China’s population declined last year, for the first time since the mass
deaths associated with Mao Zedong’s disastrous Great Leap Forward in the 1960s.
Or maybe it would be more accurate to say that China has announced that
its population declined. Many observers are skeptical about Chinese data. I
have been at conferences when China released, say, new data on economic growth,
and many people responded by asking not “Why was growth 7.3 percent?” but
rather “Why did the Chinese government decide to say that it was 7.3 percent?”
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In any case, it is clear that China’s population is or soon will be at a
peak; the best bet is probably that population has been falling for several
years. But why consider this a problem? After all, in the 1960s and 1970s, many
people worried that the world was facing a crisis of overpopulation, with China
one of the biggest sources of that pressure. And the Chinese government itself
tried to limit population growth with its famous one-child policy.
So why is population decline not good news, an indication that China and
the world in general will have fewer people placing demands on the resources of
a finite planet?
The answer is that a declining population creates two major problems for
economic management. These problems are not insoluble, given intellectual
clarity and political will. But will China rise to the challenge? That’s far
from clear.
The first problem is that a declining population is also an aging
population — and in every society I can think of we depend on younger people to
support older people. In the US, the three big social programs are Social
Security, Medicare, and Medicaid; the first two are explicitly targeted at
seniors, and even the third spends most of its money on older Americans and the
disabled.
In each case, the funding for these programs ultimately depends on taxes
paid by working-age adults, and concerns about America’s long-term fiscal
future arise largely from a rising old-age dependency ratio — that is, a rising
ratio of seniors to those of working age.
China’s social safety net is relatively undeveloped compared with the US,
but older Chinese nonetheless depend on government aid — especially the state
pension. And China’s old-age dependency ratio is skyrocketing. This means that
China will either have to inflict a lot of economic pain on its elderly,
sharply raise taxes on younger citizens, or both.
The other problem is subtler but also serious. To maintain full
employment, a society must keep overall spending high enough to keep up with
the economy’s productive capacity. You might think that a shrinking population,
which reduces capacity, would make this task easier. But a falling population —
especially a falling working-age population — tends to reduce some important
kinds of spending, especially investment spending. After all, if the number of
workers is declining, there is less need to build new factories, office
buildings, and so on; if the number of families is declining, there is not much
need to build new housing.
It would be foolish to assume that China cannot cope with its demographic issues. After all, if we are taking the longer view, China has been an incredible success story, transforming itself from a poor, developing nation into an economic superpower in just a few decades.
The result is that a society with a declining working-age population
tends, other things equal, to experience persistent economic weakness. Japan
illustrates the point. Its working-age population peaked in the mid-1990s, and
the country has struggled with deflation ever since, despite decades of
extremely low-interest rates. More recently, other wealthy countries whose
demographies have begun to resemble Japan’s have faced similar issues, although
these issues have been sidelined — temporarily, I would argue — by the burst of
inflation set off by policy responses to COVID-19.
To be fair to the Japanese, they have arguably handled the issue of
population decline pretty well, avoiding mass unemployment in part by propping
up their economy with deficit spending. This has led to high levels of public
debt, but there has been no hint that investors are losing faith in Japanese
solvency.
But can China — whose working-age population has been falling since 2015 —
manage things equally well? There are good reasons to be skeptical.
China has long had a wildly unbalanced economy. For reasons I admit I do
not fully understand, policymakers there have been reluctant to allow the full
benefits of past economic growth to pass through to households, and that has
led to relatively low consumer demand.
Instead, China has sustained its economy with extremely high rates of
investment, far higher even than those that prevailed in Japan at the height of
its infamous late-1980s bubble. Normally, investing in the future is good, but
when extremely high investment collides with a falling population, much of that
investment inevitably yields diminishing returns.
Indeed, at this point China’s economy appears to rely on an incredibly
bloated real estate sector, which sure looks like a financial crisis waiting to
happen.
It would be foolish to assume that China cannot cope with its demographic
issues. After all, if we are taking the longer view, China has been an
incredible success story, transforming itself from a poor, developing nation
into an economic superpower in just a few decades.
On the other hand, I am old enough to remember when every other business
book seemed to have a samurai warrior on the cover, promising to teach the
management secrets that were turning Japan into the world’s economic leader.
The point is that for economies, as with investment funds, past performance
is no guarantee of future results. We do not know how much China’s demographic
challenges will cause it to stumble, but there are good reasons to be
concerned. I have heard pessimists describe the situation in China as similar
to that of post-boom Japan without the same high level of social cohesion that
allowed government and society to cushion the fall.
Oh, and China is a superpower, with an authoritarian
and seemingly erratic leader. I do not think it is alarmist to worry about how
it will react if its economy performs poorly.
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