⤵ The China (Degrowth) Syndrome

The Beijing communists can't command growth from either their economy or population

Quote of the Issue

“Radicals may insist that the masses are crying for salvation from intolerable sufferings and rattling their chains in darkness and despair, but of course there never was so much personal freedom of mind and body for all, never so much readiness to bear with and even to finance the mortal enemies of the leading class, never so much active sympathy with real and faked sufferings, never so much readiness to accept burdens, as there is in modern capitalist society.” - Joseph Schumpeter, Capitalism, Socialism and Democracy

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The Essay

⤵ The China (Degrowth) Syndrome

Item: Chinese women have had it. Their response to Beijing’s demands for more children? No. Fed up with government harassment and wary of the sacrifices of child-rearing, many young women are putting themselves ahead of what Beijing and their families want. Their refusal has set off a crisis for the Communist Party, which desperately needs more babies to rejuvenate China’s aging population. With the number of babies in free fall—fewer than 10 million were born in 2022, compared with around 16 million in 2012—China is headed toward a demographic collapse. China’s population, now around 1.4 billion, is likely to drop to just around half a billion by 2100, according to some projections. Women are taking the blame. - The Wall Street Journal, 01/01/2024

If there were an Up Wing Quote Hall of Fame — and there might be one someday — this pithy line by Nobel laureate economist Robert Lucas would be an inaugural inductee: “Once you start thinking about growth, it's hard to think about anything else.” Makes sense. Economic growth made the modern world, after all.

But once you start obsessing about economic growth, it’s hard to then avoid thinking about population growth — at least if you believe the former is driven, fundamentally, by people discovering new ideas. And lots of economists do believe that “other things equal, a larger population means more researchers which in turn leads to more new ideas and to higher living standards,” writes economist Charles I. Jones in the 2020 paper “The End of Economic Growth? Unintended Consequences of a Declining Population.”  

While ideas birthed in one country often spread to other countries and get used productively, seemingly every country would like to be an important idea hub. Indeed, for a country already on the technological frontier, such as the United States, it’s imperative. To be a geopolitical superpower also means being a tech superpower.

The relationship between population growth, idea generation, and economic power may at least partly explain why China is desperate to reverse its continuing demographic decline. Beijing may not be counting on AI to replace human creativity. Of course, there are other reasons to want a large and growing population, from creating a large and diversified domestic consumer market to providing ample military manpower. More people also make it easier to fiscally support safety net programs and manage government debt.

A growing economy + a growing population

But let’s take a step back: Doesn’t having a high per person GDP and a growing population say something significant about a country’s success? That’s the argument Jones and his co-authors make in a new NBER working paper, “Population and Welfare: The Greatest Good for the Greatest Number.” As these economists see things, only looking at economic growth per person might give an incomplete picture of how a national economy is really doing. The total number of people in an economy who are experiencing growth also matters. From the paper:

… a world with a billion happy people is “better” than a world with a million people if they are identical in every other way. Similarly, a catastrophe resulting in the death of half the world’s population would constitute a profound tragedy, even if individual consumption levels remained constant. Consider two hypothetical economies with exactly the same time path of total factor productivity (TFP) so that the production opportunities for these economies are the same. One country chooses to keep population constant, and all the TFP growth flows into higher per capita consumption. The other country chooses to keep its per capita consumption constant and uses the extra resources to increase its population. The traditional focus on per capita consumption says that the first country is more successful, but this seems odd given that the two countries have exactly the same production possibilities. This hypothetical is not too far from some real world examples. Between 1960 and 2019, consumption per person increased by a factor of 6 in Japan versus a factor of 3 in Mexico. However, Mexico’s population tripled while Japan’s population only rose by 30 percent. Which country was more successful?

Indeed, this perspective scrambles a lot of economic narratives. Among the surprising results: Looking at both population growth and consumption growth in various countries from 1960 to 2019, countries like Mexico and Kenya, which hadn't seemed very successful based on per capita GDP, actually did quite well in terms of overall social welfare growth. On the other hand, countries usually seen as successful, like Germany and Japan, didn't do as well because their populations weren't growing much. Same with China, as this chart from the paper shows:

(One public policy implication here: Government investments in “nonrival knowledge” — information that can be shared and utilized without diminishing its value, such as a new genetic editing technique or a new kind of nuclear reactor technology — should consider the number of future people potentially benefiting from future advances. As such, “we may be willing to spend more to mitigate global warming the larger the future population relative to today’s,” the researchers offer as an example.)

