In my last post we evaluated the first argument for secular stagnation – economic inequality – and found it to be completely irrelevant. This was true even though some sectors of the US population, from the middle of the middle class down, are clearly under stress. In this post we’ll take a look at the second argument: demographics.

As we think about the demographic argument, we need to keep in mind the Curtisian Rule of Demographics: all demographic projections are wrong.(1) You might suppose that we’d all be experts on the subject of procreation, but in fact nobody knows anything about the subject, with the result that virtually every long-term projection anyone makes turns out badly.

The most famous bad outcome was, of course, that of Thomas Malthus himself, who infamously predicted human doom at the hands of a Malthusian catastrophe, as human population growth outstripped food production. Wrong, wrong, wrong.

More recently, the same prediction was made by the Population Bomber(2) Paul Ehrlich. It was already too late, said Ehrlich – hundreds of millions of humans were going to starve (or die of disease) – and only by draconian government action could billions more be saved. But what bombed, of course, was Ehrlich’s prediction. Even as his book was coming out, human procreational practices were changing drastically, resulting in a world in which population growth isn’t the problem, population decline is the problem. Talk about being wrong.(3)

Now, bizarrely, the direct ideological descendants of Ehrlich are demanding draconian government action because the US population is growing too slowly and is causing secular stagnation. How they can switch sides with a straight face is a subject that would be interesting to speculate about, but I promised to take their arguments seriously, so here goes.

The demographic argument for secular stagnation goes like this. For the half century after World War II the US economy boomed only because we enjoyed major demographic tailwinds: the huge Baby Boomer generation was born, women entered the workforce in large numbers, and productivity grew rapidly. All this, say the secular stagnationists, is history, and so is US economic growth.

But suppose you were a Keynesian economist writing in, say 1936. Would you have foreseen these big tailwinds? No, what you would have foreseen is – secular stagnation, a la Alvin Hansen. Hansen looked at the recent past and made a big mistake. Current secular stagnationists also can’t foresee the future. They look at the known tailwinds from the recent past, observe that they’re behind us, and project – secular stagnation.

It’s the very nature of demographic phenomena to be unpredictable, and my thoughts about the matter are likely to be no more perspicacious than anyone else’s. But it isn’t all that difficult to identify some trends that point in the opposite direction from secular stagnation:

Large generational cohorts. While it’s true that the Baby Boomers are entering retirement age, with their most productive years behind them, the secular stagnationists fail to note that the Millennial Generation is actually larger than the Baby Boomers. There are some 76 million Boomers, but 87 million Millennials. The oldest of the Millenials is barely thirty, while the youngest are not yet teenagers. That cohort will be productive for a very long time.

Immigration. The secular stagnationists assume that immigration will remain as-is. It’s certainly true that the immigration issue is currently a political football in Congress, but that could change quickly. As commentators have noticed,(4) the character of immigration into the US is changing rapidly. Economic conditions in Mexico have greatly improved, and as they have, the migration of desperately poor Latinos to America has declined precipitously. Today, the major demand for entry into the US comes from highly educated, even wealthy foreigners. Eventually, even Congress will recognize that welcoming these migrants and giving them a clear path to citizenship will be an important driver of economic growth for many years to come.

Aging societies. It’s true that as the Baby Boomers age, the US population gets older, but let’s put that in perspective. Virtually every major economic competitor of the US is vastly worse off. Indeed, by comparison, America looks positively juvenescent. Here is the percentage of the national population that is aged 65 and older in various countries:

Japan – 26%

Germany (and Italy) – 20%

UK – 16%

USA – 12%

China – 9%

The percentage in China is lower than that in the US, but it is rising much faster. Only India, among even conceivable competitors to the US, has a lower percentage of over-65 citizens (a mere 5%).

Retirement age. There is no reason to suppose that the US retirement age will remain at 65. That age was established in 1880 by Otto von Bismarck, when the average male’s life expectancy was 55. The US adopted the same age in 1935, when the life expectancy was 61. Given the dangers faced by the Social Security System, vastly longer life expectancies, and much better health later in life, we can safely assume that people will soon work ten years longer.

Birth rates. This one is a bit out there, but I wouldn’t be surprised to see US birth rates rise somewhat in the future. They declined because of growing affluence and women working outside the home. But in a post-feminist world I would see families essentially “right-sizing” the decisions as between children and work in ways that will tilt toward children a bit more than in the recent past.(5)

Adaptability. The ability of a society to change and adapt is an important determinant of whether demographic projections are destiny or not. The mere growth in population – as with the Baby Boomers – only translates into an economic advantage if the economy is vibrant enough to make room for the newcomers. In most places around the post-war world, rapid population growth only translated into greater poverty. Women entering the workforce certainly provided a tailwind to the US economy, but in many societies even today women are prevented or discouraged from working, or are shunted off to low-skilled or part-time work. As the most open society in the world, America has embraced change. For example, we currently boast 46 million foreign-born residents, far more than any other nation. In its largest city, New York, 37% of the residents are foreign-born, some 3 million people. That’s far and away the largest number of any city in the world. To indicate how “closed” other societies are, and therefore how resistant they may be to changing their demographic fates, here are the foreign-born percentages in other cities: Berlin – 13%; Tokyo – 2%; Rio de Janeiro – 1%; Sao Paolo – 1%; Shanghai – 1%; Mumbai – 1%. Ouch.

Next up we’ll look at the central banker-exhaustion argument.

(1) To understand why this is the case, see my two posts, “On Demographic Projections,” posted on 1/16/15 and 1/22/15. The short of it is that while demography is a very power force, straight-line demographic projections of current trends are almost always wrong. Life is just too complicated.

(2) Ehrlich published The Population Bomb in 1968.

(3) Even the New York Times, formerly a big Ehrlich supporter, recently ran an article entitled “The Unrealized Horrors of Population Explosion.” 5/31/15. As the article noted, Ehrlich claimed that India was history, that 65 million Americans would die, and that “England will not exist in the year 2000.”

(4) E.g., David Brooks, New York Times, 5/26/15.

(5) Full disclosure: I have six kids.

Next up: Slow Recovery or Secular Stagnation? (Part 5)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.