Population decline does not have to lead to economic decline, despite assumptions of economists and media

January 31, 2012

The mainstream news media in the United States have put a completely negative spin on the news that by 2060 Japan will lose one third of its population by natural means—no famine, no war, no epidemic, no forced expulsion, just fewer people being born. 

The articles all dwelt on the pension crisis that a shrinking population will cause, as fewer people of working age support more retired people who happen to be living longer (and thank goodness for that!).  None of the benefits of a shrinking population, such as decreased unemployment, increased wages and a shrinking energy and resource footprint, were cited in any of the stories I saw.

The negativity is embedded into the characteristics attributed to Japan’s natural population shrinkage:

  • ABC-TV: “even more troubling,” “little signs of improvement,” “paint a dire picture,” dismal birthrate.”
  • FOX  News: “greater burden,” “grim estimate.”
  • Associated Press: “grim population decline,” “greater burden,” “grim future.” 

Even those media, primarily European and Asian, which did not use the negative characterizations, focused almost exclusivity on the pension challenge; for example, The Tokyo Reporter  and the Guardian.

In my extensive reading of economic theory and practice I have found very little on how to manage a falling population. The assumption of virtually all economists is that the economic system keeps growing through population growth. Even those few economists who propose a “steady state” don’t tell us how to get there, or how to address issues related to “no growth” such as the increased percentage of retirees until the population stabilizes at a lower level.

And yet all the long-term global problems we face as a species over the next few hundred years demand that we use fewer nonrenewable natural resources and the easiest way to do that is for the population to decrease.  The Japanese present the first working laboratory about how to go from large to smaller without famine, epidemic or war.

In my view, the reason that most economists and all of the mainstream news media consider a growing population a blessing and a shrinking population a curse is because they are ideologically set to dislike the actions that society must take to smooth the transition as the population of a rich nation declines:

  • Government intervention, to make sure that society reallocates resources, e.g., from caring for the young to caring for the elderly.
  • Higher wages, as a shrinking population will lead to less unemployment and then labor shortages.
  • Higher taxes, as a means to fund necessary programs to make the transition to a less populous society.
  • Immigration and a greater ethnic diversity, as a means to address labor shortages.

These actions all tend to redistribute wealth (within the country and across the globe) and to create a more equitable distribution of wealth in society. Japanese government, media and think tanks, as in the United States and elsewhere, are controlled by its moneyed elite. It makes sense then that it’s hard for these people to view as positive something that works against their own short-term best interests.

Change always affects the economy, creating a new set of winners and losers. But when change leads to economic growth, as it often does, the bigger pie can mask the impact of the change, sometimes for decades. When the pie remains the same or shrinks, the costs of addressing social challenges suddenly become much more apparent. Thus it took the great recession and its grim jobless aftermath for people to realize that changes to law and policy had shifted an enormous amount of wealth from the poor and middle class to the wealthy. The growing economy masked the change.

There is no doubt that a shrinking population will create a shrinking economy. But absolute economic might does not translate into individual well-being. Whose people are better off on average? China’s, with its 1.35 billion people sharing a $6.988 trillion gross domestic product (GDP) for $5,184 a person; or Japan’s, with its 127 million people sharing $6.855 trillion GDP for $45,774 per person?

If we measure well-being in terms of per-capita GDP, we see that a country can thrive with a smaller population. There is no reason then why it can’t thrive after its population has shrunk. And no reason why the transition to a smaller population must cause pain to society, although it may cause some pain to those who will have to give up a part of their wealth to address the issues that the transition to a smaller population entails.

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