Wasting Public Funds on Destroying the Planet
It is remarkable that ostensibly intelligent people can be made to fear the possibility that Europe and Japan will be less crowded places in the years ahead. The Financial Times has an article that reports on a warning from “top fertility experts” over “Europe’s chaotic response to its demographic crisis.”
It is hard to find the evidence for the crisis in the story. The article reports that health care spending as share of GDP is projected to rise from a Europe-wide average of 6 percent at present to 8 percent by 2050. Since the U.S. currently spends 15 percent of its GDP on health care, it is difficult to get too concerned about this prospect.
The article gives the usual hype about the rise in dependency ratios – there will be fewer workers for every dependent. Those who have mastered arithmetic know that the projected increases in productivity swamp the impact of rising dependency ratios on living standards. For example, if productivity growth averages a very modest 1.5 percent annually, by 2050, before-tax wages will be nearly twice what they are today. This means that even if taxes increased by 15 percentage points over this period, workers would have far higher after-tax incomes in 2050 than they do today.
The best way to deal with Europe’s “demographic crisis” would be to teach arithmetic to the top fertility experts and the reporters who cover their press statements.
posted by Dean Baker @ 8:55 PM
14 Comments:
At 5:36 AM,
James Schipper said…
Dear mr Baker
Some countries in Europe now have fertility rates between 1.1 and 1.2. This means that each generation is about half of the preceding one. Such low fertility must be a problem. The question is not so much whether fertility is below the replacement level, but how far it is below that level.
Regards. James
At 8:36 AM,
John said…
When I was young we were supposed to worry about the exploding population. As I recall a certain Paul Ehrlich was famous for his doomsaying.
Now in my senior years I'm supposed to worry about the very opposite?
No, enough! I want you talking heads to come together and agree on an officially approved worry that we can fret over at all times. No more of this changing worries like women's fashions.
At 10:22 AM,
Dr. Tax in Sacramento said…
I am not sure whether you are responding to the article or simply defending your own beliefs. If the demographic projections are correct and if the European nations are going to go from 20% to 33% of people over 65 does that change anything in the continent? Are there implications for the workforce or for the social welfare system or for health care? Of course there are.
Do just one hypothetical. If fertility rate is dropping and the Europeans import workers, from other parts of the world where fertility rates are considerably higher - does that have any implications for those nations in terms of their social systems? IF you think no problems you probably have not been attentive to the range of emerging issues in place like France or Spain.
The mix of population by age creates differing effects on the economy in terms of all of the things mentioned in the article. Presumably an older population has even a smaller fraction of people in the work force (what would be the difference between the potential effects in the US and Europe where participation rates are significantly different) or for the ability of the governments to maintain their social welfare spending at the levels of GDP currently (remember that the % of GDP going to government in all of Europe is higher than the US)?
The point of the article was not alarmist, the FT is rarely alarmist, but to get thinking people to consider the effects.
At 12:26 PM,
S Brennan said…
tax Sacramento,
Is this a question or a statement:
"If fertility rate is dropping and the Europeans import workers, from other parts of the world where fertility rates are considerably higher - does that have any implications for those nations in terms of their social systems?" - tax Sacramento
The reason I ask is your question/statement presupposes that population size must remain constant regardless of productivity gains.
Why
At 4:06 PM,
Robert Hume said…
The other important point is that the immigrants very often bring in their parents and grandparents who immediately become eligible for some form of subsidy. And, of course the immigrants themselves get old so either we go into a Ponzi scheme or, sooner or later, we stablize at some population ... perhaps after a decline in which we need build no new roads, buildings and much other infrastructure just repair the best stock.
Also the burden of educating and otherwise supporting the young is reduced.
At 6:50 PM,
Half Sigma said…
"Those who have mastered arithmetic know that the projected increases in productivity swamp the impact of rising dependency ratios on living standards."
If productivity has really risen so much, then how come we don't have more vacation time today than we did back in the unproductive past?
