Beat the Press

Dean Baker's commentary on economic reporting

5/01/2006

What’s the Problem With Less Crowding?

It would be reasonable to think that a densely populated island with exorbitant land and housing prices would be happy to alleviate its crowding problem. That’s not the thinking at the Washington Post.

The Post had an article this morning noting the surprising fact that the number of obstetricians in Japan is declining along with its dropping birth rate. The article notes that Japan’s population is currently shrinking, and that if current trends continue, its population will fall from over 127 million to just 100 million by 2050. The Post then describes this drop in population as a “problem.”

Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know. Maybe the Post will explain its reasoning in some future article, but for now, this front page story simply doesn’t make sense.

21 Comments:

  • At 6:45 AM, Anonymous James Schipper said…

    Dear Mr Baker
    Two issues are often confused: population decline and aging. Population decline as such is no problem, but it so happens that population decline, if it is the result of below-replacement fertility, goes together with aging. An aging population has an increasing dependency burden. Fewer workers relative to capital may mean higher wages, but that is hardly beneficial if an ever increasing share of those higher wages have to taxed away to support a burgeoning population of seniors.
    As so often, the dose makes the poison. If the fertility rate is 1.9, the problem is probably quite manageble. If it is 1.3, as seems to be case in Japan, aging problems may be quite severe.
    Regards. James

     
  • At 8:06 AM, Blogger spiiderweb™ said…

    I agree with James. That is exactly what I came here to comment about. Unless more is held aside from earnings of younger people, the country can't support the aged.

    Aged support is a pyramid scheme. It requires ever increasing numbers of participants or increasing costs to the younger.

     
  • At 8:10 AM, Blogger spiiderweb™ said…

    Have to agree with the original post.

    Less crowding and higher wages are both good. Except for care of the aged, Japan will benefit from the current trend.

     
  • At 9:29 AM, Blogger PGL said…

    Wasn't this issue also part of the Social Security debate? I seem to recall an interesting paper by Paul Krugman, Brad DeLong, and some other very bright economist! I'm always amuzed at certain pundits (e.g., those who write for the National Review) who seem to confuse aggregate growth with per capita growth.

     
  • At 10:47 AM, Anonymous baileyman61 said…

    I too must disagree with the first three posters. Embedded in their argument is the assumption that a working person cannot by their own contribution to economic output accumulate sufficient capital to fund their own retirement. That is, that they must depend on the next generation to fund their retirement, which iterates through subsequent generations. Careful, now, this assumption is also equivalent to saying the net present value of a person's lifetime income less lifetime liabilities is negative. True? Not possible for everyone or on average.

     
  • At 12:49 PM, Anonymous Anonymous said…

    Sheesh. Japan is fine. Productivity will continue to increase over the next 30 years as the typical japanese becomes far healthier and wealthier in coming decades.

    No doubt their government will have to tinker with redistribution from time to time. But like America, there is absolutely nothing to worry about long term.

     
  • At 12:55 PM, Blogger Tom Faranda said…

    I don't write for Narional Review Online, but anyone who thinks that a dramatically aging population is not going to create societal dislocations and intergenerational squabbles is living in lala land.

    Now Dean Baker in a book he co-authored - Social Security: The Phoney Crisis (Pp. 57-60) - tries to make a case that as we're living longer, we're living healthier, and I'm sure he would apply that rationale to Japan. Meanwhile healthcare costs as a % of GDP continue to rise. And then there's funding social security...

    Fewer workers + more retirees = economic troubles big time.

     
  • At 1:15 PM, Blogger Finnsense said…

    We should remember that the problem with pensions is that the system most of us have does not work so that you pay for your own pension. That will have to change and the transition will need to be managed well. However, it is short-term and needn't be a disaster.

    It is short-term because once the transition is made and people pay for their own pensions through contributions during their lifetimes it doesn't matter. Pensions are just savings.

    Secondly, it needn't be a disaster because there are a whole bunch of things that can be done to ease the pressure. People can work longer and get a smaller state pension, making up the rest with their savings. Retirees don't actually need very much money having already paid off their home loans so you needn't be looking at huge aged poverty.

     
  • At 2:49 PM, Anonymous Dale said…

    For some people, every possible scenario is a problem requiring dismantling social safety nets, privatization, longer working hours, lower wages, etc. etc. etc.

