Will Falling Population Growth Actually Reduce Economic Growth?

Questioning the standard Substack view

Was population growth a consequence or a cause of the transition to modern economic growth? This would be good to know, given that fertility rates continue to fall around the world. Understanding how these factors influenced each other in the past could help us predict what declining populations mean for our future.

If it’s true that economic growth caused population growth historically, then we might have nothing to worry about. But if population growth helped drive economic development, we might need to start worrying.

I won’t bore you with a detailed overview of the debate. Just know economists are pretty divided on the issue. If you want more detail, look here and here for ‘pro-demographic guys’ and here and here for their opposition.

It’s very interesting. Some researchers find bidirectional causality, some find little to no statistically significant relationship, some explicitly outright contradict each other, depending on the timeline and geographic area. So what are we to make of this debate?

Well, there are roughly two schools of thought. One is that modern economic growth causes population growth, and the other is that population growth causes modern economic growth. These two sides seem irreconcilable, don’t they? Well, I’ll spoil the punchline a little early: both sides can be right, (and in fact they are), just at different points in time.

David Bloom resolves this apparent conflict in his paper Population Dynamics and Economic Growth in Asia by examining the demographic transition. This is a commonly accepted theory that states that during modern economic growth, an economy changes from a high fertility, and high mortality one, to a low fertility, and low mortality one. But the transition is slow, and the two variables do not fall at the same time. At first, mortality plummets, mostly clustered around the ages of 0-5, due to a reduction in waterborne disease. But during this time of low mortality, fertility is just as high as ever. Thus, the population explodes.

What this indicates is that at this stage the first school is right. High rates of population growth are consequences of the decline in mortality, and the decline in mortality is, of course, not caused by higher population growth; it is caused by greater wealth generation, which in turn creates infant-saving infrastructure and lowers food prices. And, of course, this then causes a huge surge in population.

So modern economic growth is a trigger for rapid population growth because it causes the demographic transition to begin.

But Bloom’s theory also vindicates the second view. “less widely recognized, though perhaps more important, [the demographic transition causes] sizable changes in the age distribution of the population.”¹ The initial surge of surviving children creates the leading edge of a population bulge. Later, as fewer babies are born, this creates a trailing edge.

Look at the leading and trailing edges from 35-45 move up the pyramid over time

While death rates drop quickly and cause population to surge, birth rates eventually follow the same pattern. They gradually decline until they match the new, lower death rates. At this point, the population stops growing. Japan has nearly reached this stage, while South Korea has moved beyond it, with its population now shrinking. Since the decline in births affects only the bottom of the age distribution (newborns), the population's shape changes from a pyramid to something more like a rectangle. This has important consequences.

Here’s why: “The young and the old tend to consume more output than they generate, unlike working-age individuals, whose contribution to output and to savings tends to be more than commensurate with their consumption.”² Therefore, where this population bulge sits in time significantly affects output per person. Bloom finds that economic performance “tends to be depressed when a relatively large part of the population consists of young and elderly dependents.”³ As an added benefit, having fewer young dependents leads to more education per child, which helps future economic growth.

Could the 1950s have birthed something as innovative and exciting as Rock & Roll without the baby boom? Pictured: Little Richard

So the debate in the literature seems to be a false dichotomy. It conflates the trigger and the time path. Once the trigger is tripped, (Britain in the 1780s or Singapore in the 1960s), population growth transforms from an effect of economic growth to a cause of economic growth. And Bloom thinks population growth causes economic growth mostly because of the youth-dependency ratio. But before I wrap this post up, I’d like to count some other benefits in the tally. I would be disappointed if you came away from this essay thinking the youth-dependency ratio is the only thing population growth is good for! So let’s see what the fabulous Gary Becker had to say on the issue.

Becker distilled all the benefits into a few big ones. They were: larger populations may encourage higher returns to specialization, larger populations may spur more research and development, (investments in knowledge and technology), also increases in human capital, increases in labour supply, and increased demand for goods and services. (bigger market)

Since Malthus, many economists have thought negatively of population growth, thinking it lowered per capita income. Some thought it diluted the capital stock or ran “our resources dry”. But these ‘negatives’ commit a heavy implicit assumption that people often make. It assumes the market won’t react! It assumes population growth is independent of capital accumulation. That more families will not invest in human capital, that more capital-intensive cities will not grow in importance, and that specialization will not increase, increasing human capital more. It also assumes the market won’t create substitutes for resources that decrease in supply, or invent less costly extraction methods. As Tyler Cowen says, don’t underestimate the elasticity of supply.

So, Becker concludes that these negatives, when compared to greater R&D, specialization, and larger markets, clearly suggest a positive cost-benefit tradeoff for population growth.

So to conclude this post, what are we to make of our current situation? We’re in uncharted territory, being this far to the right of the demographic transition. We’ve seen that population growth does have a causal effect on economic growth. Becker thought that the benefits of population growth outweighed the costs. But what happens when populations shrink? Do the downsides then outweigh the advantages? Bloom's research also showed major benefits from population growth. This suggests what I worried about at the start: declining populations might slow down our economic and technological progress.

Becker saw this coming in the 1990s: “Birth rates could become so low relative to mortality that the steady-state rate of population change could be negative. In fact, fertility is presently below its replacement levels in more than a dozen countries. Declining populations could eventually have a significantly negative effect on specialization and other determinants of productivity.”⁴ In 1950, the global fertility rate was 4.86. When Becker was writing in 1999, it was 2.73. This year, it’s only 2.401, barely above the replacement rate.

As we’ve written before, policy has a very hard time affecting fertility. Rather than focusing on incentivizing more babies, we may very well need to focus even harder on technological progress. Expanding the capacity of the humans we do have, by embracing developments in AI, robotics, and automation, could maintain economic growth even with increasingly fewer workers. The new demographic transition may be inevitable, but technological decline doesn’t have to be.

1. Bloom, p. 258

2. Ibid.

3. Ibid.

4. Ibid.