The Demographic Cliff

A plunge in births by immigrant women led the charge to a new low in U.S. birthrates.

Tyler Cowen says that this is the real fiscal cliff, but what I think is important is to see that there’s nothing particularly “fiscal” about it. Since we do have some important federal programs in place to transfer economic resources from working-age people to elderly people, demographic shift translates into a budget issue. But this isn’t an accounting problem. It’s an actual problem of the quantity of human beings around and what they’re doing. If a very large share of the population is elderly and in need of care, then either those elderly people will have a very low standard of living (thanks to an inadequate number of caregivers) or else a very large share of the working-age population will need to be taking care of elderly people.

There are also implications for savings. Your savings just looks to you like a number on a computer screen somewhere. But the concrete manifestation of long-term savings is investment in long-duration assets—houses and airports and shopping malls and office buildings. The amount of this kind of investment that’s happening at any given time is cyclical and sensitive to interest rates, but a driving assumption underlying all of it is that “in the long run we’re going to need more stuff because there will be more people.” If there actually won’t be more people, then the outlook for investment looks very different.

None of which is to say that population aging and even shrinkage is necessarily an insurmountable disaster or anything. People sometimes worry that with automation and whatnot there won’t be any jobs for humans in the future. But there will be—taking care of old people! It does, however, have big implications for the economic future.