Population: Fueling (or Stalling) Economic Growth

Last year, the birthrate in China, the world’s second-largest economy, was the lowest on record. After decades of trying to control the population with a single-child policy, the effects of these laws have finally become real.

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For the first time in 60 years, China’s population fell in 2022, with 850,000 fewer births than deaths, according to the country’s official report. The country’s largely unpopularanti-population growth policies have done precisely what the government designed; the birth rate has fallen to 6.77 births per 1,000 people.

But instead of celebrating the success of the country’s arguably inhumane population control measures, China’s leadership has expressed concern over reaching this milestone too soon and is scrambling to figure out how to increase birth rates once again.

The country is the world’s largest, with more than 1.43 billion residents. And if they aren’t careful, their supremacy will be toppled by India. India’s population is 1.38 billion, but with a robust birth rate, this country could easily overtake China within a decade.

China wants to remain the largest country in the world, but why? The larger a country’s population, the greater the burden on social programs and other government-provided assistance. And although communist governments are designed to provide this type of welfare, the answer is less ideological and more capitalistic.

The Economics of Population

Population is one of the driving forces of modern economies. The amount of people within a country determines how many consumers the nation has and how many people are available to produce goods and services. Population is a critical factor for demand and supply, the lifeblood of any economy.

When the population grows, the economy has more buyers and drives greater demand for goods and services. The bigger the population, the more adept the market will be at supplying market demands. This growth cycle also encourages competition and innovation, exponentially increasing growth potential and consumption.

Tyler Cowen, Bloomberg contributor and professor of economics at George Mason University, described the relationship between population and economics this way, “With a significantly growing population, macroeconomic policy is much easier. The growing demands of an increasing number of workers and consumers is itself a form of economic stimulus. But these demands are not in general inflationary, because they are offset by more work and higher output. Those boosts in supply will tend to offset inflationary pressures, and they also will maintain economic growth. A significantly growing population is a kind of macroeconomic free lunch.”

His apt synopsis of the cyclical nature of population and economic growth makes a compelling argument for demographic expansion. Furthermore, it explains China’s alarm at their country’s poor population performance.

The decline in the Chinese population isn’t a new phenomenon. However, the country’s population of working-age citizens has notably fallen by 5% since its peak in 2011. Ten years ago, seven out of 10 Chinese people were working-aged. Today, that number has shrunk to six out of 10. In a country that depends heavily on labor to fuel its productive economy, the decrease in working-age citizens should cause alarm.

But China’s economy has been changing for a while. Its GDP growth peaked at 14.2% in 2007, and even though performance has remained high compared to other countries, it has steadily declined compared to historical norms. China’s GDP in 2021 was an enviable 8.1%, but further fell to 3% in 2022—the second lowest level in forty years.

China’s average annual GDP growth rate (since 1989) is 9%. But now, the International Monetary Fund believes the Chinese economy will maintain 4% annual GDP growth through the rest of the decade.

There are many reasons for this stark change in economic performance. Some point to China’s zero-COVID policy, which kept workers and consumers at home far longer than their western counterparts; others say restrictions on access to western technology caused by security concerns hampered the country’s growth potential.

But the big picture tells the whole story. China’s economic changes, like their population issues, didn’t grow overnight. Instead, decades of data clearly indicate an aging population and dwindling birth rates as significant factors in China’s economic future.

A History Lesson

China isn’t the only country feeling the population pinch; the U.S. has its own unique labor supply issues. But the interesting thing is how they got here. Because when considering both countries, it's easy to notice they’ve followed entirely different paths.

Every day, 10,000 U.S. citizens turn 65, and the senior population will make up 20% of the country by 2050. The economic consequences of America’s aging workers are already taking hold. But how did we get here?

World War II ushered in a birth boom the likes of which the country may never see again. For twenty years, from 1936 to 1956, the fertility rate ballooned from 1.8 to 3.2. That means the average woman had at least three children who would survive to adulthood.

The generation created during this birth boom was aptly named the Baby Boomers, and boom they did. As they aged into the workforce in the 60s and 70s, they blazed new trails and completely transformed the American business landscape.

This generation's sheer size meant more labor than ever was flooding the U.S. job market. It was also the first time women began working outside the home en masse, exponentially increasing the amount of available labor.