At 8:47 PM,
Patrick S. O'Donnell said…
I'm no economist, but as John writes above, this does remind one--in a converse, perverse kind of way--of past Malthusian Darwinist (with all due respect to Malthus and especially Darwin) worries about population growth and subsistence, an argument ('the dismal theorem') refuted by Engels with a delightful reductio ad absurdum (and contemporary discussions of which are found in William Murdoch's The Poverty of Nations: The Political Economy of Hunger and Population, 1980, and several works by Jean Dreze and Amartya Sen). Demographics is a discipline in search of demand (a 'crisis').
At 9:26 PM,
Dale said…
There is always a crisis. And the crisis will always call for belt tighening by ordinary working folks. The nature of the crisis is perhaps besides the point. But we must remember never to relax, never to expect a better world of peace, prosperity and beauty.
And I suppose that we should get over thinking the productivity increases will, in the future, have anything to do with broad based prosperity.
At 9:27 PM,
S Brennan said…
Half Sigma,
Productivity gains have nothing to do with either vacation or pay. Vacation in the US is strictly compensation, it is no different than pay. In other countries vacation is mandated by the state.
To be clear, productively gains render labor less valuable to capitol investors and the executive class that serves the untitled gentry. They simply need less of labor as labor becomes more efficient and as demand drops for labor so too does compensation. Vacation in this country is strictly compensation.
At 2:10 AM,
James Schipper said…
Dear mr Baker
Suppose that Peter weighs 100 pounds and Paul weighs 500 pounds, then their combined weight is too great. However, it does not follow that both Peter and Paul should go on a diet. At 100 pounds, Peter is clearly underweight and should try to become fatter, not leaner.
Similarly, some countries are demographically overweight and others are demografically overweight. To say that some countries should try to reduce their fertility rate while should try to increase is is perfectly logical.
World population is an abstraction. If your neigbor has 10 kids, that doesn't mean that you should refrain from having children. Likewise, if some African countries have fertility rates far above the replacement level, it doesn't follow that European countries with fertility rates below 1.4 should refrain from pursuing a natalist policy.
Regards. James
At 5:54 AM,
Dean Baker said…
a few quick points:
first economists are supposed to know that well-being depends on after-tax wages, rather than the tax rate. Bill Gates is much better off than me even if he faces a tax rate of 99 percent and I get my income tax free.
Economists who talk about groing dependency ratios seems obsessed with discussing tax rates, rather than what happens to after-tax income (which rises in every scenario). My guess is that they are more concerned about the politicians who may have to support unpopular tax increases at some future point that the real impact on living standards (this certainly seems to be the case in the United States).
In terms of the population these countries need, as the population stabilizes and falls, many jobs that must be filled today will no longer exist (e.g. childcare workers and school teacher). In the case of other jobs, if there is a labor shortage (remember we were concerned about high European unemployment, as in too much labor) then wages rise and the less productive jobs go unfilled. So, there is no one to work the midnight shift convenience stores, there are no people working as valets at restuarants. Excuse me if I'm not worried about this.
On the Malthusianism in my comment, I'm sorry, global warming is really. That is the view of every climatoligist not employed by the oil/auto industry. Whatever steps we might want to do to reduce greenhouse gas emissions will be easier if there are fewer of us emitting. That should be pretty evident.
At 7:35 AM,
Anonymous said…
It seems like Dean has high regard for certain future trends while dismissing others. Global warming by 2 to 9 degrees in 2100 seems like a sure thing along with huge health care cost rises by 2025, yet the pace of accelerated technology gains seems to be ignored -- a trend which could easily mitigate both problems in coming years.
By the way, productivity gains over the past 100 years has cut work from about 65 hours/week in 1900 to around 37 hours a week in 2000.
At 5:53 PM,
Laurent GUERBY said…
"well-being depends on after-tax wages"
Plus value of goods and services provided by paid taxes.
Economists are supposed to know that :).
At 9:15 PM,
James Schipper said…
Dear mr Baker
It makes sense to say that economic well-being depends on the level of after-tax income. Unfortunately, this may not be true at the subjective level. A person may feel better-off if he makes 20 000 per year and can keep it all than if he makes 40 000 before taxes and has to surreender 16 000 of it to the government. It is pointless to call that irrational. What matters is whether such feelings are real. Irrational sentiments are as real and psychologically valid as rational ones.
Regards. James
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