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Megan McArdle | Our Demographic Decline

Our whole economy and social system are designed for a growing economy, and a growing population.  Without future growth, savings and investment become more necessary, but less attractive.  Without growth, people become less generous towards strangers and more unhappy about their own circumstances. And without the growth around which all of our modern welfare states have been structured, the modern safety nets that governments have spent the last century establishing may not be politically or economically sustainable.  

If you think that population decline is going to be a net boon to society, take a long hard look at Greece.  That’s what a country looks like when it becomes inevitable that the future will be poorer than the past: social breakdown, political breakdown, economic catastrophe.  

Start with a simple equation: economic growth equals the growth in the workforce plus the growth in the productivity of that workforce.  If the workforce shrinks, then productivity growth needs to be higher, in order to compensate; otherwise your economy shrinks.  In theory, we can compensate for the coming demographic shift with higher productivity.  A shrinking population, after all, means a higher capital to worker ratio.

But this doesn’t quite work, because our population will not simply get smaller; it will also get older.  If everyone was going to suddenly die at 45, we might be able to get the requisite productivity boost.  But as the population ages, it will change dramatically, becoming less innovative, more risk averse, less physically capable.  Just as we desperately need productivity to speed up, it is probably going to slow down.


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