Can someone explain to me a model of an economy where this makes sense?
For the economy, a slower increase in the population raises concerns about American competitiveness. But it could actually be a good thing. A number of economists, including the Federal Reserve Chairman Ben Bernanke are worried about the lack of inflation and income growth in the United States. Fewer workers could drive up salaries. What’s more, fewer new Americans might help slow government spending. That may curtail the rising US federal debt, which many think will soon cause interest rates to jump and hold down US GDP growth. “At a time of fewer government resources, fewer new people might not be such a bad thing,” says New Hampshire’s Johnson.
This seems very wrong to me. For one thing we have an aging population who we are going to need to support, and the less working age population we have to support them the more of a burden they become. Like a pyramid scheme you can’t permanently improve this situation with faster and faster population growth, but you certainly can make the situation worse by decreasing the number of working people per retired person. In addition, lots of government spending, like defense spending, is non-rivalrous public goods so that a higher the population means a lower the per-capita cost. I’m very curious to hear how Kenneth Johnson, the “population expert” from which this claim comes, sees per-capita government spending decreasing. Or perhaps he is talking only about total spending, but why should that be a concern?
Likewise I find his claim that lower population growth will drive up salaries to be confusing. After all one man’s salary is another man’s price, which decreases his real wage. Perhaps he thinks there are basically two types of people: skilled and unskilled. And that what’s really happening is population growth is decreasing in the unskilled which will make them more scarce relative to the skilled, and thus able to command a higher wage. I don’t find this very believable, either empirically or as a model for our economy.
Can someone explain to me a model where decreasing population growth raises real wages and decreases per capita government spending? I do not mean to be dismissive of Professor Johnson or his claims, but I am at a loss here.
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Wednesday ~ December 22nd, 2010 at 11:40 pm
Adam
It’s the first I’ve heard of a model like this, but I can convince myself that under certain tight assumptions it might be useful.
If you imagine an economy that is, for example, driven by the existence of natural resources (say UAE), I would bet that GDP is not very sensitive to the size of the workforce / population, and slower population growth would lead to higher GDP per capita growth. I think it could generally hold for any economy whose main industries are extremely capital intensive.
That said, I don’t think the above analysis makes any sense as applied to the US economy in the context of “the census shows less immigration than it used to.” In particular the lower government spending assertion smacks of that weirdly anti-immigrant populism where immigrants are sneaking and and stealing free healthcare and jobs. Time Magazine after all; it’s not exactly the AER.
Thursday ~ December 23rd, 2010 at 12:05 am
Lord
Slower population growth should raise real wages of the employed. Much of this will be absorbed supporting a larger elderly population, but if you think long range growth is constant at 3%, there will be more than enough to go around. A good example of this is the UK where population has been stable for more than 40 years and they have had better per capita growth than the US over that period. When you aren’t growing the easy way, by population, you end up growing by human capital. He didn’t say per capita government spending will decrease, only that it will not increase as fast which is very reasonable. The government has been spending more than it has been taking in for a long time and freezing and cutting those expenditures will limit that growth as we shift from new investment to sustaining investment. Transfers will grow, but the rest of government needn’t.
Thursday ~ December 23rd, 2010 at 12:36 am
Andy Harless
If we’re “worried about the lack of inflation,” then we’re obviously talking about the short run (which in the present case might last long enough for population growth to matter — i.e. it might take a decade for the economy to recover at its present rate). In the short run, with capital fixed, population growth would lower the real wage, but I take the passage you cite to be talking about nominal wages. Regardless of what happens to real wages, we want nominal wages to rise in the short run because that helps people pay debts that are fixed in nominal terms and because the anticipation of rising prices creates an incentive to invest. Also, in the short run, more labor force growth means more unemployment, which means more government spending. (I’m assuming that new members of the population don’t create enough demand to support their own potential employment. OTOH, they would create some demand, which would probably generate enough revenues to pay for the additional expenditures, so there would be a net improvement in the budget. But if we’re talking about people who are too young to work, then they’re almost certainly a net drain on the budget via public education and such.)
Thursday ~ December 23rd, 2010 at 1:00 am
Adam Ozimek
When I was writing this I thought “Andy Harless will have a counterintuitive but plausible explanation”.
What your saying can explain one piece at a time, but as a whole story it doesn’t work. Here’s what doesn’t make sense about the whole thing: if population growth is going to impact real wages, it has to be, like you said, in enough of a short run that capital can’t adjust. Likewise if it’s going to help us with inflation. But this can’t be about more children since they won’t impact labor markets in the short run, so there’s no way for it to be a net improvement on the budget. In addition, children are only new demand and not new labor, so this cuts against the labor market story. And in any case if it’s going to be about short-run impacts it isn’t todays birthrates and population growth that matters, it’s birth rates and population growth 18-24 years ago which determined todays labor market growth.
I’m still very confused about what model of the economy this guy is using.
