Economic Growth in an Era of Demographic Decline

A shrinking population isn't the end of economic expansion.
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A shrinking population isn't the end of economic expansion.
Typical view of the Shibuya station crossing in the middle of Tokyo during a rainy night. (Photo: Moyan Brenn/Flickr)

Typical view of the Shibuya station crossing in the middle of Tokyo during a rainy night. (Photo: Moyan Brenn/Flickr)

Depopulation in Japan is accelerating. Such demographic decline is often associated with economic decline, albeit the latter causing the former. However, economic growth can also inform demographic decline, with better educated and more prosperous households containing less children. In this sense, Japan is a victim of its own success.

A falling population will eventually undermine economic growth. Smaller numbers of people demand less goods and services. Workers retire, outnumbering those who still pay into the pension system. The future for Japan looks dire.

The drop in population isn't as severe as the numbers suggest. For one, demographic projections have a poor track record with migration rendering models moot. Workforce should be the main concern. People could work longer and more could participate (e.g. women). Via education and training, salaries increase. Thus, a smaller workforce generates greater total income. Demand for goods and services grows. The economy grows even as the population declines.

Higher wages aren't the only way to generate more purchasing power for the entire shrinking population. Innovations in advanced industries lower the cost of goods and services. Total income stretches further, buoying employment.

Such savings only go so far. Communities grappling with demographic decline face health care and education costs rising faster than a growing economy, never mind one managing to tread water via efficiency gains in the manufacturing sector. In the United States, policy innovation spurs health care productivity growth:

The Obamacare gamble that hospitals can become much more productive conflicts with a famous theory of why health care costs rise. William Baumol, a New York University economist, called it the “cost disease.” ...

... This theory asserts that productivity growth in health care is inherently low for the same reason it is in education: Productivity-enhancing technologies cannot easily replace human doctors or teachers. In contrast with, say, manufacturing — a sector in which machines have rapidly taken over functions that workers used to do, and have done them better and more cheaply — there are, at least for the time being, far fewer machines that can step in and outperform doctors, nurses or other health sector jobs.

But a new study casts doubt on that theory and suggests Obamacare’s bet may indeed pay off. The study, published in Health Affairs by John Romley, Dana Goldman and Neeraj Sood, found that hospitals’ productivity has grown more rapidly in recent years than in prior ones. Hospitals are providing better care at a faster rate than growth in the payments they receive from Medicare, according to the study.

As more of the world transitions into demographic decline, health care costs move to center stage. We don't need a cool app or more computing power. We need better health care, cheaper. Take aim at this moonshot and better manage a world with less people.

Jim Russell, a geographer studying the relationship between migration and economic development, writes regularly for Pacific Standard.