     
  • At 7:41 PM, Anonymous James Schipper said…

    Dear mr Baker
    People who don't work have to be supported by those who do, even when the non-workers own lots of capital, because capital without labor is unproductive. If I own a fleet of trucks but can't find any drivers, then those trucks aren't going to provide me with any revenues.
    This means that childless peole have to be supported in their old age by other people's children, whether they own capital or not. If a farmer is childless and wants to use his farm as a retirement fund, this is possible only if somebody else's son will be available to buy or rent the farm from him.
    Likewise, a country with a low fertility rate will be able to provide adequately for its senior citizens if it invests capital abroad. If a Japanese reaches the retirement age with 200 000 dollars invested abroad and if the rate of return is 4%, then foreign workers can provide him with 8 000 dollars of annual income.
    Consciously or not, that seems to be what the Japanese have been doing for some time. Of course this is not possible if all countries have low fertility.
    Regards. James

     
  • At 8:26 PM, Anonymous Anonymous said…

    In this context young people do two things

    1 - (when they are just entering the labor force) they provide relatively cheap labor

    2) - (when they in their prime)
    they help support older people who cannot support themselves

    that these are distinct confuses things. ie: the first is something rwers typically care about whereas the 2nd is something lwers typically care about.

    WaPo's perpective is that of management, hence they feel 1. This would be my guess as to why they put a article on the front page about Japan's big 'crisis'. That they do not explain their premises probably means they do not know why they feel they way they do.

    --there are potentially other societal biases. With this topic is very hard for anyone to be objective. For instance if deep down you have some contempt for older people you are going to see this kind of thing as a 'crisis'. or if you are a warmonger type you might see an older population as too weak ... or if you are Catholic you might have been taught big families are good .. and so on.,

    Who knows what passed thru the reporter's and editor's minds in this case.

     
  • At 3:28 PM, Blogger knzn said…

    james, You seem to be assuming that only one technology is possible for combining capital and labor. But a nation facing a shrinking labor force will most likely be able to adopt new, more capital-intensive technologies. In fact we already see this in Japan, for example in the increasing use of robotics. Moreover, such a nation can learn to specialize in producing capital-intensive goods, which it can then trade for the more labor-intensive goods that it might need. In the extreme it is probably true that “capital without labor is unproductive,” but Japan’s working-age population is never going to zero, and I would argue that the econometric evidence supports the view that there is a lot of substitutability between labor and capital in the long run. Your farmer should sell his farm to ADM (or their Japanese equivalent) and let them apply automated farming techniques.

     
  • At 3:34 PM, Blogger OskarShapley said…

    Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know.

    Mr Baker,

    if half of Japan's workers was killed today in a misterious series of accidents (a.k.a. deus ex machina), the real income of the other half of workers wouldn't double.

    A single driver can't drive two lories at the same time and lories double the size won't fit in the streets. Half of James Shipper's lories would stand still.

    My understanding is that capital is a product of labour.

    Your understanding/interpretation of capital seems to indicate that capital is equal to land. If we imagined a land (Egipt?) in which there are so many workers and so few arable land, that the workers/peasants have to cultivate small plots of land, then killing half the population would indeed significantly increase their wages, assuming they could easily cultivate plots double the size.

     
  • At 3:42 PM, Blogger Dean Baker said…

    I'll throw in a few quick comments here. If we ignore net holding of foreign assets (Japan has a large net positive position, the U.S. has a large net negative position), support for any cohort of retirees must ALWAYS come at the expense of the working population.

    This is every bit as true if the retirees get zero money from the government and all their income from private assets as if they get zero money from private assets and all their income from the government. The hope of advocates of private accounts is that they will lead to more savings and a larger future GDP. Whether private accounts will have much of a growth payoff is very much in dispute, but no economist will dispute that at a given level of GDP, a larger population of retirees implies fewer goods and services available for consumption by the working population.

