Economic Abundance with a Shrinking Population: Why
August 28, 2014
(This item originally appeared in Forbes.com on August 28,
Perhaps one of the silliest myths around today, in my
opinion, is the notion that a shrinking overall population
naturally causes or leads to economic decline. This is
gradually becoming more immediately relevant, as the fertility
rate is below replacement on every continent except for
It’s true that a larger population will have a higher total
GDP, simply because you are counting more people. However,
you can have a large population with a relatively low
per-capita GDP (all of Africa, 1.1 billion), or a small
population with a high per-capita GDP (New Zealand, 4.5
million). So, obviously, just piling people together doesn’t
create wealth and personal abundance.
As most any economist should know, per-capita incomes – what
we usually mean by “wealth” – are largely a factor of
productivity. Of course this includes the productivity of
the employed, but it also includes productivity within the
household or in other nonmonetary realms – the real-life
economy, not the “economy” of statistical abstraction.
Let’s take, for example, Japan. The country has had a lowish
fertility rate (1.42
births per woman
) for some time, although not all that
much lower than Thailand (1.50) or Germany (1.43), and
higher than Poland (1.33) and Hong Kong (1.17). However,
someone has to be first in these matters, and it just
happens to be Japan.
is estimated to have peaked in 2008 at
128,083,960 people, and was estimated for 2014 at
127,220,000. So, it declined an estimated 0.7% total over
The total population is projected to fall to 95.2 million in
2050. Which is still a lot of people for a smallish island,
without much flat land. It is roughly the population of
1960. New Zealand is actually only 29% smaller than Japan by
land area, and almost the same size if you omit Japan’s
sparsely-populated Hokkaido island. If New Zealanders can be
reasonably prosperous on about the same size island with 4.5
million people, why can’t Japanese be prosperous with “only”
95 million people? Or 50 million, or ten million?
The picture gets a little more interesting when looking at
(15-64). It peaked at an estimated
86,908,333.3 in 1995 (sorry if I chuckle at estimates that
go down to the partial-human), and had declined to an
estimated 79,144,166.7 in March 2013. This is a total
decline of 9% over eighteen years, or 0.53% per annum. The
present rate of decline is about 1% per year in working-age
This is not a particularly fast rate of change. Why can’t
those working-age people be productive and prosperous, and
perhaps become more productive and prosperous? A 2-3% annual
increase in real productivity is common in economic history,
and in the best of times it can reach 5% or more. In other
words, the variance between “high growth” and “stagnation”
in the productivity of the working-age population is far
more important than these modest trends in population.
At the same time, the population over 65 has been growing,
as a percentage of total population. In 1989, 11.6% of the
population was over 65; in 2006 it was 20%; and in 2055, it
was estimated to climb to 38%. Unlike most wildly-incorrect
economic projections, these demographic projections are
likely to be fairly accurate.
This is a real issue, and a rather novel one. Care of
elderly has been a part of human society from prehistory.
However, most people died before 65, so there were never so
But, I see no reason here why those who are in their
productive years, 15-64, can’t be as productive as they are
today, or more so. The fruits of production (in practical
terms, income) will be used for whatever the
highest-priority goal is, and care of elderly will probably
rank high on that list.
We have two basic conclusions thus far: first, that
working-age people can continue to be productive, or become
more productive, no matter what the overall demographic
trends are; and second, that there is a real demographic
shift here which is somewhat new in all of human history.
This will involve some challenges and changes, but the pace
is actually rather slow, and an excellent solution can be
The main problems are, in my view, related to existing
government policies and programs, which are based, overtly
or implicitly, on expanding population. Basically, they are
Ponzi schemes, which need to grow or die. This includes
public pensions (“Social Security” in the U.S.), existing
healthcare programs, and patterns of government debt and
deficits. Many of these were conceived in the late 19th
century, and expanded during the mid-20th century. They may
have been appropriate for 1960 or 1970, but are not
For example, a pattern of continuous government deficits and
growing total debt can be sustained for some time if nominal
GDP is also growing quickly. The “debt dynamics” allow
debt/GDP ratios to maintain some semblance of
sustainability, at least until a politician’s term of office
is ended. Alas, this continuous-growth Ponzi doesn’t work
well in an environment of population shrinkage.
Today’s calls for increased immigration and so forth are, I
find, mostly motivated by the urge to keep the Ponzi running
and thus maintain the status quo. The solution is rather to
establish an arrangement that is appropriate for demographic
realities. Japan’s deficit and debt problems will be
resolved either via currency depreciation or formal default.
But, this is just a shuffling of paper. Who cares. In 1949,
Japan’s government made it illegal to run a deficit or issue
government bonds; this lasted until 1965. At that time, the
existing debt had already been eliminated by postwar
The Japanese government thus had no debt and no deficits.
Perhaps such a time will come again. Perhaps it would be a
very prosperous time, as the 1950s and 1960s were for Japan.
Perhaps the working-age population would become more and
more productive, and thus enjoy higher and higher real
incomes, even though there happens to be slightly fewer of
them each year.
Public pensions and healthcare are another system that
worked fine in 1970, but aren’t working today. The total
cost of both programs, plus other welfare-related programs,
was 5.77% of National Income (similar to GDP) in 1970; in
2012 it was 31.34%. Obviously, the programs which worked
fine in 1970 aren’t working today.
This just means you need some new solutions. Japan will
eventually have new health and welfare-related arrangements
of some sort. We know this because the existing ones will
obviously perish at some point.
Unfortunately, the attempt to maintain these existing,
inappropriate arrangements itself is leading to the
impoverishment of working-age people, whose productivity is
indeed the “economy” itself.
For example, taxes have been rising continuously. The recent
increase in consumption taxes (national sales taxes) has
gotten a lot of attention. However, one of the biggest taxes
in Japan is what we would call a payroll tax on income. It
was apparently 14.42% for companies in 2013, and 13.94% for
individuals, for a total of 28.36%. And, there is no upper
limit on income.
I don’t have good data on historical payroll tax rates in
Japan, but as a percentage of National Income, the revenue
from the tax was 5.4% in 1970
, 13.6% in 2000, and
17.1% in 2012. The consumption tax did not exist in 1988; in
1989, it was introduced at 3%. It is scheduled to rise to
10% in 2015.
The secret to making people prosperous is what I call the
Magic Formula. It is: Low Taxes, Stable Money. This is
actually what Japan did in the 1950s and 1960s, as I
documented in my book Gold:
the Once and Future Money
. The government is
doing the opposite today, and getting the opposite result.
This has nothing to do with demographics, but is the simple
cause-and-effect of government policy.
If Japan is going to have another period of prosperity, with
a graying population, the eventual solution will be the
same: to make working-age people as productive as possible.
This means the Magic Formula, combined with other government
policies that address the realities of our time, rather than
relics of the past that should be abandoned before they
cause any more problems.
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