Demography and Economic Destiny

Megan McArdle examines the extent to which southern Europe's economic troubles are related to their demographic profiles. While she makes no explicit reference to U.S. troubles, some inferences can be drawn. The arc of modern industrial societies goes something like this. Improvements in living standards and health care result in lower infant mortality rates and increased longevity. As a consequence, parents make the rational decision to have fewer children because they have an expectation that these children will all grow to adulthood. Having fewer children allows them to pour more resources into raising each child. At first, this results in increasing growth as women can enter the work force and people in general can work longer.

However, as birth rates fall to below replacement level, a bulge enters retirement and starts drawing down on their savings, or to greater detriment, they draw on social security schemes that must now be funded by a smaller work force. These macroeconomic trends weigh down the economy. Even before these older workers enter retirement, they are highly paid, but less likely to be innovative risk-takers in ways that grow the economy.

The whole piece is worth a read, its an excellent primer on the subject. So what's to be done? McArdle calls for the usual remedies of raising the retirement age and forcing people to save more on their own. These are in fact good ideas, but I wonder why no one ever touches on the idea of immigration from countries where there are still high birth rates or there are two many people to countries with demographic issues. The U.S. has a demographic issue of its own, not as bad as that of Europe. We are in a better position to absorb immigrants than Europe, because we are already a nation of immigrants. I have posted this graphic before, but look again at the advantage of bringing in workers from a country like India:



Don't be fooled by the scaling either, India's population dwarfs that of the United States. Also, the U.S. problem is not near as bad as Italy's. To look at the population pyramid for any country by past or future decade click here, it is pretty interesting stuff.