Thursday ~ December 23rd, 2010 at 1:59 am
Andy Harless
He does talk about immigration in the first paragraph. I think one could make both arguments, (1) fewer immigrants mean less competition for jobs in the short run (assuming immigrants don’t create enough domestic demand to support their employment), and (2) fewer children mean less drain on governments. Of course fewer children do also mean less demand and therefore fewer jobs, but this is obviously endogenous: children are just a manifestation of the multiplier effect, an expense that people choose based on their income. OTOH immigration is also endogenous, so all the first argument is really saying is that it’s a good thing people aren’t dumb enough to keep coming to the US when there are no jobs.
Thursday ~ December 23rd, 2010 at 12:45 am
MorallyBankrupt
If we were a nation that exported lots of labor in the form of services or labor-intensive goods, I could see how slower population growth could drive up wages up in the medium term. Of course, that would depend on the kind of goods and services that other nations cant provide because they lack expertise, IP, certain resources / etc. Although following this same line of thought we’d see higher prices on those goods/services and depending on the price elasticity of demand of these said goods and services.
Soooo I guess if all those conditions were true AND the products and services were largely inelastic?
I do take issue with your claim about an aging population, though. You are right that it is a problem with certain transfer payments like SS and medicare, but not every older person is being supported by young people. I’d be interested in seeing some hard data on how much money flows from young -> old. Aren’t these graying citizens some of the last people to have pensions? If not, do they have savings or 401ks or IRAs or paid-off homes which they can reverse mortgage for income until they pass away? I have a hard time believing people die as broke as they are born.
I don’t necessarily think the aging population theme is very important. Why? Because these people have assets. Say my dad outlives his expected life and market turbulence and maybe some surprise inflation mean his IRA/401K/SS are not enough. I give him money every month. One day he dies and leaves me his house, and some possessions. Now a younger generation inherited both the personal and common wealth of the previous generation. Not so bad if you ask me. Yeah it might be pricey supporting an older generation but, as a generation, we are equipped with the best means to do it thanks to our collective education.
So we might have to cough up some extra cash out of our paychecks to help the old. Thankfully we can, since they helped us get to where we are now. And besides, there’s a whole lot more old people in the labor force now earning money and paying that FICA deduction (okok, not these 2 years, but you know what i mean) [ http://www.calculatedriskblog.com/2010/11/labor-force-participation-trends-over.html ]
Thursday ~ December 23rd, 2010 at 1:12 am
Karl Smith
Most of what Johnson said sounded strange but on Monetary policy there is a logic.
More worker would imply an increasing demand for money. If you are thinking of the money stock as fixed this will tend to be deflationary and worsen our condition.
However, we have a rate target so increasing money demand should be met by increasing lending. More population should supply more credit unconstrained borrowers who can profitably take out loans at the prevailing interest rate.
Thursday ~ December 23rd, 2010 at 1:22 am
MorallyBankrupt
Do you really think demographics can be a driving force in a monetary system that is open to people outside the nation? Nothing stopping foreign companies from issuing wanting to issue dollar debt and increasing demand for that money, right?
What about forex reserves built-up as a result of balance of payments imbalance?
Is there somewhere I can brush up on this because I still see it as a little far-fetched.
Thursday ~ December 23rd, 2010 at 10:33 am
Lord
BTW, 3% is better than the most optimistic Social Security projection and is equivalent to assuming the problem will be boundless surpluses as interest payments take over budget. The UK hasn’t done that well, but it has done better than the midrange projection. Talk about holding two contradictory ideas in the head at the same time; this is it.
Thursday ~ December 23rd, 2010 at 10:54 am
Growth is good - Economics -
[...] AGREE with Adam Ozimek that this is a daft view of the impact of population shifts on economic performance:For the [...]
Thursday ~ December 23rd, 2010 at 11:05 am
bdbd
Odd coincidence, this kind of thing turns up in Orwell’s little essay “In front of your nose,” which I happened to be reading yesterday. See the birthrate paragraph
http://orwell.ru/library/articles/nose/english/e_nose
Thursday ~ December 23rd, 2010 at 11:27 am
Growth is good [The Economist] | DreamInn
[...] is good [The Economist] I AGREE with Adam Ozimek that this is a daft view of the impact of population shifts on economic performance: For the [...]
Thursday ~ December 23rd, 2010 at 12:35 pm
Pablo Garcia
I took economic development in college and a model that we focused on was the solow growth model. I think this seems to be the model he is using. From what I recall, a decrease in population growth led to higher ourput per capita. Higher output per capita is implied to mean a higher standard of living (i think), in the short run. Thast what I recall. Something must be increasing if standard of living is increasing, which most likely is wages (unless people started working more hours).
So I think he might be using the solow growth model. I don’t recall much from it, but I remember that changes in savings, population deprectiation in the short run led to short run growth but in the long run the countries return to the steady state. Something a long those lines.
Tuesday ~ December 28th, 2010 at 12:11 pm
Growth is good | She's a Savvy Investor
[...] AGREE with Adam Ozimek that this is a daft view of the impact of population shifts on economic performance: For the [...]