The Death of Birth Is Not a Worry
"For one particular car produced by an American manufacturer, for example, 30 percent of the car's value is due to assembly in Korea, 17.5 percent due to components from Japan, 7.5 percent due to design from Germany, 4 percent due to parts from Taiwan and Singapore, 2.5 percent due to advertizing and marketing services from Britain, and 1.5 percent due to data processing from in Ireland. In the end, 37 percent of the production value of this American car comes from the United States."~Douglas A. Irwin, Free Trade Under Fire
With birthrates falling in wealthy nations, there's a growing perception that those countries face a somewhat darker economic future for their perceived child deficits. The thinking is that with less people working and producing, countries with falling populations will see economic output drop due to a lack of young, able-bodied workers.
Birthrates have been falling in the industrialized world for more than a century now and worldwide since the 1970s. And with rich-country birthrates declining, New America Foundation senior fellow Phillip Longman has written The Empty Cradle, a book that suggests our prosperity is threatened by lower population growth.
To reverse the aforementioned decline, Longman has suggested providing parents whose offspring complete high school higher social security or pension benefits, while policymakers in Japan have looked into giving families monthly cash payments of $270 per child in order to reverse the trend. The birthrate issue is not as pressing in the United States, but as it stands now, parents can reduce their federal tax bill the more children they conceive.
The problem with all this handwringing over birthrates is that it does not acknowledge the broader truth that in a globalized world, the boundaries of the nation-state are no longer a huge factor in economic performance. Worries over birthrates seem dated, and only would have been relevant in an era when a lack of technology made it difficult for goods of all types to cross national borders.
Why birthrates used to matter. Adam Smith wrote in The Wealth of Nations that "The most decisive mark of prosperity of any country is the increase of the number of its inhabitants." Two centuries after, the late Julian Simon proclaimed in The Ultimate Resource that "The standard of living has risen along with the size of the world's population since the beginning of recorded time."
The arguments made by Smith and Simon are hard to argue with. From Smith's pin factory in the Wealth of Nations and the assembly-line innovations of Henry Ford to the manufacture of Boeing's 787 Dreamliner, plentiful workers have allowed for the very specialization of labor that leads to rising economic growth. Workers are in the end capital, so if populations decline there would seemingly be less economic activity in the aggregate.
It is well known that birthrates in Germany, Italy and Spain are below "replacement level," which means their populations are set to decline in the future. In Japan the birthrate is 1.2 children per woman, far below the 2.1 level necessary to ensure future population growth. In the United States the rate of birth is falling, but is still above replacement level due to greater procreation among immigrants and religious doctrines that encourage larger families.
If these trends continue among industrialized nations, the economic results have the potential to be profoundly negative. And with many of the industrialized nations facing increasing deficits in order to support a rising number of retirees, the tax implications are scary.
More "hands" mean more work specialization, more economic output, and more taxpayers of working age to pay looming bills generated by politicians. This seems to suggest that increased childbearing should be promoted through government incentives to ensure continuing population growth.
Why birthrates don't matter anymore. The problem with the alleged birthrate threat at first glance is that it fails to account for how capital is deployed. It can't be stressed enough that workers are part of the capital stock. Looking at birthrates from this perspective, an entirely different-and more optimistic-picture emerges.
Indeed, as the late Walter Wriston once wrote, "To manufacture a product in the United States in 1988 required, on average, only two-fifths of the blue-collar labor needed just eleven years earlier." Wriston's broad point was that the kind of physical output which used to require a lot of bodies to produce is increasingly being produced without so much human labor.
In contrast with U.S. automakers who are still hampered by labor contracts that make them non-viable without taxpayer support, the "economy of the mind" in the United States has thrived. Whereas the production of an automobile still requires a fair amount of human labor, the production of the microchip (which powers all manner of communication and computer technologies) is achieved with minimal amounts of physical exertion.
Wal-Mart is another example. Though not a manufacturing company, it is in the business of constantly providing a better experience for its customers with as few workers as possible. Thanks to innovations, it's increasingly able to do just that. To shop at Wal-Mart today is to make purchases without ever interacting with store employees given one's ability to scan and bag purchases ahead of a credit-card swipe; all of this done in self-service lines.
Secretaries and clerical workers formerly essential to labor-force productivity have been replaced by voicemail and the personal computer. Though we used to conduct our banking and investing activities through bank tellers and stockbrokers, the ATM and online investing allow us to do both without talking to anyone.
From 1900 to 1920 agriculture and manufacturing interests employed 30 to 40 percent of all Americans. That number has been falling since thanks to technological advances in both sectors that have freed up Americans to do other kinds of work. Technology has made a shrinking division of labor in the agricultural and manufacturing spaces less pressing amid much higher output in both.
The above examples speak to what is often forgotten among those who worry about birthrates. Specifically, they have very little to do with the all-important factor when it comes to economic growth: productivity per worker. As evidenced by incomes and standards of living, workers in the US, Japan and Europe are far more productive than their counterparts around the world.
Along those lines, the classical model of economic growth makes plain that demand is an afterthought. With human wants unlimited, there will always be demand for goods. The important factors are resources and the opportunities to put them to good use. Supply is demand. People ultimately trade products for products, so if labor productivity is rising, population growth (or decline) isn't much of a factor when it comes to prosperity.
