The More, the Merrier

May 23rd, 2013

by Eric Schaefer

Five years after the 2008 financial market collapse, governments and central banks across the globe have still not re-ignited a sustained global economic expansion. What growth there has been, has been localized, sporadic and anemic. Europe remains mired in recession. The expansion in the U.S. is episodic, with alternating quarters of growth and contraction. While China, seemingly rebounding, lacks the aggregate demand to pull other economies along in its wake.

How to put the global economy on an even keel remains a puzzle to be solved. But, a more profound worldwide economic stagnation looms on the horizon. How we tackle today's problems will determine in part our ability to navigate the secular dearth of growth we are soon to face.

According to United Nations' projections, several nations in the developed world will begin to experience a contraction in their populations within the next decade. Much has been already written about the looming graying of the West's population. But, surprisingly little has been said on this subject by media economic pundits. This demographic decline should come as no surprise. A natural consequence of an aging population is a smaller proportion of men and women in the family formation stage. This, combined with lower fertility rates (than even a generation ago), guarantee the birth rate will be below the population replacement rate. Unless offset by higher immigration, or a rebound in fertility, population declines throughout much of the developed industrialized world are inevitable.

Germany — despite, or perhaps because of, unification — is one of the first nations to experience the cresting of its population. Between 2005 and 2010, UN demographers estimate that Germany's population declined slightly and project the pace will accelerate over the next decade. Japan, on the other side of the world, is not far behind. Population growth between 2005 and 2010 has been barely positive according to the UN; by 2015, the decline will be evident — first gradual and then picking up speed. Unless unchecked by positive measures to encourage immigration or to induce the Japanese to have more children, the UN projects that by the end of the century Japan's population will have declined by 25%.

Even before written history, a constant theme throughout man's history has been the ever higher march in his numbers. The Black Death during the 14th Century was one of the few prolonged interruptions of this trend. Our outlook and institutions implicitly take for granted there will be more of us tomorrow than there are today.

For instance, population expansion is a key driver in our theories of long-term economic growth. Economists generally accept a combination of population growth, investment (or, capital deepening — with more machines and tools available to each worker) and technological advances explain growth or its lack. We have not even begun to ponder the likely consequences of a population bust in any country or among several key nations. Why, for example, would anyone be motivated to buy property in Japan, when in 25 years time (if current trends are not offset) there are likely to be almost 15 Million fewer Japanese? Perhaps it is better for all that our time horizons for most decisions are not that long.

Even China will not be exempt from the systematic decline in its population; at best, it will gain the benefit of the experience of Japan and Germany before it. The United States, in contrast, is one of a few industrialized, developed nations whose population is expected to continue to grow over the next century.

Those who worry that the 21st Century will witness the eclipse of American power should take some comfort from these projections. But, the title is ours to lose if we shortsightedly yank the welcome mat from our borders. It is the countless individuals seeking to emigrate to our shores to become Americans, who will help preserve our global economic lead.

Notes on Sources and Methods:

Population estimates sourced from the 2010 Revision of the United Nations (UN) World Population Prospects.

Projections are shown as a percentage of each country's population in 2005. For Germany, its population in 2005 was estimated at 83 Million; for Japan, 126 Million; for the U.S., 297 Million; for China, 1.3 Billion; and, for the Russian Federation, 144 Million.

Projections from 2005 onward are illustrated with dotted lines.

(Sources: UN; AIFS estimates.)

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