Two basic problems of a declining population in a Country
From the NYT opinion pages comes Paul Krugman’s description of the two basic problems of a declining population in a country, Dr. Krugman ues China as an example.
China’s population declined last year, for the first time since the mass deaths associated with Mao Zedong’s disastrous Great Leap Forward in the 1960s. Or maybe it would be more accurate to say that China has announced that its population declined. Many observers are skeptical about Chinese data. I’ve been at conferences when China released, say, new data on economic growth, and many people responded by asking not “Why was growth 7.3 per cent?” but rather “Why did the Chinese government decide to say that it was 7.3 per cent?”
In any case, it’s clear that China’s population is or soon will be at a peak; the best bet is probably that population has been falling for several years. But why consider this a problem? After all, in the 1960s and 1970s, many people worried that the world was facing a crisis of overpopulation, with China one of the biggest sources of that pressure. And the Chinese government itself tried to limit population growth with its famous one-child policy.
So why isn’t population decline good news, an indication that China and the world in general will have fewer people placing demands on the resources of a finite planet?
The answer is that a declining population creates two major problems for economic management. These problems aren’t insoluble, given intellectual clarity and political will. But will China rise to the challenge? That’s far from clear.
The first problem is that a declining population is also an aging population – and in every society I can think of we depend on younger people to support older people. In the United States, the three big social programmes are Social Security, Medicare and Medicaid; the first two are explicitly targeted at seniors, and even the third spends most of its money on older Americans and the disabled.
In each case, the funding for these programs ultimately depends on taxes paid by working-age adults, and concerns about America’s long-term fiscal future arise largely from a rising old-age dependency ratio – that is, a rising ratio of seniors to those of working age.
And China’s issues?
First, China’s social safety net is relatively undeveloped compared with ours, but older Chinese nonetheless depend on government aid – especially the state pension. And China’s old-age dependency ratio is skyrocketing. This means that China will either have to inflict a lot of economic pain on its elderly, sharply raise taxes on younger citizens or both.
Second, The other problem is subtler but also serious. To maintain full employment, a society must keep overall spending high enough to keep up with the economy’s productive capacity. You might think that a shrinking population, which reduces capacity, would make this task easier. But a falling population – especially a falling working-age population – tends to reduce some important kinds of spending, especially investment spending. After all, if the number of workers is declining, there’s less need to build new factories, office buildings and so on; if the number of families is declining, there’s not much need to build new housing.
Resulting in a society with a declining working-age population tends, other things equal, to experience persistent economic weakness.
Japan illustrates the point. Its working-age population peaked in the mid-1990s, and the country has struggled with deflation ever since, despite decades of extremely low interest rates. More recently, other wealthy countries whose demographics have begun to resemble Japan’s have faced similar issues, although these issues have been sidelined – temporarily, I’d argue – by the burst of inflation set off by policy responses to Covid-19.
To be fair to the Japanese, they’ve arguably handled the issue of population decline pretty well, avoiding mass unemployment in part by propping up their economy with deficit spending. This has led to high levels of public debt, but there has been no hint that investors are losing faith in Japanese solvency.
But can China – whose working-age population has been falling since 2015 – manage things equally well? There are good reasons to be skeptical.
China has long had a wildly unbalanced economy. For reasons I admit I don’t fully understand, policy makers there have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to relatively low consumer demand.
Instead, China has sustained its economy with extremely high rates of investment, far higher even than those that prevailed in Japan at the height of its infamous late-1980s bubble. Normally, investing in the future is good, but when extremely high investment collides with a falling population, much of that investment inevitably yields diminishing returns.
Indeed, at this point China’s economy appears to rely on an incredibly bloated real estate sector, which sure looks like a financial crisis waiting to happen.
It would be foolish to assume that China can’t cope with its demographic issues. After all, if we’re taking the longer view, China has been an incredible success story, transforming itself from a poor, developing nation into an economic superpower in just a few decades.
On the other hand, I’m old enough to remember when every other business book seemed to have a samurai warrior on the cover, promising to teach the management secrets that were turning Japan into the world’s economic leader.
The point is that for economies, as with investment funds, past performance is no guarantee of future results. We don’t know how much China’s demographic challenges will cause it to stumble, but there are good reasons to be concerned. I’ve heard pessimists describe the situation in China as similar to that of post-boom Japan without the same high level of social cohesion that allowed government and society to cushion the fall.
Oh, and China is a superpower, with an authoritarian and seemingly erratic leader. I don’t think it’s alarmist to worry about how it will react if its economy performs poorly.
