US Demographics not as Strong as Widely Believed

A recent op-ed in the Wall Street Journal by Mr. Ben Wattenberg, a senior fellow at the American Enterprise Institute, takes an optimistic view on US demographics and on their likely impact on the economy.  The WSJ today published my response in which I repeat the argument I made in America Heading Towards Zero Population Growth? that the growth of the US population is in a multi-decade decline.

Text of my letter:

“Regarding Ben J. Wattenberg’s (“Immigrants and ‘Comparative Advantage’,” op-ed, Aug. 9): It is true that the U.S. is in better shape than Europe or Japan, but the rate of growth of the U.S. population has fallen below 1% per year and will decline further over the next four decades. Due to the passing of baby boomers in increasing numbers, the two decades starting in 2030 will see no population growth except for immigration.

Mr. Wattenberg’s figure of 400 million Americans in 2050 is too high and would be reached only if the birth rate, life expectancy or the number of immigrants rises significantly in coming decades. My own estimate is 375 million in 2050, which is 61 million more Americans than we have today. This may appear nominally attractive, but the population grew by 60 million, or 24%, in the 22 years since 1990. A 60 million increase by 2050 would be equivalent to growth of only 19% in 38 years.

Even Mr. Wattenberg’s optimistic scenario would be growth of 27% in 38 years, a rate which is well below that of recent decades, with predictable consequences for domestic consumer demand.”

End of letter.

Mr. Wattenberg is not alone in holding an optimistic view.  In fact, robust population growth is seen by many as one of the unique assets of the US economy.  Last month, Goldman Sachs CEO Lloyd Blankfein argued that US economic prospects look promising in part due to demographics:

“The U.S. has a number of major competitive advantages that we sometimes overlook — especially given the focus of the 24-hour news cycle on sensational, and mostly deflating, events. First, the U.S. has favorable demographics — thanks to its relatively high birth rates and immigration. While the BRIC countries — Brazil, Russia, India and China — have generated extraordinary economic growth, the U.S. remains a magnet for many of the smartest, most ambitious people in the world. […] Immigration is one of the main reasons why the U.S. has grown faster than many other developed economies. The growth in the foreign-born population contributed roughly 30 percent to 40 percent of total U.S. population growth from 1980 to the mid-2000s. New immigrant workers provide a boost to economic growth. Just think about the effect new workers have on demand for housing, let alone creating new businesses.”

Because they are only partially accurate, some of these comments end up painting an overall picture which is too optimistic. First on the birth rate, it is higher than that of Japan or Europe, but it had been until recently near replacement level, equivalent to a total fertility rate (TFR) of 2.1 children per woman.  But since the financial crisis  began in 2008, the TFR has fallen below 2.1, as recently reported by The Economist. The TFR may well recover to replacement level as the economy improves. That is better than sub-replacement but a TFR of 2.1 is not sufficient to turn demographics into a source of economic strength. In addition, discussing birth additions without mentioning death subtractions presents only half of a full picture.  As increasing numbers of baby boomers pass away in the next three decades, the population will grow at a slower rate than in recent decades.

Another factor to consider within the overall population numbers is the evolution of each age group.  The expected increase in the number of older people has been widely documented and discussed, in particular as it relates to the pressure it will place on government social programs. A subsidiary measure of this development is the rise of the dependency ratio, which is the number of dependents (children and retired people) per working adult. In the US the ratio had been declining for decades and it is now set to start rising. (See Our Growing Inactive Population).

Turning to immigration, it is true that the US could open its doors wider to more immigration and by doing so, reach any population level that it wishes. But few commentators or politicians are advocating this approach. If we continue with the current run rate of 1 million new (legal) immigrants per year, the growth rate of the US population will continue to decline. And that would be true even if we raised annual immigration to 1.5 million newcomers.

There is nothing wrong with being too optimistic on demographics except that it could prevent policymakers from considering other steps to promote economic growth. If there is a widespread belief (as seems to be the case) that population growth will be a strong driver of the economy, we may forego some other growth-boosting measures which are in fact necessary.

In my opinion, growth for the US economy in the next few decades has to come from two main engines, first the perennial innovation engine, and second the manufacturing and export engine. The US can become once again an export powerhouse, not just in agriculture and technology, but also in other manufactured products along the entire value-added chain. Whether this requires a dramatic devaluation of the US dollar remains to be seen. If such is the case, we would not be the only country racing for a depreciated currency. Europe certainly does not want to see a stronger Euro, and if the Euro breaks up, virtually all countries except for Germany, Finland (and possibly France) will end up with currencies which are relatively weaker than the Euro. Germany may end up with a new Deutsche Mark which like the Swiss Franc will be stronger than its exporters would like to see.

Repatriating as many manufacturing jobs as possible and searching for new markets overseas are likely to be two important elements of a future growth strategy. Based purely on demographic trends, India and Sub-Saharan Africa look especially promising because improving health care and declining fertility rates (the two go hand in hand) could possibly yield the same kind of very large demographic dividend which we have seen in China and other Asian countries in recent decades.

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