The Demographic Cliff

Lost within the tsunami of campaign reporting was a study released by the Centers for Disease Control (CDC) on October 3, 2012. The report, titled "Births: Preliminary Data for 2011," passed through the 24-hour news cycle with hardly a mention. The only reason I heard about it was due to a short blurb carried by a local outlet, which reported a significant drop in teenage births. This news item was, of course, reported as positive. But the full report and its tables of statistics reveals nothing positive whatsoever. According to the CDC numbers, 2011 was a banner year. It recorded the lowest birthrate in our national history.

In March of 2011 I penned a short essay for American Thinker, "Where Have All the Children Gone?" which considered the worldwide trend of falling birthrates. This essay will cover the recent declining birthrates inside the United States, as well as economic repercussion that fall entails. According to the report, the General Fertility Rate (GFR) for the U.S. in 2011 was 63 births per 1000 females (ages 15-44). This was a 1 percent drop from 2010. The decline among Hispanic American females was 6%; the decline among non-Hispanic blacks was 1%, and there was no change among non-Hispanic whites.

Nineteen states saw drops in live births, including both Blue states (California, Illinois, and New York) and Red states (Texas, North Carolina, Utah, and North Carolina). Among the different age cohorts, the number of births dropped 10% for females 15-19, 5% for females 20-24 (the lowest number of births ever recorded for that cohort). For females 25-29 the birthrate declined just a tad under 1 percent. The birthrate for females 30-34 remained unchanged, while the age group 35-39 saw a 3% increase in their birthrate. The birthrate for females 40-44 remained essentially unchanged.

The rapid decline amongst younger women and Hispanic women drove the Total Fertility Rate (TFR) down to 1.89 live births per female 2.089 during the years 2004-2007. To maintain a stable population, a society needs a TFR of 2.1 births per female. The "First Birth" category dropped 2 percent in 2011, which made it the lowest on record. First Births dropped for the 15-24 cohort, but rose in the 35-39 cohort. This statistic reinforces previous findings that women are steadily having their first child much later in life.

These dry metrics illustrate social, political, and most importantly, economic changes that are fast transforming our society at a pace that would exhaust even President Obama. Our capitalist system and our socialist welfare system of government rely heavily on growing populations. The Industrial Revolution from the 18th through 19th Centuries, as well as the rapid rise of the developing nations circa 1983-2007 occurred during periods of rapid population growth. While the U. S. will continue to see its population grow, the rate of growth is slowing. To put it another way, our population is growing due to the fact that people are leaving this world slower than new ones are entering it. And if trends continue, the United States will follow Japan (whose population is now shrinking at 250,000 people a year), Germany (which will lose 25% of its population during the next 50 years), and Russia (in which over 1000 villages are abandoned each year). What should have been the number one issue of the 2012 elections wasn't even mentioned by either candidate. The funding (or lack thereof) of our generously bloated welfare state has to come from somewhere. Our federal budget deficits are not only a symptom of a political class that refuses to say no -- they are also a reflection of our inverted demographic status. Two of our largest entitlement programs (Social Security and Medicare) depend solely on large cadres of younger workers earning sufficient incomes to keep everything going. The deficits we shall face in coming years will tower above what we're running now. There will be too many elderly retirees and too few younger workers.

An even a deeper problem overshadows our serious budget shortfalls. Our market-oriented economic system is geared toward a future expectation that there will always be a stable group of consumers and producers. In a perfect world, the number of consumers and producers grow with each generation. Businesses can profit more when they can produce more with less. Growing populations married to modern technology result in higher living standards. In a free society like ours, people use their genius to solve problems of agricultural, industrial, and financial productivity. And as we saw during the period 1983-2007, when this system is painted on a global canvas, the chronic destitution of Third World nations can begin to be addressed. The age-old problem of wealth distribution was addressed through the application of free markets and global trade. But all this progress was predicated upon stable if not growing populations. What bank or venture capitalist is willing to risk huge sums of money on markets with dwindling consumer bases? What kind of institutional investor would risk his cash on a 30 year municipal bond for a city that is not only aging but has a dwindling population (or more importantly, what kind of interest would he demand)? Box stores like Wal-Mart and Home Depot make best sense in a society that is young and growing.To put it another way: How many 75 year old retirees take out 30 year mortgages on 4 bedroom homes?

