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Babies and the Great Recession

The roots of economic collapse start with demographics.

12:16 PM, Oct 25, 2012 • By JONATHAN V. LAST
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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.

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