The Demographic Deficit

18/04/2011

Intro

In the quest for a sustainable economy, politicians and economists in developed countries are busy juggling taxation, retirement age, GNP growth, savings rate and public debt. All in vain, if the underlying demographic deficit remains unaddressed. With a steadily diminishing pool of people to produce the actual goods and services, no amount of taxation or saving can keep up with the inexorably increasing needs of the elderly, the sick and the destitute.

The very fabric of democracy will be threatened, when the state cannot live up to its commitments. Rampant inflation could wreak havoc with financial stability. The retired and other dependents would deliver the majority of the vote and wield political power. Under such circumstances, the young and capable will probably vote with their feet, leaving the rest to fend for themselves. Social security may well revert to an ancient format, when children took care of their parents.

We are heading for a geriatric society, a unique event in human history. The first signs of this adverse condition are already visible. Economic growth is stagnating and in most developed countries the public deficit is approaching a critical limit. The long-term solvency of many countries is in question.
 

Towards the precipice

Japan is the first harbinger of things to come. A sustainable economy requires a stable population base, which implies a total fertility of 2.1 children per woman. In Japan fertility has gone downhill and is now touching 1.2. Total population is starting to decline and the economic performance is permanently in the doldrums.

Other countries are following suit. The fertility of the southern fringe of the European Union hovers around 1.4 and the economy is following the Japanese pattern. Some EU-countries are better off, but no one attains population sustainability. The future of Europe looks bleak, to say the least.

Some countries, like South Korea (fertility 1.2) and Singapore (1.1), are bucking the economic trend but the boom is unsustainable. They are now riding a crest of high productivity, because the relative number of children and elderly (the support ratio) is temporarily very favorable. The decline will be steep, as the number of working-age people will fall almost by half in every generation.

The escape from this demographic trap is exceedingly difficult, because an increase in fertility brings relief only a quarter of a century later ̶ an eternity in politics. Meanwhile the investment in (non-voting) children must compete with the cumulating demands of the voting elderly, who might constitute an electoral majority. Improved technology will be helpful, but immigration creates its own problems. Anyhow it is frowned upon in the most exposed countries.
 

Perverted economics

Formerly a big family meant better social security for the parents as well as more hands in the fields. Nowadays the rationale is reversed in rich countries. Children are an unequivocal economic burden, but fortunately homo economicus does not reign supreme. Otherwise parenthood would be abolished except among the subsidized poor.

Even so economic pressure bears heavily on our reproduction. Furthermore it introduces unfair inequality among the citizens. The non-reproducing are free riders, who rely on the efforts and expenditure of parenting people for their old-age sustenance. A middleclass childless couple enjoys a massive economic advantage compared to a family of five or six. This is a disgraceful injustice.

In their defense the childless refer to the looming overpopulation of the world. This is bogus. A surplus of poor, uneducated immigrants cannot make up for the demands of a modern economy. At present trends, world population will anyhow top out at 9-10 billion in the 2040ies. Economic growth reduces fertility in poor countries, which is good news. The rich countries are now grappling with the rapidly emerging downside.
 

Face the facts

There are no simple solutions and for that very reason the fertility problem should be publicly discussed. But the whole subject has been taboo. To open the debate, human capital should be included in the national economic accounts.

Human resources, the decisive production factor, are not included in current GNP calculations. This omission is a residue of an obsolete economic logic. An overabundant resource like air and water has no exchange value because supply is (or at least was) unlimited. This presumption formerly held for manual labour as well, when capital was the main bottleneck of the economy. Now it is manifestly untrue.

Reduced replenishment of human capital is equivalent to the wear and tear of production machinery. It must be accounted for by annual depreciation in order to avoid an overwhelming loss when the equipment is ready for the scrapyard. For human capital we must in addition carry the huge cost of decommissioning, which should be included in balancing the books. Otherwise we are living in a lie and are in for very unpleasant surprises on the day of reckoning.
 

The moral challenge

All this is rather self-evident, but most people live in denial ̶ or they do not care. Hopefully the citizens will take note, when they read in the papers that the trumpeted economic growth actually is a decline, that we are consuming our capital base and become poorer by the day. If we do not want to change our ways, we at least take the decision with open eyes.

For the destitute reproduction is irresponsible. For the wealthy the reverse is true. At bottom we are facing a fundamental moral challenge. Are we responsible for the long-term future of our community? What if nothing means anything once I am dead? Without offspring, at least in the collective sense, life loses the core of its meaning. Without children there is no future.