Notably, birthrates in Lebanon, Lesotho and Liberia are far higher than they are in the U.S., Ireland and France, but no one is suggesting that the former countries are primed for major growth in the future. Citizens of all three doubtless have a lot that they "want," but lacking the worker productivity of wealthier nations they don't have the supply to fulfill their desires. Countries that demand goods are first supplying them, which underscores once again the importance of productivity per worker above population.
Wriston found that from 1967 to 1988, "the physical weight of U.S. product exports, per constant dollar value, fell 43 percent." Somewhat similarly, former Fed Chairman Alan Greenspan has frequently pointed out that while the aggregate output of the United States is five times greater in real terms than it was in 1950, the output weighs the same.
Importantly, neither Wriston nor Greenspan's examples can account for the knowledge and services that U.S. firms impart domestically and to the world, and which account for an increasing share of our economic activity. In short, our productivity has far outpaced population growth.
The globalization of production. Also forgotten in the population discussion is what's happening away from the well-established, industrialized countries. Their growth points to greater labor specialization, more production, and bigger markets for producers in countries whose populations aren't growing as fast as some might like.
And with the weight of our output having shrunk - sometimes to zero given how much of our output consists purely of intellectual capital - our ability to transport the goods we produce worldwide has increased. Birthrates matter in a world where goods don't flow freely, but when goods do flow freely, a talented individual can live in a retirement community but still transact with and be enriched by demand from workers across state lines, and around the world.
Former Secretary of State George Shultz once remarked in a speech that he saw "a snapshot of a shipping label for some integrated circuits produced by an American firm. It said, ‘Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country of origin is unknown.'"
More recently, Bob Weese, a spokesman for GE Canada, told the Wall Street Journal that due to integrated supply chains between the U.S. and Canada, "Some components cross the border four or five times" before the actual saleable product is finished. As evidenced by the imported inputs that go into the manufacture of a U.S. made automobile, much of what we produce today could not be made as cheaply and efficiently if U.S. producers were solely reliant on firms with a U.S. address.
What this tells us about birthrates is that they're increasingly irrelevant in a world economy that becomes more and more enmeshed every single day. So long as markets are open and free, growth will be there for the taking for talented individuals irrespective of where they live.
According to a Wikipedia entry on world population growth, Europe's population is expected to decline 29 percent over the next forty years, while in North America it's only expected to grow 18 percent. These numbers scare those who fear low birthrates, but apparently ignored are projections that point to population growth of 37 and 58 percent in Asia and Latin America, along with 45 percent growth worldwide.
Nobel Laureate Robert Mundell has famously said that "the only closed economy is the world economy," and judging by projected birthrates worldwide, the only limits to growth among citizens of countries with declining populations concerns their ability to profitably produce for the rest of the world. Not only will workers in less developed countries serve as extra hands for production of goods conceived in areas where birthrates are slowing, but their productivity will enrich the industrialized world through increased demand in return for their production.
Unfunded liabilities. The fact remains that many industrialized countries have enormous future liabilities in terms of retiree pensions. If birthrates in those countries are declining, won't their governments' ability to make good on their promises be compromised? At first glance, the answer is yes, due to the mismatch between the number of workers and retirees, but given a second pass, the outlook becomes more promising.
Government revenues rise and fall based on the number of individuals producing, but logic tells us that revenues are driven more critically by the level of taxable wealth creation. When output increases alongside a reduction in costs, wealth is boosted.
Looking at the future, assuming no major trade wars, there exists the opportunity for individuals in countries with low population growth to access the less developed world's cheaper labor force to create goods for a global population that is expected to grow. In that case, no matter the birthrates in one region or country, the potential for taxable wealth creation is enormous, and with that, the revenues necessary to fund a one-time wave of governmental liabilities.
No doubt the numbers are scary in the U.S. and Japan alone, but it's also true that yields on long-term government debt serve many purposes including as a signal of investor opinion of those governments' ability to make good on their liabilities. With yields on American and Japanese debt still low, it's possible that markets sense what those who fear declining birthrates don't: that future wealth creation will make a nominally insurmountable problem highly manageable.
Conclusion. Workers are by definition capital, and the more workers we have, the more innovation there is to serve their needs, along with greater labor specialization. Still, as evidenced by low productivity in many countries with high rates of birth, birthrates aren't the major story that some commentators suggest. The bigger story is output per worker.
Considered in light of individual worker productivity, the outlook is much better due to the growing ability of great minds to innovate, and through innovation, to create more wealth with much less of the human inputs that were previously necessary. If the present problems of the industrialized world are solved by allowing more economic freedom, the low birthrates in those same countries won't mean much. And they'll mean even less if individuals in Third World countries are also allowed more economic freedom themselves to produce.
Birthrates likely were a major economic factor in the time of Adam Smith. But with the world shrinking by the day when it comes to the ability of individuals to trade freely across borders, it seems this is yet another supposed problem that will never amount to anything. So rather than further empowering our governments to tax and spend in order to stimulate childbirth, the best solution is merely to maximize individual freedom to innovate and produce.