Population growth is stalling. Here is what it means for politics and economics.
Aging demographics will mean less creative destruction, fewer startups, misallocation, and increased pressure on political and social institutions.
ICYMI: I had a lot of work come out at the end of last year. Discourse Magazine ran my story on the abundance agenda. CGO filed comments on the FTC privacy rule, which I authored. And I released a research paper on common carriage. You can find all my work on my website.
Last week, an important moment passed. The Chinese government announced that deaths officially outnumbered births. I say officially because there is good evidence that China has been cooking the books for some time and the population numbers are even lower than this.
While there is a lot of debate about the official stats, no one denies the startling trend that China and other countries are on. They will soon enter a stage of population degrowth.
The US won’t be spared the demographic crunch in the end, but it will happen to us much later. I count this as a plus because our leaders, if they are smart, will be able to watch how other countries manage the decline and adopt the best strategies in our context.
Already the population slowdown is having a massive structural effect on the economy in the form of less creative destruction, fewer startups, and misallocation, all of which will continue. But I worry that leaders in the US aren’t preparing for what’s coming next. In the very near term, political institutions in the US will be forced to face their own shortcomings.
The US in a degrowth world
Based on current fertility rates and age structures from the United Nations, many countries are expected to see serious population declines by the end of 2100. South Korea (–53%) will be the biggest hit, but Ukraine (–49%), China (–46%), Cuba (–42%), Poland (–42%), and Japan (–41%) are not far behind.
But unlike Ukraine, China, Japan, and at least 61 other countries, the United States is slated to end the century with more people, around 400 million in fact.
For a little while at least, the US will be among a rarified few countries that are developed and will continue to grow. That cohort is small though, and only includes Canada, Australia, Sweden, New Zealand, Norway, and maybe the United Kingdom. But that’s about it. Every developed country in the world will lose significant populations in the coming decades.
The biggest source of new people in the US will continue to be net international migration, which added just over a million people between 2021 and 2022. Although the population is expected to grow, the US population growth is already crashing.
That growth will be uneven. Some regions are going to shrink while others will expand. The South will continue growing, while the Northeast will face declines. And California could also see a dwindling population, like in the last couple of years.
Changes are coming to our institutions
Declining birth rates will put pressure on nearly every institution that this country has.
Healthcare systems will buckle as the average age inches up. Colleges will struggle as the new cohorts get smaller and smaller. Dealing with Social Security and Medicare will be fun since it only faces a deficit of around $114 trillion. You know how everything seems to have gotten worse since COVID? Expect more of that.
Japan is right now undergoing the kinds of changes we should expect in the coming decades. Towns that were once hubs are turning into ghost towns and fields. And on the way down, local governments are being forced to operate with fewer tax dollars. This has meant cities are cutting back on services like public transportation and snow removal, merging schools, laying off government employees, and cutting funds for public parks. Some cities are already experiencing this crunch and more will face it in the future.
As Dean Baker rightly points out, “many countries, notably Japan, have managed to do just fine in the face of a declining population and shrinking workforce. Their people continue to enjoy rising standards of living as their population shrinks.”
But Japan is well managed. Will Mississippi be able to manage the decline as easily? Will West Virginia? While I’m hopeful, I’m skeptical.
California is just beginning to go through this transition, but it is already buckling. For years, California has been able to paper over its fiscal problems with growth. But the state really did a number on itself when it passed Proposition 13 back in 1978. By narrowly constraining the growth of property taxes, state budgets shifted away from property taxes and towards income taxes. Prop 13 is the reason why California has to tax high earners, and it’s the reason why the state budgets can swing so wildly every year.
Proposition 13 is a classic example of a transitional gains trap. This trap happens when one group, property owners in this case, gets a government-mandated benefit that comes at the expense of the public. Over time, that inefficient policy accrues only to the special group, and when it comes time to change the law, they fight against it.
California’s institutional problems might be well known, but other states face similar problems. Will states and localities do the hard work to clean up their budgets and their regulatory codes? Again, I’m skeptical.
What fewer people means for the economy
Fewer people will impact the structure of the economy as well. Truth be told, those trends are well underway.
It is already widely accepted that population growth explains a big part of why fewer new companies have sprung up since the 1970s. The decline in workers accounts for “roughly two-thirds of the decline and why incumbent firm survival and average growth over the lifecycle have been little changed.”
These trends will only worsen since “a decline in population growth reduces creative destruction, increases average firm size and concentration, raises market power and misallocation, and lowers aggregate growth in the long-run.”
As Kopecky & Taylor (2022) explain, aging demographics can help to simultaneously explain three paradoxes: the rising wealth-income ratio, the falling risk-free rate, and an increased risk premium. As they write,
The shifts exert less pressure on risky returns as high-wealth elderly reallocate away from equities: aging makes retirement saving a “crowded trade” but more so for bonds. Projecting our model to 2050, aging pushes the safe rate below zero, but the risk premium remains elevated, as post-boomer demographics push asset returns to unprecedented and persistently low levels.
An aging population also means long-term interest rates will probably drop back down to their historical lows. A recent Effective Alturism Forum post from by Trevor Chow, Basil Halperin, and J. Zachary Mazlish had a good explainer of the logic behind this, known as the Ramsey rule.
Although there are important variants, this key function behind macroeconomics can be reduced to a simple equation that estimates real interest rates.
That is,
where:
r is the real interest rate over a given time horizon
ρ is time discounting over that horizon
σ is a (positive) preference parameter reflecting how much someone cares about smoothing consumption over time
g is the growth rate
The point of the rule is quite simple. We should expect the real interest rate to be higher when either (1) the time discount rate is high or (2) future growth is expected to be high. Since population growth is declining, option 2 won’t be happening. But as the population ages, they will discount future payoffs more heavily than working-age individuals. So option 1 might be pushed up slightly. Still, the overwhelming pressure from option 2 on the Ramsey rule means that interest rates are bound to be low for the foreseeable future.
The tally
So what’s the tally on all this?
In the near term, aging demographics will mean less creative destruction, fewer startups, increases in average firm size and concentration, more market power, more misallocation, and lower aggregate growth in the long run. Interest rates will stay low, as will the risk-free rate, even as risk premiums remain high. All the while, a graying population will keep the wealth-income ratio from converging.
In turn, these economic trends will pressure politics, school systems, health systems, transportation systems, municipal services, and every other institution that requires growth.
And in the long run, as economist Chad Jones says plainly, one very real path for us is that “living standards stagnate for a population that vanishes.”
While I am confident that the US can get through this bottleneck, we are entering a world of degrowth. It’s a world we aren’t ready for.
We have never lived in a modern era of massive declining birth rates.
Extra readings
If you want to understand the nuts and bolts of this decline, check out Ryan McEntush at Pirate Wires on the topic. It is mandatory reading.
China’s slowing growth might be good for foreign relations since projections “suggest annual economic growth [in China] will slow to about 3% by 2030 and 2% by 2040, while averaging 2–3% overall from now until 2050." China will eventually overtake the US as the largest economy, but will never enjoy a meaningful lead over it.
Noah Smith’s “How much does aging really hurt a country?”
"Interest rates will stay low." Do you still agree with this?