Jonathan Last’s recent article in The Wall Street Journal is sufficiently alarmist and buzz-generating to please his agent and publisher on the eve of the release of his book What to Expect When No One’s Expecting, with the doom and gloom tagline America’s Coming Demographic Disaster. ‘No One’ is an exaggeration since there were about 4 million births in the US last year, but I understand the appeal of using a title which is reminiscent of Heidi Murkoff’s blockbuster book on pregnancy. As to the phrase ‘Coming Demographic Disaster’, it could put Last, years from now, in the category of pessimistic forecasters who were proven spectacularly wrong, alongside Paul Ehrlich, author in 1968 of The Population Bomb. Forecasting is a difficult task and extrapolating the known past and present into the future has often proved to be an inadequate approach. There are usually new hitherto unknown factors which intervene down the road and which derail any linear or semilinear prediction.
However, none of this should diminish the fact that Last’s article is an excellent must-read for anyone who still believes that US demographics are strong and supportive of future economic growth. As I wrote a few months ago, there are many, including many in leadership positions, who still live with this illusion. Last’s main point is absolutely correct. The birth rate (and fertility rate) has declined since the 1970s and the growth rate of the US population has been on a downward trend. This phenomenon yielded a large demographic dividend from about 1982 to 2005, but it is now leading to large negative consequences for the economy. I covered several of these points in previous articles on this site. Most critical in my view is the rise in the dependency ratio which is likely to last now for several decades. US demographics provided steady tail winds to the US economy for decades and added a large demographic dividend when the birth rate fell and more women joined the work force, but we are now over that hill and are facing intensifying demographic head winds.
I differ with Last on his recommendation that we need more children now. Children born now will not contribute to the economy for another twenty years and their numbers will only further exacerbate an already climbing dependency ratio. We cannot rewrite the past but what we need now are more adults in their 20s, 30s and 40s, in other words more children born in the 1970s, 80s and 90s. Yet, had we had these children back then, the economy would not have been as strong in the 1980s and 1990s because less capital would have been available for saving and investing. In many ways, we front-loaded demand, saving, investment and prosperity in those two decades and now face some inverse complications.
All is not lost however. Instead of boosting the birth rate now, a four-point solution would include 1) raising the age of eligibility for Social Security and Medicare, 2) improving labor force participation, 3) continued innovation and 4) more exports. The first two would slow, delay or neutralize the rise in the dependency ratio. Innovation is the most important driver of the economy but innovation without a large demographic audience does not achieve its full wealth creating potential. An iPhone introduced to a market of 3 billion people clearly will create more wealth than an iPhone introduced to a market of 30 million people. Because US demographics are getting weaker and US demand will be less strong than in the past, an obvious solution is to look for new sources of demand outside our borders. For this reason, it is essential that the US cultivates new export markets, in particular in countries with attractive demographic profiles. As I wrote in this article, these markets are chiefly India and the countries of SubSaharan Africa, notably Nigeria, Tanzania and Uganda where the population is large and the fertility ratio is expected to decline, raising the possibility of a demographic dividend in coming decades. This dividend is not guaranteed to happen. It is only a window of opportunity which opens and closes. And countries are able to capitalize on it only if they strengthen their institutions and improve their governance and transparency.