A nation can work around a problem such as falling birthrate or even falling populations -- at least for a period of time. Japan has one of the oldest populations in the developed world. Yet, while the economy struggles, capable firms like Toyota continue to produce jobs and generate wealth. Domestically, Japan suffers from price deflation due lack of consumer demand. While the Japanese yuppie enjoys falling prices, Japanese companies are seeing their profits fall. As a result, the Japanese Central Bank has had to provide a steady dose of Quantitative Easing. The Japanese M2 money supply has grown 3% annually for the last 20 years. Because of its aging population, Japan also instituted higher sales taxes to pay for its leviathan public sector. Forty-three percent of Japan's national budget is now consumed by interest payments alone (that's 9% of its GDP). But the Japanese should consider themselves fortunate. Japan has a per capita GDP of $45,000 and remains one of the world's largest creditors with some $3.1 trillion in foreign holdings. But this cannot go on forever.

For the U.S., the situation isn't as bleak as either Japan's or Europe's. But that is only because we are two decades behind them. The U.S. has been blessed with a very resilient and diversified economy. Our decentralized economic and political system (as compared to other G20 nations) gave our economy an amazing amount of elasticity. But things are rapidly changing. Dodd Frank is transforming institutional and consumer capital markets, while a plethora of new regulations in energy, health care, agriculture, and transportation will raise costs and stifle growth of small to medium sized businesses. Even the Internet isn't immune, as both federal and international agencies keep up a steady pressure to reign in this one last medium of free enterprise and open expression. As we begin to suffer the same economic-demographic problems other nations suffer from, people and markets will have fewer options available and more institutional hurdles facing them. We are now no different than the "managed societies" of Europe and Asia.

Already we are suffering from demographic malaise. The most obvious area is the single-family home market. In 1970, there were 35 million single-family dwellings. By 2005 that number grew to 72 million. Even without the mortgage bubble, housing prices were set up to fall. There are just not enough young people in the market today. Many experts believe that home prices will steadily decline due to over-inventories of single family homes. Of course regional migration patterns will determine spot markets. Markets in Utah, Colorado, and Texas will outperform those in Michigan, Illinois, and New York. Other areas to worry about are those industries that cater to children and young families. Aging societies have limited markets for consumer goods that focus on children and young families. Whether we're talking about the market for larger mini-vans, children toys, children's apparel, diapers, or baby beds, falling demand equates to falling profits. One wonders if the fall of Hostess has a little to do with an aging society. Hostess, wrote Larry Popelka, saw its glory days during the 1960s and 1970s. However, during a period of falling birthrates and rising health concerns, Hostess failed to innovate. Not only were there fewer children, but health conscious parents refused to feed their 1.5 children desserts full of HFCS and other sweeteners.

It is difficult to predict exactly where our economy will go in the long run. Currently, inflationary pressures in food and energy are more a product of U.S. monetary and regulatory policies than market forces. Like Japan, our long-term economy will face inflationary and not deflationary pressures. Older societies consume less than younger growing societies. China will soon be flooded with its elderly, and within a decade many places in Europe will see falling populations. Both North and South America will soon be in the same boat. This has long-term ramifications for U.S. agriculture and manufacturing exports. And with sagging domestic demand, the U.S. will not be able to make up the shortfalls overseas. How our economy will correct for this is impossible to tell. This will come about as our president and the Beltway class are implementing an ever growing set of far-reaching regulations and higher tax regimes. Some believe that a total collapse of our financial system will result. While I don't yet subscribe to this dystopian future, I am at a loss to wonder how our society will survive as it becomes older and our numbers eventually become fewer.

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