China’s much more threadbare social safety net reflects the fact that it’s still a developing country and cannot afford even the kind of basic support for the elderly that the US provides, never mind the more robust system seem in most European countries. It’s been said that Europe at least got rich before it got old, while China is getting old before it gets rich.
On balance, Japan hasn’t done so badly. It does have that strong social cohesion, and a much more developed economy and technological capability than China. It has also avoided the huge problems that high immigration creates in historically monocultural societies. Most Japanese look at Europe, with all the upheaval caused by millions of very culturally-different immigrants, and thank their lucky stars that they didn’t go that route.
Oh, and China is a superpower, with an authoritarian and seemingly erratic leader.
Eleven months ago everybody thought Russia was a superpower. There’s ample evidence that China has even worse problems of institutional corruption, incompetence, and technological shoddiness. The last time they fought an actual war was 1979 (and they lost). There are reasons to worry, but even Xi probably realizes that any attempts at military adventurism will make Putin’s flounderings in Ukraine look like a success by comparison.
“This means that China will either have to inflict a lot of economic pain on its elderly, sharply raise taxes on younger citizens or both.”
Hmmm, either? Really? Seems to me to be a distribution problem. The same distribution problem that suddenly exists in Peru (this one, the one the media is calling an attack on democracy), …, almost everywhere we look.
Am I reading correctly into your comment that you see a third option? I think there is, with a wealth tax, but you aren’t actually clear about your policy prescription.
I agree, the problem is an extractive economic system that takes a share of value for those who don’t need it.
China has shown that it can be flexible on this issue. It will be interesting to see what happens.
The post made me look up the age distribution of wealth. I suspect people would be interested in this article. Average net worth by age for Americans: How do you compare?. Note that the author knows the difference between median and mean.
Arne:
Just fixed the link.
Most Japanese look at Europe, with all the upheaval caused by millions of very culturally-different immigrants, and thank their lucky stars that they didn’t go that route.
[ Astonishing comment, with no thought of centuries of rapacious European colonialism or rapacious Japanese invasions in Asia – particularly in this context the Japanese murderous invasion of China in 1937 which has never been apologized for. ]
Anon:
Valid comment on the invasion of China by Japan.
But completely irrelevant to the point I was making.
https://news.cgtn.com/news/2023-01-13/Caution-needed-in-Japanese-alliance-1gymdSQrz2g/index.html
January 13, 2023
Caution needed in Japanese alliance
By Daryl Guppy
China’s Ambassador to Australia Xiao Qian suggested earlier this week that Australia should be more cautious about Japan’s remilitarization when responding to Japan’s Ambassador to Australia Shingo Yamagami, who gave hawkish remarks about China.
Ambassador Xiao said, ”During the Second World War, Japan invaded Australia, bombed Darwin, killed Australians and treated Australian POWs in a way that is humanly unacceptable. And the Japanese government has not apologized for that up to today. If they don’t apologize, it means they don’t accept it’s wrong, and they might repeat the history.”
The use of the Nazi swastika symbol is banned in many countries, but the rising sun imperial navy flag continues to fly it on the stern of Japanese warships. This unbroken link with the past symbolizes Asia’s concerns with Japan’s remilitarization. It’s a concern ignored by the United States and its Pacific allies.
The core concern is found in the post-War differences between the two main aggressors. Germany acknowledged its fascist past. Germany’s past was forgiven but not forgotten. Japan has not reconciled with its militaristic past and its abuses in China and Asia. Japan ignores these stains on its national moral character.
This includes their denial of the Nanjing Massacre with an estimated more than 300,000 deaths. It includes the horrors inflicted by Unit 731, which conducted biological and chemical warfare tests with more than 3000 civilian deaths. It includes the wholesale slaughter of civilians in China and Asia. Memorials to the Sook Ching massacre in Singapore and similar atrocities elsewhere in Asia, are a reminder of an unrepentant aspect of Japanese culture….
Krugman has been wrong before about Social Security and he is wrong now. And I wonder where the Bears have been all the years that I have been trying to tell them that Social Security is paid for by the workers whow get the benefits. And that simply raising their savings rate (you call it the payroll tax, by a dollar per week per year (when the Trustees project short range financial inadequacy) social security can pay for itself forever. It is true that the cash taken out is put in the bank on the same day by someone else, but this is true for every “savings” plan. Workers expenses in retiremnt will keep getting larger over time, so the ;arger tax (s0 called) that you pay in is going to be what is needed for your own benefits when the time comes. There will be times…as there always are times, when the economy does not provide as much “interest” or profit on your savings/investments as at other times. this has been true since before money was invented. famines, wars, plague, the draft, recessions, death of children… but the likelihood is that furture “children” will be making more money than we are…and be producing more goods and services. As a nation we are so fat now we will not..unless we are insane…notice any decline in standard of living. OH, and with fewer children, there will be fewer mouths to feed, so even that global catastrophe which is much more likely andmuch more dangerous than lower incomes because fewer children…will cause less real pain with fewer people than with more.
