China has reported that its population is declining. Given the number of souls there, that may strike some people as a step in the right direction. But, Paul Krugman writes, a declining population presents a nation with two big problems:
The first problem is that a declining population is also an aging population — and in every society I can think of we depend on younger people to support older people. In the United States the three big social programs are Social Security, Medicare and Medicaid; the first two are explicitly targeted at seniors, and even the third spends most of its money on older Americans and the disabled.
In each case, the funding for these programs ultimately depends on taxes paid by working-age adults, and concerns about America’s long-term fiscal future arise largely from a rising old-age dependency ratio — that is, a rising ratio of seniors to those of working age.
The other problem is subtler but also serious. To maintain full employment, a society must keep overall spending high enough to keep up with the economy’s productive capacity. You might think that a shrinking population, which reduces capacity, would make this task easier. But a falling population — especially a falling working-age population — tends to reduce some important kinds of spending, especially investment spending. After all, if the number of workers is declining, there’s less need to build new factories, office buildings and so on; if the number of families is declining, there’s not much need to build new housing.
The result is that a society with a declining working-age population tends, other things equal, to experience persistent economic weakness. Japan illustrates the point: Its working-age population peaked in the mid-1990s, and the country has struggled with deflation ever since, despite decades of extremely low interest rates. More recently, other wealthy countries whose demographies have begun to resemble Japan’s have faced similar issues, although these issues have been sidelined — temporarily, I’d argue — by the burst of inflation set off by policy responses to Covid-19.
It has taken a long time, but Japan did a pretty good job of managing the problem:
To be fair to the Japanese, they’ve arguably handled the issue of population decline pretty well, avoiding mass unemployment in part by propping up their economy with deficit spending. This has led to high levels of public debt, but there has been no hint that investors are losing faith in Japanese solvency.
Time will tell how China handles the problem. But it's also a problem we face in Canada.
Image: Business Insider
