When I was an undergraduate several decades ago, I came across the term ‘suppressed minor premise’, a critical but overlooked part of an argument. I have never come across the term since, but it describes exactly the role of demography in economics.
In particular, the economics that I learnt in the 1980s and which as far as I know is still largely taught, assumes a steady expansion of the population. Young people will be born, old people will die, the former will outstrip the latter and all will be well with the world. The labour supply will expand, as will the market, and economic growth will be built from both productivity gains (more value per hour of labour) and population expansion (more hours of work thanks to more people of working age).
These were the conditions of early industrial societies like Britain’s in the nineteenth century where fertility rates remained high (six births per woman until well past the middle of the century) and mortality rates plummeted (new medicines, better food, efficient sewers). There was a bit of a wobble in the interwar years when fertility rates plummeted – reaching around two in the UK and Germany, for example, by the time World War Two broke out. Prescient economists like John Maynard Keynes were aware of the crucial link between economics and demography and worried that a birth dearth might mean a secular slump. But along came the post-war baby boom and all was well again.
The optimal economic conditions, from a demographic perspective, are when previous high fertility and population growth means, relative to the population, few elderly dependants and many twenty- and thirty-somethings active in the workforce, but who in turn are not having large families. The demand for pensions and healthcare is light, the investment in education and childcare need only be moderate as not that many youngsters are coming through the system and the generation of the active can devote themselves wholly to producing and consuming.
This is known as the ‘demographic dividend’. It provides no guarantee of economic success – poor leadership and political instability can squander it. See much of the Middle East today. But when the demographic planets are thus aligned, conditions are ripe for economic flourishing. We saw it in Japan post-war, we saw it a few decades later elsewhere in East Asia and we even saw it to an extent in the UK of the 1980s and 1990s when late boomers like me were thrusting our way into the workforce and up the competitive greasy pole.
But as night follows day, so the low birth rate which obviates the need for investment in children leads to the drying-up of the next fresh inflow into the labour market. Today, across the world, the low fertility rates of recent decades are creating a drag on economic dynamism.
Japan, once the land of the rising sun, began its precipitous fall from that status precisely as its workforce began to decline at the end of the 1980s. With fewer and fewer workers per retiree, its economic growth slumped, its government debt ballooned and its creativity and inventiveness has waned. Each year, China’s economic growth is diminished by its waning workforce and population. At least China has the luxury of tens of millions still in low-productivity agriculture who can be transferred to more productive pursuits, so productivity gains can still be material. Advanced western countries like the US and UK do not have that luxury.
It turns out that the great suppressed minor premise of economics has ceased to apply. There is no demographic dividend any longer buoying activity but instead ageing and population decline is casting its grey shadow over country after country, the consequence of generations of low fertility. Too few children eventually means too few workers. In the UK, the ratio of workers to retirees has slipped from four to three and will before too long head for two. Expect endemic labour shortages and fiscal crises as fewer and fewer taxpayers have to fund more and more pensions and healthcare.
Moving the pension age by a few years has a one-off and very limited benefit. And as politicians from President Macron to President Putin have discovered, it costs vast amounts of political capital given its unpopularity. Mass immigration is a Ponzi scheme as immigrants reduce their fertility rates and age. Besides, we are seeing a great pan-European backlash against the cultural change involved. And in any case, fewer and fewer countries are producing the extra workers who can substitute for our own youngsters. Those ones that still do are poor and produce low-productivity workers. And even countries like Jamaica and Thailand now have fertility rates below the UK’s. AI will not come to our rescue: if it were about to, we would now be seeing rising, not falling productivity.
There is only one path back to economic dynamism and that is to restore our fertility rate, to start having families of two or three as the norm. After fifty years of sub-replacement fertility, it is late in the day. And we have barely started talking about it.
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