This “declining population” or “ageing society” is nonsense. damn nonsense. propaganda by rhe people who need people for armies customers, and a lot of unemployment to discipline the workers. and economists.
https://fred.stlouisfed.org/graph/?g=Z4aD
January 30, 2018
Age dependency ratios for United States, United Kingdom, Euro Area, Japan and China, * 2000-2021
* Older dependents to working age population
https://fred.stlouisfed.org/graph/?g=Z4a9
January 30, 2018
Age dependency ratios for United States, United Kingdom, Euro Area, Japan and China, * 2007-2021
* Older dependents to working age population
anon
age dependency ratios are more important to this discussion than “inequality”, though i doubt i could explain that to my friends who have had “inequality” drilled into their heads without understanding the problem of inequality or distinguishing it from rob from the rich.
my eyes are not up to reading the graphs you provided. have anything with real numbers?
China is having the same problem every other area of the world is having: water. Also, China cannot reach the economic heights of the western world until they free their citizens to be free to think. China is a success because the western world changed their economies from one of production to ones of making money from money, finance. China basically said sure, we’ll be your producers while you book the rents.
China already has a complete social welfare blanket for her older population, and benefits are increasing. Also, personal savings rates tend to be high through working years. Then again, the age dependency ratio for China has been and is lower than in the United States and other most developed nations. As for the lowest in income, severe poverty has been ended and incomes at the lowest levels have been steadily rising.
This column is typical of Paul Krugman’s writing on China shows a prejudice that evidently makes learning about China too difficult for Krugman but the writing is a welcome stereotype for the New York Times.
Imagine, imagine, what the Chinese might discover if they could only “think.” Why the Chinese might even establish a new foundation for astronomy:
https://english.news.cn/20230119/ecc7a17bda50431388088905b0cbbdb6/c.html
January 19, 2023
Chinese discovery challenges classical theory of astrophysics
BEIJING — Chinese astronomers recently discovered a distribution law of stellar mass that applies when stars are born. The new finding challenges a classical theory of astrophysics, and will have a profound impact on frontier research in fields such as the evolution of stars, galaxies and the universe.
A research team, led by Liu Chao, a researcher at the National Astronomical Observatories of China (NAOC) under the Chinese Academy of Sciences, found that stellar initial mass function (IMF) varies with metallicity and time, and the discovery was published * in the latest issue of the academic journal Nature.
In the vast universe, many new stars of different masses are born in batches in the same star formation region. Most structural and evolutionary properties of galaxies strongly rely on the IMF, namely the distribution of the stellar mass formed in each episode of star formation, said Li Jiadong, the first author of the paper from NAOC.
For over half a century, most astronomers believed that the stellar IMF is universal and constant at all stages of the universal evolution, which has become a “classical hypothesis” in astrophysical textbooks….
* https://www.nature.com/articles/s41586-022-05488-1
China cannot reach the economic heights of the western world until they free their citizens to be free to think….
[ I know, I know, the Chinese might even build a permanent space station and advanced global positioning system, and explore Mars and the dark side of the Moon and the Sun. If only the Chinese could think…
https://news.cgtn.com/news/2022-11-17/China-Space-Station-Shenzhou-14-crew-begins-third-spacewalk-1f1K3LRtwxW/index.html
November 18, 2022
Shenzhou-14 crew sets up ‘bridge’ between cabins in third spacewalk
By Guo Meiping and Zhao Chenchen ]
Anon
I think he meant politically and entrepenurily..though the Chinese are famous entrepreneurs.
you are too sensitive. there was never any anti-chines bigotry where i lived and when. i am aware that was not always true. but i don’t see any prejudice where youarenseeingit (here).
i think you need to try to think about how you would know if you were seeing anti chinese bigotry whare it wasn’t. this isn’t to say there isn’t any, but you arewasting your life carrying that burden.
Yeah Coberly, he totally missed it.
Becker,
That was an insensitive comment :<)
Should have been “she totally missed it.” Most writing contains the fingerprints, or more appropriately “foot-in-mouth prints” of the author. We have known Anon first as Anne, then Ltr over the years from EV to AB. We may change our handles from time to time, but the biases of outspoken opinion remain indelible.