Are shrinking populations only good news?

From Thomas Malthus to Paul Ehrlich and thereafter many predictions have been made regarding the effects of population growth. Malthus thought that people would be kept at subsistence level, and that productivity gains would result in population growth until the economy converged again to subsistence level. In The Population Bomb published in 1968, Ehrlich argued that overpopulation would lead to mass starvation.

What we see today is a different story. Productivity gains have made obesity a bigger problem than hunger in many countries. And almost everywhere, fertility rates are falling. Some countries do even experience negative population growth. From an environmental perspective this is likely to be good news. Fewer people, holding everything else constant, implies less pollution and less extraction levels of our planet’s scarce resources. A shrinking population does, however, lead to a few economic dilemmas.

One is debt. As The Economist’s Buttonwood columnist Philip Coggan points out:

First, debt is easier to service if your nominal income is rising, but nominal income growth has been very sluggish in [countries such as] Japan. Second, debt does not decline as the population falls; so the debt per capita rises, making individuals even more cautious. You are not going to go on a spending spree if you have high debts already and you are worried how you will afford retirement.

Another economic problem is the effects that the changing population structure has on social security. Having a pension system where today’s workers pay for today’s retirees has worked during times of a growing economy and an increasing population. But when growth rates in many countries are slowing down and the number of workers shrink relative to the number of retirees, the pyramid turns upside-down. Indeed, as has been discussed before in Buttonwood’s notebook, and on this blog, the projected changes in dependency ratios are striking. The next post will attempt to illustrate this problem graphically.

Simon Hedlin

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