The Demographic Panic

An Economic Analysis

Recently, many persons seem to worry about demographic trends in the world and more specifically in developed countries. This week, French president Emmanuel Macron addressed the issue in a speech on the major orientations of the newly formed government. It’s true that France used to be one of the rare rich countries where the fertility rate was maintained at a relatively high level – though below the replacement rate of 2.1. But the French fertility rate is going down since the mid-2010s, as the chart below indicates (source).

The French situation is nonetheless good compared to what is happening in other countries. Italy’s fertility rate for instance is down to 1.3, South Korea’s is (dramatically) less than 1.1, and the U.S.’s less than 1.8.[1] The point however is that there is nothing new. For most developed countries (and France is an exception) fertility has been decreasing for several decades. The trend expands to all countries as Michael Huemer notes in an essay that discusses the issue, as the chart below shows (source):

It is therefore a bit surprising that observers and politicians are suddenly worrying about an issue that is several decades old. But, at least in the West, I think this is probably the symptom of the increasing acknowledgment that liberal democracies show signs of decadence and decline. Demography is indeed one of the factors that at the same time contribute to this decline and indicate that people themselves are anticipating it (more on this below).

There are at least three reasons why a declining demography is a major problem for a nation and its state. First, for a given rate of immigration, a diminution of the fertility rates entails a diminution of birth and over the long term, an aging population. An aging population means a reduction of the workforce, a decline in average productivity, more risk-aversion, and an increase in the share of resources allocated to the support of nonproductive and less healthy people. In short, the older the population is on average, the less it produces wealth and the more it needs resources to sustain its life standing. Second, fewer births entail that fewer persons will live. This reduces the chance that among the persons being born we will find the next Einstein or Bill Gates.[2] Third, less births means (again, keeping the immigration rate and everything else constant) a diminution of the population over the long run, which entails more vulnerability to military threats. Population size is obviously an important military factor, as the current war between Russia and Ukraine illustrates.

It is interesting to tackle the demographic problem with a bit of economic reasoning. The decision to have a child is partly an intertemporal one. There are many reasons why people would want to have a child or not. Part of them are the biological urge and the intrinsic worth of raising a human being. There are also more material considerations. In the short term, having a child entails significant opportunity costs, e.g., the money spent on their education and health, and the sometimes significant sacrifice in terms of professional ambitions and career. In the long term, a child will become an adult who can support psychologically and materially the aging parents. Keeping the biological urge and the intrinsic worth of having a child constant, the decision to have a child is affected at the margin by the tradeoff between short-term and long-term considerations. In sum, we sort of have an intertemporal optimization problem analogical to a standard consumption/saving one. And, as it happens, the reduction of fertility rates is often accounted for in terms of this kind of marginal analysis. In particular, the fact that the job market is now fully open to women implies an increase in the opportunity cost of raising a child.[3] More speculatively, pension schemes reduce the incentive to have a child.     

If we continue with economic reasoning, the social choice regarding the number of children to have (i.e., how many children “society decides to have”) is also an intertemporal one. In the short run, raising children diverts resources from more productive uses. Human beings are not productive – at best – before the age of 16-17 and, to make them productive, society has to allocate a lot of resources to them. Of course, it pays off over the long run. In this sense, making kids is an investment that society makes to maximize the present value of future stream of wealth that these kids will contribute to create as adults.

Note that this entails an externality issue. None of the three reasons that make a higher fertility rate socially desirable is reflected in the individual maximization I alluded to above. You make children and invest in them for immediate and future returns, not for future growth, to increase the probability of finding geniuses, or to increase the country’s military power. Indeed, children-making and raising is an (impure) public good. The state is thus on solid grounds when it implements public policies aiming at increasing the fertility rate. These policies typically act on the immediate or short-term opportunity costs, as illustrated by those implemented by Orban’s Hungary or those to which Macron alluded in his speech a few days ago.

However, public policies targeting short-term opportunity costs have not been effective overall. Or maybe they have been, but not enough to compensate for the decrease in fertility due to other factors. Above, I mentioned that among the other factors that determine people’s preferences for having children are the biological urge and the intrinsic worth of having and raising a child. Let’s put the former aside and concentrate on the latter. In his essay, David Huemer argues that people put less value on having children because of liberal values and norms. This amounts to what can be called a “institutions/preferences coevolution” type of explanation. Liberal societies are more individualistic than non-liberal ones. Family is seen as less important (other forms of social relations are valued), personal and professional success is granted more value. This affects the value of opportunity costs – diminishing the opportunity cost of not having children – by changing preferences about what matters in life. Moreover, the effect of liberal institutions passes not only through personal preferences but also through social norms. It is now normal for a woman to not want to have a child. Standard incentive-based policies are mostly powerless against these changes.

This probably explains a lot. But there is a missing ingredient. Part of the intrinsic worth of having a child depends on expectations about the child’s future life. Obviously, the more you’re optimistic about the life-prospects of your would-be child, the more you’ll be willing to value having them. Though it is difficult to quantify, the decrease in fertility rates in the West probably also reflects a general pessimism about the future of Western societies. As I said above, demography is as much a symptom that people perceive and expect a civilizational decline as a symptom of the decline itself. Demographic trends are thus even more important as they reveal beliefs that can, to some extent, turn into a self-fulfilling prophecy.  

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[1] All the data are from https://www.macrotrends.net/countries/USA/united-states/fertility-rate.

[2] This is the main longtermist argument in favor of increasing fertility. John Quiggin has however recently noted that instead of giving birth to more people, we could rather divert resources toward improving the life conditions of billions of existing people, helping them to realize their full potential.  

[3] Bryan Caplan remarks however that, on the other hand, parenting options improve as a country gets richer. This tends to reduce opportunity costs.