Fewer Diapers Does Not Mean Less Economic Growth

All too frequently of late, economists claim that simply putting more demand into the economy will drive growth, and that a reduction in demand is a scary thing that will reward us with stagnation. A recent article published in the Wall Street Journal titled "Baby Bust Threatens Growth" claimed that "if fewer women have children, there's less buying of diapers, school supplies, and homes to accommodate growing families." Fewer people means less demand, and economic decline if mainstream economists are to be believed.

But if we go back to Economics 101, economic growth is simply about making us better off. This has nothing to do with population growth. It can be difficult to separate the two: more people can logically mean a higher level of production that is the source of all demand, thus more jobs created to fulfill that demand, but it doesn't necessarily follow that we are better off in per capita terms.

Economic growth should be measured by individual income, with population growth taken out of the equation. Sure, more people will create things that fewer people cannot. Ten people on a tropical island will likely accomplish more than two people through specialization. But it's the population's contribution to specialization, not growth in itself, that fuels economic progress.

For fun, let's assume "Michael" was born 30 years ago. He's working today, is earning $50,000 a year, and as his income logically signals that he is contributing to supply, it also tells us that he is demanding goods in return. Production is once again demand, and because Michael is working 9 to 5 he is exchanging the fruits of his labor for goods produced by others: he goes to the grocery store, he purchases a car, plus he has an iPhone.

But are we better off having Michael around? Maybe so. We surely like him, but he doesn't necessarily make us all better off economically. We are not better off having sold Michael's mother diapers, school supplies, and a bigger home. If Michael didn't exist, we'd find a way to put those resources to better use.

Indeed, we must consider the unseen. Entrepreneurs can't innovate without capital, so what if Michael's mother had chosen to not have a child, and instead put the money that was spent on diapers into the bank, or a brokerage account? If so, the money saved wouldn't have disappeared; rather it could have been loaned to entrepreneurs seeking to create the next Microsoft, or invested in businesses eager to expand. Purchase of diapers amounts to capital consumption on an item that is perishable, while savings amount to investment meant to increase overall productivity, and with it, much greater demand over the long term.

Back to Michael, we are better off not because he was born, but if he is contributing to society - maybe he's a doctor ridding the world of a horrid disease, or a construction worker building roads that removes trade barriers from producers. In some way, he is likely contributing to specialization efforts that make life on the proverbial tropical island easier.

This isn't to say that we should scoff at the purchase of diapers and school supplies that bring Michael from a baby to a contributing adult, but it is to say that those purchases are not in themselves driving economic growth. If near-term demand were the objective, as opposed to real growth, we could simply hand all of our earnings off to Harry Reid and Mitch McConnell for them to redistribute, rather than invest with the Peter Thiels of the world who are looking to supply seed capital to the next Intel.

Real economic drivers are what individuals are contributing to the economy - fostering innovation, efficiency, and greater communication - that make all of us better off. Savings and investment are what give life to these advances; advances that occur less frequently when near-term consumption wins out over the savings that precede all economic progress.