    The second point is that the impact of productivity growth on raising living standards will typically dwarf any impact of rising elderly dependency ratios ratios on lowering living standards. Suppose that the ratio of workers to dependents (both elderly and children) falls from 2 to 1, to 1.3 to 1 over 45 years (approximately the story projected for Japan). If dependents receive benefits that average 40 percent of the before tax wage, this means that the dependency burden rises from 20 percent of the workers's before tax pay to 31 percent. However, if productivity growth averages 1.5 percent annually over this period, then before tax wages will have increased by 95 percent. This would leave a typical worker with almost a 70 percent increase in after tax wages, even though they would face a much higher tax burden. It is hard to see this as a crushing burden for future generations.

    Finally, there are items that don't get included in official price indices that may lead a serious understatement of real wage growth in this context. If Japan gets less crowded, then its people will receive benefits not recorded in standard data. For example, a lower population will mean that people will live closer to their workplace and face less congestion getting to and from work. Suppose that the average round-trip commute is reduced from 2 hours to 1 hour. On an 8-hour workday, this is equivalent to an 11 percent increase in the hourly wage, if the workday is thought of as time spent at work, plus time spent travelling.

    As I said before, I don't see the problem here.

     
  • At 5:54 PM, Anonymous Anonymous said…

    Best single line smackdown of the whole hand-wringing I have yet seen:

    "Careful, now, this assumption is also equivalent to saying the net present value of a person's lifetime income less lifetime liabilities is negative."

    I'm gonna write this on my wristband for the next whiny tax-haters huddle I find myself into.

    And may I be the next person to take a swing at explaining this to Mr. Schipper:

    If the old are healthier - which the Japanese will make sure of - then they can be "retired" and still pop out of the house occasionally and drive your truck for you. Their eyesight will be much better than we are used to, their reflexes, their joints, all ready and willing. My "retired" father-in-law is always doing stuff like this to ease the boredom.

    But robots will probably be taking care of it anyway. The railroads of *today* are already technically capable of running most everything remotely, it's just liablity (don't want to hit a car with an unmanned train, ugly PR), union resistance, and the capital needed to upgrade everything that keeps them from doing it.

    Please try to remember the fact that the future will be, y'know, futuristic. :>

    ----a different chris

     
  • At 7:38 AM, Anonymous Anonymous said…

    One other point that no one has put up is that the Japanese are extremely nationlistic and don't want Koreans or other foreigners to work there. Much like the todo here over our Mexican debate now. At some point maybe they will relent.

     
  • At 9:55 AM, Anonymous Robert Hume said…

    The reason the Post sees it as a problem is that in the US immigration is the reason that our population is not evolving as is Japan's.

    The Post is convinced that immigration is a moral good and hence population growth must be a moral good and population decline is bad.

    This has changed since the 70's when there was little immigration and population was forecast to decline. This was then seen as a great plus for the environment.

     
  • At 5:56 AM, Anonymous James Schipper said…

    Dear blog members
    Some good arguments were made. I'll make 3 final comments.
    1- Replacing more labor-intensive capital by less labor-intensive capital in response to a declining workforce comes at a cost.
    2- The dependency burden of retirees depends on the retirement age. There is nothing sacrosanct about the age of 65. The longer people live and the longer they stay fit, the higher the retirement age can be.
    3- Nothing can go on forever, and therefore we can't count on continuous increases in productivity. 1.5 % may not sound like a lot, but it means a doubling of productivity every 46 years, and there is no guarantee that it will happen, especially if it means higher energy consumption.
    Capital and labor are to some extent substitutes, but capital and energy are much more complementary. Two farmers with big tractors may plow as much as 4 farmers with smaller tractors, but the energy consumption per acre plowed may be roughly the same. We should always bear in mind that there are four factors of production: labor, capital, raw materials and energy.
    Regards. James

     
  • At 7:05 PM, Anonymous Robert Hume said…

    Eventually the world will come to a maximum in population. Then it will either stay at that level or it will decline.

    Presumably the world will eventually come to a stable population at some level.

    Whatever economic system is needed to deal with a constant population is one that we should work out and which we should point to.

    We also need to plan on how to be most happy as world population declines, since we are almost certain to eventually end up in that situation.

    So, I agree with many others. It makes no sense to say that we must aim for a growing population. That sort of scenario cannot continue indefinitely

     
  • At 3:18 PM, Anonymous Anonymous said…

    And so you thought reporters understood economics? I know better.

     
  • At 3:20 PM, Blogger Laura said…

    We should know by now that reporters don't understand economics.

     

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