Before boomers aged into the workplace, only a third of U.S. women worked outside the home. That rate steadily increased to 38% in 1960, 43% in 1970, 52% in 1980, 58% in 1990, and 60% in 2000.

This new, gender-diverse workforce breathed new life into the American economy. Growing enterprises and elevating existing corporations to new heights became a boomer specialty. As a result, between 1960 and 1985, net domestic investment from private businesses comprised about 5.4% of the GDP each year. To put this in more tangible terms, during that time, $1 of every $20 spent in the U.S. was used to expand private businesses.

But the birth rates, and the economic success, couldn’t last. As fertility sank to 1.7 in the late ’70s, so did the economy. And when the birth rate ticked up again in the early 2000s, the U.S. and global economies experienced the meteoric rise of the dot-com bubble.

Boomers Gone Bust

Today, the U.S. economy faces a new population predicament. For the last 10 years, the U.S. population has grown at the second slowest rate on record. So while the country isn’t technically shrinking, population growth is hanging on by a fraction of a percent—0.47%, to be exact.

And those Baby Boomers aging out of the workforce? Their demographic is set to increase by 1.2% annually. While the working-age population, age 25-54, is only projected to grow by 0.2% yearly.

According to Neil Howe, economist and managing director at Hedgeye Risk Management, almost half of the country’s growth throughout history has resulted from efforts of the working-age population. Decrease the number of people in the working-age demographic, and the country’s prospects for future economic growth are in grave peril.

But the acute shortage of working-age labor should come as no surprise. For months, the U.S. labor market has been in an uproar, with far more jobs than people to fill them. Currently, there are 10.8 million open jobs in the U.S., and only 6 million people are seeking employment. It doesn’t take a math genius to observe the significant gap between labor demand and labor supply.

Although the market remains relatively strong, it isn’t as robust as it once was. And because of the labor shortage, it lacks some of the agility it once had. Typically, the Federal Reserve would respond to economic shrinkage by printing more money and lowering interest rates to encourage more participation in the economy, but with the current state of inflation, those measures are all but impossible.

With few tools the Fed can use in the face of inflation, the alternative solution seems obvious: encourage people to have more kids as economic insurance for the next generation. But what about this generation?

Unfortunately, having more children won’t fix the problem overnight. Even if a baby boom began tomorrow, the economy wouldn’t see the positive effects of the population increase for several decades when the children become working-age.

And even if increasing the birth rate could help, the crippling effects of inflation have put many families’ plans to have children on hold. The costs of everything from diapers to childcare are just too high, and few households can afford a parent to stay home full-time.

Inflation exacerbates the already low birth rates to create a chronic condition this economy will struggle to shake off.

Population Changes Across the Globe

The U.S. isn’t alone. Europe's population has grown by fractions of a percent since the 50s and has even gone negative in recent years. In 2021, the EU shrank by 0.11%. Much like the United States, many of the population problems result from an aging population with a longer life expectancy.

Despite its nominal growth, the EU has managed to grow economically. Their average GDP growth rate stands at 1.66%. But in the United States, where population issues are a comparatively new problem, average GDP growth is double at 3.13%.

Richard Jackson, president of the Global Aging Institute, made an interesting observation, “The economy of the developed world for the last two centuries now has been built on demographic expansion. We no longer have this long-term economic and geopolitical advantage.”

But the less developed world? That’s an entirely different story.

Some of the poorest nations on Earth have the fastest-growing populations. The top 25 countries leading the population pack are all located in Africa. But a growing population doesn’t automatically change a country’s economic outlook.

Unlike the U.S., Europe, and the rest of the developed world, these countries are historically mismanaged, struggle to provide essential goods and services for their citizens, and are often fraught with conflict. A growing population should mean there will be more consumers and labor to help turn things around, but without the right leadership and infrastructure, is that what will happen?

The people being born in Africa’s fastest-growing countries are the workers of the future. The question is, will their countries be able to harness the power of people to build up consumer culture? Will these nations be able to offer a competitive labor market once the newest generation becomes working-aged? Or will the increase in population be too much for their already fragile political and economic systems to bear?

The ebb and flow of the population is much like the push and pull of the market. Ever-changing, never the same, but always correlated. As nations’ populations rise and fall, so too do their countries' economic outlooks.

Although an undisputed indicator of economic output, population stagnation, or even decline, doesn’t have to spell doom. Those who understand how to do more with less without sacrificing agility will always rise.

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