14 March 2004

Raising Hell

Yet even if declining fertility rates can bring a 'demographic dividend,' that dividend eventually has to be repaid. At first there are fewer children to feed, clothe, and educate, leaving more resources for adults to enjoy. But soon enough, if fertility continues to remain below replacement levels, there are fewer productive workers as well, while there are also more and more dependent elderly, who each consume far more resources than children do. Even after considering the cost of education, a typical child in the United States consumes 28 percent less than the typical working-age adult, while elders consume 27 percent more, mostly in health-related expenses.

Eventually, as the pool of potential mothers diminishes, and as young people find more and more of their income going to support the old, both population loss and economic stagnation become nearly inevitable. Younger workers, finding not only that the economy requires them to have far higher levels of education than did their parents, but also that they must pay far higher payroll taxes, are less able to afford children and so have fewer of them, causing a new cycle of population aging. This in turn requires still more taxes to finance, thereby making the cost of children even less affordable, while also further diminishing the economy's ability to provide jobs for those young people that are left. Today, due largely to the crushing cost of pensions and health care, the oldest countries of 'old Europe,' such as Spain and Italy, have economies that produce double-digit youth unemployment rates, despite a theoretical shortage of youth. In Japan, the combination of a rapidly growing older population and a dwindling supply of new workers has caused what Yamada Masahiro of Tokyo Gakugei University has called 'low birth rate recession' --which has now lasted for more than a decade and that could grow much worse as the population of Japan contracts in absolute numbers.

Adding to the viciousness of the aging cycle is a gradual loss of innovation and entrepreneurialism. In 2002, for example, Babson College and the London School of Business released their latest index of entrepreneurial activity by country which shows a distinct correlation between a nation's high ratio of workers to retirees and a high degree of entrepreneurship. Thus, for example, India and China. which stand among the most entrepreneurial countries on earth, deploy roughly five people of working age for every person of retirement age. Meanwhile, Japan and France rank among the world's least entrepreneurial nations, displaying some of the lowest worker-to-retiree ratios. Countries such as the United States, Canada, Italy, and Germany have levels of entrepreneurial activity that correlate closely to the ages of their populations.

Demography is not destiny. Demography is the outcome of the choices individuals make. A conversation on samesex marriage at the The Road to Surfdom shifted to a strange theory that the demographic collapse of Western societies is due to mounting egoism and the abandonment of traditional values. I think it has a lot more to do with the economic penalties of child-bearing. I doubt the Costello solution of working long past the traditional age of retirement is really going to address the problem. And I seriously doubt that some 'restoration' of traditional values is going to overcome the serious economic costs to the individual.

What kind of policy would neutralise the economic penalties for having children?

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