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Wednesday, July 19, 2006

Crisis? What Demographic Crisis? I Don't See Any Stinking Crisis...

When I was younger, we used to celebrate declining population growth as good for the planet instead of worrying about not having enough kids to take care of the elderly. Dean Baker says that shouldn't have changed:

Stagnation Celebration, by Dean Baker, American Prospect: Even the most casual consumer of elite American commentary knows about the looming demographic crisis. The drumbeat of warnings that the United States and (more acutely) Europe face some sort of catastrophe due to stagnating or even declining populations has been steady and loud for years. Here in the United States, the ... pundit consensus [is]... that our aging population will exert a crushing burden on the American work force in the future, through seniors’ demands for entitlements and services.

Happily, we have nothing to fear but the fear mongers themselves. A simple look at the data shows that the much-feared specter of the baby boomers’ retirement doesn’t in fact portend any kind of fiscal or economic crisis. Indeed, one can go further: the prospect of declining populations ... is actually great news.

Here in America, the story is that the retirement of the baby boomers will lower the ratio of workers to retirees from close to 3 to 1 at present down to just 2 to 1 in 30 years. While this fact is supposed to scare people, a bit of simple economics shows there is no real basis for concern.

Starting with the basic ratios, the ... Social Security trustees project that the share of the population that is under age 20 will fall from roughly 30 percent in 2005 to less than 25 percent in 2035... This means that to some extent, we will be ... shifting some of the resources from the young to the old.

But this shift is the less important part of the story. The more important part is productivity growth. We know that, barring an economic catastrophe, workers will be far more productive in 2035 than they are today. Technology will continue to improve, computers will get better, workers will be more educated. Even if productivity growth were to fall back to its slowest pace on record (1.5 percent annually), workers in 2035 would still be producing 50 percent more on average than workers do today. This means that two workers in 2035 would be as able to support a retiree as three workers are today. If productivity grows at the same rate as it has over the last decade (and during the period from 1945 to 1973), then workers will be almost twice as productive in 2035 as they are presently. In this scenario, two workers would be far better able to support a retiree in 2035 than three workers are today.

Even setting aside the productivity factor, the basic scare story of a labor shortage never made any sense to begin with. In Econ 101 we teach that when there is more demand than supply, the price (in this case wages) goes up. Rising wages will not frighten most people. (In fact, rising wages will pull many older workers back into the labor force.)

Of course, if wages rise, then some jobs will disappear. Workers will leave the least productive forms of employment and move to jobs where their labor will be more productively employed. Currently, 15 million people work in the retail sector -- just over 11 percent of the work force. If labor becomes relatively scarce, then stores will have fewer retail clerks on the floor. Convenience stores might keep shorter hours. Are you scared yet?

More than 11 million people are employed in hotels and restaurants -- approximately 9 percent of the work force. If labor becomes scarce, ... Hotels might clean rooms less frequently and thoroughly. Are you running for the tranquilizers yet?

For anyone who bothered to think it through, this is what a labor shortage means -- fewer people working at low-wage jobs... The looming nanny shortage may terrify policy elites in Washington, but a future where most workers won’t take those jobs because they can find higher-paying employment probably looks pretty good to most people.

All told, there is simply no real problem here. In fact, in many ways the country and world will benefit from slower -- or even negative -- population growth.

Fewer people means less pollution and less crowding. Think of global warming. The basic problem is that we are spewing too much carbon dioxide into the atmosphere each year. ... If the population is smaller, or doesn’t increase as much as is projected, we can achieve the same reductions in greenhouse gas emissions with less conservation.

It is not just global warming that will be affected by the size of the U.S. and world populations. All forms of pollution increase or decrease roughly in proportion to the size of the population. Similarly, the drain on natural resources is also proportionate to the population. For example, the water shortages that are afflicting many western states will worsen if their populations continue to grow rapidly. ...

Fewer people doesn’t just mean shorter commuting times, it also opens up access to desirable land for recreation and vacation purposes. ... If you’ve been overwhelmed recently by the crowds at a national park, museum, or national landmark, it should be easy to understand some of the benefits of a declining population.

In short, pundits may spell doom, but we can rejoice in the knowledge that they're spellbound by a delusion. There is Santa Claus, there is the tooth fairy -- and there is our looming demographic crisis.

For more on the productivity issue, see Paul Krugman's "America's Senior Moment":

One way to describe the truth is to say that there is no program called Socialsecuritymedicareandmedicaid: these are separate programs with separate problems. Look at the accompanying chart which shows the ... CBO projection..., but breaks it down by program. Yes, the total rises drastically—but Social Security, although it is the biggest of the programs now and the only one of the three programs whose costs are driven mainly by demography, accounts for only a small part of that rise. That tells us that demography is not the main driver of these long-run projections. ... Pundits who want to sound serious love to contrast Social Security as it was in 1950, when sixteen workers were paying in for every retiree drawing benefits, with Social Security as it will be once the baby boomers have retired, with only two workers per retiree. But most of the transition from sixteen to two happened a long time ago. Since the mid-1970s there have been about three workers per retiree —and Social Security has been running a surplus. ...

    Posted by on Wednesday, July 19, 2006 at 10:11 AM in Economics, Policy, Social Security | Permalink  TrackBack (0)  Comments (49)

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