Why a declining population could actually help economies
Trade wars. Currency movements. Trade balances. Normalizing interest rates. Combating climate change and poverty. Year after year, the G-20 discusses the same narrow range of issues, never agrees on very much and follows up on even less with any real action. But this year might just be different. The Japanese are taking the chair and, to their credit, they have decided to put something that genuinely matters at the top of the agenda, namely demographics.
Even more striking, they are challenging a cozy consensus of the past couple of decades. Most mainstream economists and policymakers take it for granted that a declining population is bad for the economy and we need to do all we can to reverse it. But the Japanese are starting to argue that it may not be true. Technology might mean that we need fewer people, while all the services required by the elderly might actually stimulate demand. If true, policies to combat an aging population might be a big mistake.
Whether the Japanese ever actually get to force any new ideas on to the G-20 agenda remains to be seen. Some crisis or other, from a stock market collapse, to a chaotic Brexit, to a recession in China, may well engulf the world and demand the attention of the presidents, chancellors and finance ministers who normally attend its summits. With luck, however, they will find some time to pay attention.
Haruhiko Kuroda, governor of the Bank of Japan, kickstarted the debate with a speech that had the not-completely snappy title Demographic Changes and Macroeconomic Challenges. The consensus, the governor conceded, was that a falling population made it very hard for an economy to grow.
On one level, it is easier to see why that is true. After all, total GDP is just output multiplied by the number of workers, so if you have fewer people you automatically get lower GDP even if every individual produces the same amount, or even a bit more. Aging populations are less innovative and dynamic, and all those old people cost a heck of a lot to look after. The net result? Growth grinds to halt and government deficits rise and rise. Indeed, plenty of economists have started to argue that the general slowing of growth and productivity over the past two decades, and especially since the crash of 2008, are an early sign of the impact of the gradual aging of the whole industrialized world. Whichever way you look at it, it’s all bad.
Kuroda’s significant point, however, was this. Maybe that is not quite the whole story. It’s possible, he argued, that an aging population could be completely fine. Rapid progress in technology, such as robotics and artificial intelligence, means that we might need far fewer workers than in the past, while improving productivity (indeed, slightly oddly, at the same time as we worry about not having enough workers, we also worry about what to do about mass unemployment created by robotics). In fact, a shortage of workers will put pressure on companies to improve productivity.
At the same time, demand for labour-intensive industries for the elderly, such as healthcare and leisure, can boost demand and kickstart entrepreneurship. There is some truth in that, as well. The cruise-ship industry probably wouldn’t be booming quite so much without so many retired people around. On top of that, it is not necessarily true anymore that only the millennials are dynamic and innovative. The biggest growth in startups is coming from entrepreneurs aged 50 and older.
Investors fret over demographic trends and steer clear of countries with falling populations because they assume they cannot grow. And yet, this is uncharted territory.
On the financial side, as pensioners cash in their savings, that too can stimulate demand and drain the glut of capital that has built up while populations were younger. The conclusion? A falling population is not necessarily as bad for the economy as usually assumed. More provocatively still, aging nations might be able to outperform younger ones.
That is of course especially relevant to Japan, where the working age population peaked in 1995 and its total population in 2008. Unlike just about every other major country, Japan has not tried to stem its declining numbers through immigration, remaining relatively closed to outsiders.
Despite the recent influx of immigrants into Germany, its population is forecast to fall to under 70 million from 81 million over the next three decades (indeed, fascinatingly, Britain will almost certainly become the largest country in Europe). Italy is going the same way, with its population of 60 million set to fall to 50 million by the middle of this century. The U.K.’s population is roughly stable, but that is mainly because of immigration. As it leaves the EU, Brits will have to decide whether they want to accept a falling population, like Japan, or keep very open borders to maintain total numbers.
The conventional economic wisdom has been that countries need rising populations and that without them growth will stagnate and welfare systems will be unsustainable. Investors fret over demographic trends and steer clear of countries with falling populations, such as Japan, because they assume they cannot grow. And yet, in truth, this is uncharted territory. We haven’t actually seen an example of an industrialized, wealthy country with a falling population before, so we can’t say for certain what will look like. The results from Japan are not especially encouraging — growth has stagnated, although when you measure GDP per person the figures are far better — but it is still very early. Maybe it won’t be so bad after all?