4 min read.Updated: 21 Mar 2021, 09:36 PM ISTVivek Kaul
Printing more and more money won’t overcome the drag of fewer and fewer working-age people
Around ten days ago, the European Central Bank said that it would accelerate its printing of money. A Reuters news report points out that the Frankfurt-based central bank plans to print more than €60 billion a month.
The idea, as has been the case since 2008, is to print and pump money into the financial system, to drive down interest rates, in the hope of generating economic growth.
The Bank of Japan has also been working along similar lines, having printed over 127 trillion yen (around $1.18 trillion) over the last one year. The Federal Reserve of the United States has printed more than $3 trillion in the last one year.
While Western central banks are printing money in the hope of creating economic growth, they are ignoring a basic factor, the population of their countries, which has either been contracting or growing at a very slow pace. As a March 2006 paper released by the European Commission put it: “Never in history has there been economic growth without population growth."
The birth rate of the European Union (EU) in 2018 stood at 1.54. This rate is the average number of children born to a woman during the course of her fertile years. Hence, in the EU, in 2018, 100 women on an average gave birth to 154 babies. The birth rate of Japan in 2018 stood at 1.42. The birth rate in the EU has risen over the last 25 years. In Japan, it has gone up since 2005.
Nevertheless, it is still much below the replacement rate of 2.1. The replacement rate is the total fertility rate of women at which the population automatically replaces itself, from one generation to another. The extra fraction of 0.1 is basically for girls who will die young, before they reach the age of fertility.
Both the EU and Japan are in the midst of a low-fertility trap. As Vaclav Smil writes in Growth: From Microorganisms to Megacities: “Fewer and fewer children around changes the perception of the ideal family size and sets it well below fertility level."
Thanks to a lower birth rate, the total population in Japan peaked in 2010 at 128.1 million. It has since been falling, and in 2019 stood at 126.3 million. Meanwhile, the working age population (people between the ages of 15 and 64) in the case of Japan peaked way back in 1996 at 87.1 million, and was at 75.03 million in 2019.
In the EU’s case, the total population is still going up, though at an extremely slow pace. In 2019, it stood at 447.5 million, having gone up just 1.5% since 2009. Interestingly, as Smil points out, by 2016, 12 of the EU’s 28 countries had already seen more than one year of absolute population decline.
Before it begins to decline, the EU’s population is expected to peak by 2025. While the EU’s population is still growing, its working age population peaked back in 2009 at 295.8 million and has since declined to 289.2 million.
The trouble is that as a country’s working age population slows down, economic activity slows down as well. Further, as Slim writes: “Aged populations provide a smaller taxation base and lower per capita state revenues." It also leads to a higher average tax burden and lower disposable income, basically conditions in which having children becomes an unaffordable option. The spread of the covid pandemic has hit incomes hard and will only harden this long-term trend.
While this trend might be at its extreme level in the EU and Japan, it will be a major problem in large parts of the developed world in the years to come. As Ruchir Sharma of Morgan Stanley Investment Management writes in The 10 Rules of Successful Nations: “The number of working-age people is expected to grow at a rate of about 0.2 percent in the United States, Britain, and Canada."
The problem is particularly severe in Japan. As Slim asks in Numbers Don’t Lie, as the Japanese working age population keeps shrinking, “who will maintain Japan’s extensive and admirably efficient transportation infrastructure?" and “who will take care of the millions of old people?"
While robots are expected to take over some of these activities, there is a need for younger workers, as Japan is likely to witness shortages of health care personnel and other workers, in the years to come. A similar trend is likely to play out in other developed countries as well, though not as soon as in Japan.
One way for the developed world to solve this problem is to allow greater immigration from other parts of the world, where populations are still growing, in particular Africa. As Rutger Bregman writes in Utopia for Realists And How We Can Get There: “If all the developed countries would let in just 3% more immigrants, the world’s poor would have $305 billion more to spend… That’s the combined total of all development aid—times three."
To conclude, lack of economic growth across large parts of the developed world is now a political problem and not something that central banks can solve by printing money, which will make a marginal difference at best. Japan is the world’s third largest economy and the EU is the largest. Their slow growth will impact the whole world.
Vivek Kaul is the author of ‘Bad Money’
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