People problems in China

Going forward, things may look even worse for China, which has problems on both the population and growth fronts. A couple of stats: First, the number of births in China in 2022 is what the United Nations forecasted to happen around 2040, according to University of Pennsylvania economist Jesús Fernández-Villaverde in my podcast chat with him last May. Second, productivity growth has slowed to a crawl, assuming it’s even positive. A WSJ piece last August quotes the head of the National University of Singapore’s East Asian Institute as saying productivity gains contribute less than a sixth of China’s GDP growth today, down from a third in the 1980s and 2000s. You can thank a shift away from market economics for that.

WSJ

WSJ

As the WSJ piece leading off this essay explains, China’s shift from the one-child policy, or OPC, to one encouraging more births has led to Chinese women — who once faced penalties for having too many children — now being pressured to have more. Of course, birth rates are plummeting across Asia, not just in China. And it’s proven devilishly difficult to boost the demand for kids through policy. (It’s also still unclear to what degree the OPC changed birth behavior and slowed population growth, although there is a consensus that there was an impact.) Fernández-Villaverde:

Right now, think about countries like Spain or Italy where fertility rates are around 1.2, which is absolutely horrible. It's like a reduction of half of the size of the population in each generation. Aggressive policies like child subsidies, making it easier to reconcile family and work, maternity leaves, etc. can push you back to 1.7, 1.8. You are never coming back to three. You are never coming back to four. The point I have argued to policymakers is if you are in a society where the fertility rate is 1.8, you can handle a gently decreasing population. What you don't want to be is in front of a demographic abyss. So policies, in my reading of the evidence, help you to go from disaster into gentle decline.

I urge you to check out my chat with Fernández-Villaverde. He made some really great points on population growth, none of which are good news for China. Not only is global population shrinking faster than many observers think, not every country will be able to attract immigrants as a partial fix:

As far as we know, the net immigration to the planet is still zero. Maybe like in Men in Black there are some people coming from outside. But let's say the US in 2040 is still bringing immigrants from some developing economies, it means that demographic problem of these developing economies is going to become even more serious. … If I were the minister of finance of Brazil, I would not be able to sleep at night. Brazil will probably start losing population around 2030, 2032, if not earlier. Who's going to migrate to Brazil? … The best and the brightest of Brazilians move to the US or to Europe. You go to any good US university, and there's a lot of top Brazilian students and researchers. Brazil starts losing population, which immigrants do you bring? … Another country that, believe it or not, will probably start losing population maybe in another 20, 25 years are all Central American republics. Who's going to migrate to Guatemala?

Coming back to our discussion about China versus the US, I think the US is still going to attract immigrants. How many immigrants we want to attract — and I say “we” now because I'm naturalized, so I can say we — how many immigrants we want to attract is a discussion we can have. But let's suppose that immigration stays at a historical level, a historical average. The US is not going to be in a very tight spot, demographically speaking, in 2040. China is going to be on a very tight spot, and that's going to really be a game changer. …. Now, something that can happen is that China, starts forcing people to have a lot of kids. … [Yet] even if the Chinese government starts forcing everyone to have kids … it takes, what, 22 or 23 years before this person completes college. And if we want these people to be top researchers, etc., they need to go to graduate school. It’s 20 years. Think about it in this way: If we are thinking about the top researchers among the cohort that is being born today in 2023, these people are not going to be researchers until 2051. Demographics has this enormous momentum; things that we decide today do not really show up until 30 years later.

The same biological reality faces America. But the US is already a rich nation, a broad-based tech leader, and (still) an attractive destination for global talent. Rather than sitting on our laurels and waiting for Rising China to obviously become Stagnant China, we need to focus on policy actions — from deregulation to immigration to science investment, as I write in my book — that will accelerate and widen the gap between the two economies.