Why a shrinking population is terrible for a modern economy

Relevance: This article explains the challenges associated with a shrinking population.

Synopsis:

A shrinking population is a bigger worry than a heavy welfare burden

Introduction:

The US population was shrinking. From the fertility rate of 3.2 in 1956, the fertility rate reached 1.6 in 2020. But the shrinking population has many challenges associated with it. For instance, the domestic business investment in the US also followed this decreasing trend.

Challenges with the shrinking population:

• The problem of ageing: There will be ever fewer workers to pay the benefits of an ever-larger pool of retirees.
• Impact on the economy: The economy will face many issues with the shrinking population. Such as,
  • The economy will not have a growing supply of new workers
  • New private investment has a harder time generating consistent positive real returns
  • The real return on ordinary physical investment fall so does the interest rate necessary to keep the economy humming.

A shrinking population and the example of Japan:

Japan faced all the economic hurdles of a shrinking population. Japan had no post-war baby boom.

1. Despite a technologically advanced and export-oriented economy, the Bank of Japan’s major policy rate fell steadily from 6% in 1991 to just 0.5% in 1995.
2. Japan also experienced an enormous property bubble in the late 1980s. This is because when businesses cannot generate enough profitable investment to match the savings rate of an older population. This resulted in huge investments in land.
3. Japan experienced an infamous ‘lost decade’, during which neither huge government spending nor persistently low-interest rates could fully revive the economy.

These are the similar trend the US is also experiencing post -2008 crisis.

Challenges in increasing the population:

• An increased government spending on child care and other support for young families would offer only a modest boost in population growth.
• Meanwhile, the ideas that offer the greatest potential for population growth, such as comprehensive immigration reform, are the least politically feasible.