The Blog

Babies and the Great Recession

The roots of economic collapse start with demographics.

12:16 PM, Oct 25, 2012 • By JONATHAN V. LAST
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Let’s tick through three pieces of bad news from the last week.

(1) David Smick has a bracing essay about the economic perils that await the next president. Actually, bracing isn't quite the word for it. Maybe terrifying is better:

The political party that controls the White House after January could, four years later, be out of power for a generation. The economic challenges are that daunting. . . .
The risk stems from something more fundamental: The globalization model of the past 30 years is cracking up. And there appears to be no new model to replace it.

What has Smick worried is this: Global exports are falling everywhere; not just China, but 12 other countries are also manipulating their currencies against the dollar; and cross-border lending has dried up. In sum, the era of globalization might be over. And, as Smick points out, it’s waning before we've come up with a system to replace it.

If Smick is right, then in the macroeconomic sense it would matter only slightly whether Obama or Romney is president because neither has any idea as to what will refill the hole in America's GDP that’s going to be left by the shriveling of our financial services sector which, at the peak of globalization, accounted for 40 percent of U.S. corporate profits.

But don't worry. It gets worse.

(2) As Smick was writing, Tom Edsall pointed to a hypothesis put forward by Northwestern economist Robert Gordon, which boils down to this: The era of U.S. economic growth is over.

Gordon's theory is that America isn't in recession; it's at the beginning of the new normal. American economic expansion, he argues, has been the result of a series of technological sea-changes—agricultural, industrial, financial, and informational. And now we're plum out of revolutions.

In a way, this is a variation on Tyler Cowen’s Great Stagnation thesis. My natural inclinations lead me to be sympathetic to this argument. It's the long-form version of saying that 60 years ago the best and brightest figured out how to go to the moon; today the best and brightest build apps for your iPhone. We're all about small-ball today.

(3) Finally, there’s this George Will column about the problem America’s democratic consensus has created for the nation’s fiscal health. Will writes:

Rash promises were made, Greve says, "in an era of prosperity, when and because we thought we could afford them." Now they "are far too entrenched to be dislodged in the course of ordinary politics." Even granting Mitt Romney's embrace of something like his running mate's reforms, this year's politics are terribly ordinary. Although consensus is supposedly elusive, it actually is the problem. "Our operative consensus," says Greve, "is to have a big transfer state, and not pay for it."

Looking at these three diagnoses, I'd propose that while all three have merit, there's something bigger lurking beneath the surface. And that thing is the single most important aspect of American life.

Lots of things have changed between 1945 and today. The most elemental is this: In 1945, America's population was on a course of steady growth; today that growth curve has flattened out and will eventually begin to decline. Because Americans don't have enough children to replace themselves and the only thing keeping our population from shrinking—for the moment—is immigration.

As Smick, Edsall, and Will make clear, America may have several discrete problems—the end of globalization or a lack of revolutions or an addiction to voting entitlement programs for itself. But each of these is undergirded by our larger demographic problem.

Globalization falters when exports shrink, but that decline is the result of slackening demand created by falling fertility. As a country's fertility rate falls, its median age rises, and eventually its population shrinks. And the only thing an old, shrinking society increases its consumption of is healthcare.

If we're seeing a slowdown of technological progress, that too can be traced to demographics. Because decades of economic research suggest that innovation is a function of population.

And as for the entitlement problem Will talks about, remember that the inherent flaws in Social Security, pensions, and Medicare aren't that the promises were made by a more prosperous society. It's that they were made by a society that was creating taxpayers at a much higher rate. America isn't poorer than it was during the Baby Boom years—we're much wealthier by almost every measure. What's changed are the assumptions about our population. People don't have as many children as they used to, meaning that we're not making as many future taxpayers as we had planned to, meaning that the ratio of workers to retirees has fallen to unsustainable levels.

And it's not just us. Look around the world at countries where the population is stagnating (or contracting), and you'll see economies stagnating, too. In the 1990s, people thought Japan was experiencing a mysterious "lost decade" where growth was suddenly put on hold. But it turned out that the mystery wasn't all that hard to solve: Japan’s economy was crippled by the country's demographics. And their Lost Decade continues today.

Well soon, it's going to be Japan's "Lost Decade" everywhere, all the time.

Jonathan V. Last is a senior writer at The Weekly Standard. His book on demographics, What to Expect When No One’s Expecting, will be published in January 2013 by Encounter.

Recent Blog Posts

The Weekly Standard Archives

Browse 18 Years of the Weekly Standard

Old covers