoundly altered in this period." Wages rose, as did prices, while rents lowered. Evidence supporting this can be found in contemporary sources.

I haven't read the whole article yet, but it seems to conclude that, for those left behind, net economic conditions were quite good.

One Salient Oversight said...

Of course, the differemnce between the effects of the Black Death and the effects of a low-birthrate induced population decline is the speed at which it occurs. The Black Death was faster at reducing population, which means that any GDP per capita benefits of a low-birthrate induced population decline will be slowly brought about.

BLBeamer said...

I browsed the linked article, probably missed some things, but my initial impression is "unconvinced." In economic terms, when the population of Europe declined by 40% in less than a decade, the society lost the production and innovation of millions of people.

That can't be a good thing, even if the survivors found their relative negotiating position temporarily enhanced. Wealth declined: rents went down, crops did not get planted, etc.

I was unable to follow the link he provides to note [1] to find out about the "saturated" economy. The concept strikes me as questionable, I would have liked to read how the author defined it.

One Salient Oversight said...

The economy of Europe at the time did lose the productivity of millions which was why GDP dropped.

But what occurred was a general decrease in demand accompanied by stagnant supply - especially in the area of housing and roads.

And while lots of crops didn't get planted, there was plenty of land for the surviving farmers to use - they didn't have to cut down forests to increase the amount of cultivatable land.

Farmers would also need beasts of burden like horses and oxen, which would have remained alive while their human masters died. The tools of dead farmers like ploughs were no longer being used either, thus increasing their supply for the surviving ones.

With crops no longer being planted, forests would have regrown, thus increasing the supply of lumber. Forest animals would have also increased in number, which would increase the supply of game for food and trapping.

Essentially what occurred was massive demand destruction, with no corresponding decrease in the supply of natural goods needed by medieval Europe. This would have a net deflationary effect on prices for such things.

So while the ordinary European farmer or town dweller would have cheaper food and cheaper housing costs, any skills needed by the upper classes would increase in demand. A virtuous cycle begins.

So while the amount of goods and services suffered a massive decrease, those left behind were nevertheless richer.

How about this for an example:

1) World A suddenly increases the supply of oil by 100%. Prices drop and everyone is richer because things are cheaper.

2) World B suddenly decreases the demand for oil by 50%. Same effect as World A.

(note: this is one of those "all things being equal examples")

BLBeamer said...

The "all things being equal" scenario doesn't fit, though, because if World B suddenly demanded 50% less oil, there must have been something else being demanded that was a substitute for oil and the price of that would be bid up as people demanded more of it.

If the demand dropped because of a massive plague, then all the millions of vehicles, factories, etc. that formerly used oil would be idle. That equates to a poorer world.

Eclipse Now said...

@ Beamer:

Innovation amongst a higher population is one point: but surely a world of 5 billion will "get by" and still continue developing medicine, science, the arts, and culture?

Now another consideration: how productive are the poor? What about the undeveloped bottom 2 billion? Just how much science and technology and culture innovation are they contributing as they struggle to find enough food to eat each day?

If we could develop and educate Africa (and other 3rd world countries) and bring on a demographic transition their population increase would finally stabilise and decrease and their overall political stability, economic prosperity and law and order might improve as well.

This would VASTLY increase the number of 'contributing citizens' while decreasing the overall world population.

Do we want a world of 9 billion with the bottom 3 starving and in poverty and draining the resources and energy of the top 6, or a "stable" world of 6 billion? Which will contribute more to overall progress?

Eclipse Now said...

OSO,
here's another REALLY good article on the economics of ageing populations.

http://tinyurl.com/ykjomsh

2 teaser paragraphs:

"In fact, no fewer than 11 OECD nations achieved faster per-capita economic growth than Australia from 1997-2007, despite slower population growth or even in some cases no population growth or a slight decline.

Clearly enough, experience shows us that rapid population growth is no guarantee of economic prosperity, and conversely a stable population does not doom a country to economic failure."

apodeictic said...

I'm not so sure your own position "seem[s] to understand basic demographics".

First, you are right to point out that given a declining population "the trick is not to aim for [economic] growth, but to focus on GDP per capita". If you can manage to keep GDP per capita steady or even increase it then a declining population shouldn't present too much of an economic problem. But the all important question is whether this is possible in practice. And this brings me to my next point.

Secondly, while population decline per se may not present an economic problem, too rapid a decline most certainly can. Your analysis fails to consider the rate of population decline. A society with a birth rate slightly below replacement level (eg 1.9) is a completely different proposition from a society with a a rate well below replacement level. It is my contention that (excluding the effects of migration) the further below replacement level a society's birth rate falls the harder it is in the long run to keep GDP per capita steady or actually increasing it. The point to be made here is that many modern Western nations have worryingly low birth rates. I'm not particularly worried about the sustainability of societies with birth rates of 1.8 or 1.9. I am, however, worried about the future of societies with a birth rate of 1.3 unless the birth rate were to pick up again.

Thirdly: tax. To state that the people whose position you are criticising assume that "taxes are somehow bad" is a crass oversimplification. Unless one is an actual anarchist then presumably one accepts some level of taxation as morally justified. So this is most definitely not a matter of people saying carte blanche that taxes are "bad". Rather the position is one of "too much tax is bad".

Once we accept this there are two distinct issues: (1) how much tax can the state justifiably (i.e. as a matter of political morality) impose, and (2) how much tax can the state pragmatically impose.

As to (1) I (along with many others of a right of centre disposition) happen to think that modern Western nations exact too much money in taxes (and are acting immorally in doing so) but I don't thereby think that "taxes" are "bad". But the much more crucial question for an economic analysis is (2). Regardless of how much tax we think the state is morally justified in exacting, there are practical constraints to the amount of tax it can in fact exact. There are all kinds of ways people will avoid paying tax if they find the burden intolerable, including under-reporting of income and assets, asset-shifting, creative accounting, emigration and even outright rebellion (such as a revolution). Importantly, people and companies -- often the most productive in a society -- can and do get up and leave when the tax burden becomes intolerable.

Fourthly, you fail to consider the existential threat that too low a population can present. You cite a future USA of 209 million. Such a scenario would not be such a big deal and a USA of 209 million could probably still defend itself from invasion. But could a USA of only 9 million? I think not. Now the USA is not really a candidate for this kind of problem, but Russia (to pick an example) with its low birth rate and sparsely populated East could very well be. Now people outside of Russia might not think it such a big deal if the Russian Far East were to change hands to, say, Chinese control, but I'm not so sure that Russians would see it that way. Am I saying that this scenario will happen? No. But it certainly becomes more likely the lower the population. And what if we're not just talking about a particular region but an entire nation and its culture becoming extinct?

Finally, I haven't considered immigration in my reply. All I will say at this stage is that immigration is not a panacea to the problems presented by a low birth rate.