[Should China should be terrified that its population is now
falling, as all our leading news outlets are telling us?]
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PAUL KRUGMAN, CHINA’S DEMOGRAPHIC CRISIS, AND THE WHICH WAY IS UP
PROBLEM IN ECONOMICS  
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Dean Baker
January 17, 2023
CEPR
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_ Should China should be terrified that its population is now
falling, as all our leading news outlets are telling us? _

,

 

I rarely disagree in a big way with Paul Krugman, but I think he
misses the boat in an important way in his piece
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China’s alleged demographic crisis. Before getting to my point of
disagreement, first let me emphasis a key point of agreement.

Krugman points out that many countries, notably Japan, have managed to
do just fine in the face of a declining population and shrinking
workforce. Their people continue to enjoy rising standards of living
as their population shrinks. In the case of Japan, its population has
been declining
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more than a decade and its workforce has been pretty much stagnant
over this period. Nonetheless, its per capita income is nearly 10
percent higher than it was a decade ago.

This actually understates the improvement in living standards enjoyed
by the Japanese population over this period. The average number of
hours worked in a year also fell
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percent, meaning a typical Japanese worker has more leisure time now
than they did a decade ago.

It’s also worth mentioning that Japan’s cities are less crowded
than they would be if its population had continued to grow. This means
less congestion and pollution, less time spent getting to and from
work, and less crowded, beaches, parks, and museums. These quality of
life factors don’t get picked up in GDP.    

Japan has been running large deficits and built up a large debt to
sustain economic growth in the last two decades, but this has not
created a major burden for its economy. Its interest payments
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its debt are less than 0.3 percent of GDP, compared to 1.7 percent of
GDP for the United States. Its inflation rate has consistently been
well below its central bank’s 2.0 percent target, although it did
see a modest Covid uptick in the last two years.

This point about inflation is central. Back in the good old days, when
the Peter Peterson anti-Social Security warriors
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in their prime in the 1990s, the standard story on an aging society
was that we would have too few workers to support all the old-timers.
The retirement of the baby boomers was supposed to break the camel’s
back. There would have to be massive tax increases, otherwise the
government would run huge deficits which would lead to cascading
interest payments on the debt. Alternatively, it could finance its
deficits by printing money, leading to out of control inflation.

The Peterson story was never very honest, since the real factor
driving its deficit horror story was the projection of exploding
private sector health care costs. Since the government picks up
roughly half the national tab on health care through programs like
Medicare and Medicaid, the explosion in health care costs then being
projected would have meant a massive burden on the public sector, even
without the aging of the population.

As it turns out, we didn’t see anywhere near
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explosive growth in health care costs projected at the time, but we
have seen the aging of the population and an increase in the ratio of
retirees to workers. But rather than seeing excess demand (Covid
shutdown and recovery excepted), our problem has been inadequate
demand. The same problem that has afflicted Japan.

This story, which now passes under the name of “secular stagnation
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is 180 degrees opposite the problem pushed by the deficit hawks. Back
then, the problem of an aging population was supposed to be that we
would be seeing so much demand that our shrinking labor force would
not be able to produce enough goods and services. Now the story is
that we see less demand with our aging population, so we will see weak
growth, unemployment, and deflation.

It’s good that the economics profession has been able to adjust its
theories to reality, but we should at least acknowledge the complete
shift in perspectives. It is a bit embarrassing that the nearly
universally accepted dogma within the profession twenty or thirty
years ago proved to be the exact opposite of the reality.

ON TO CHINA!

Okay, now that we know the terrain, the question is whether China
should be terrified that its population is now falling, as all
our leading
[[link removed]] news
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telling us?  Well, as people who have listened to the media’s sky
is falling tales should recognize, China’s falling population crisis
is just our old friend, the story of not enough workers to meet the
demands of an aging population.[1]
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the question is whether China’s economy will be able to meet the
demands created by a growing population of retirees.

As Krugman correctly points out in his column, there is no reason in
principle that China should not be able to support its elderly. The
question is a political one of whether its government is prepared to
establish adequate Social Security and Medicare-type systems to ensure
that its elderly have sufficient income and decent health care. Not
having any special expertise on China’s politics, I can’t answer
that question, but it is important to recognize that it is not a
problem of an inadequate labor force.

Where Krugman left me scratching my head was his discussion of this
problem of shifting resources to support the elderly:

“For China has long had a wildly unbalanced economy. For reasons I
admit I don’t fully understand, policymakers there have been
reluctant to allow the full benefits of past economic growth to pass
through to households, and that has led to relatively low consumer
demand.

“Instead, China has sustained its economy with extremely high rates
of investment
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far higher even than those that prevailed in Japan at the height of
its infamous late-1980s bubble. Normally, investing in the future is
good, but when extremely high investment collides with a falling
population, much of that investment inevitably yields diminishing
returns.”

There are two points I would make here. First, while Krugman is
entirely right about the high rates of investment preventing
households from enjoying the full benefits of economic growth, it is
worth noting that China’s population has enjoyed enormous
improvements in living standards over the last four decades. In the
1970s, the standard of living for the bulk of the population was only
slightly better in many respects than for people in Sub Saharan
Africa.

Today, hundreds of millions of people in China have near European
standards of living. Krugman is right that the country’s growth
could allow for even more gains (especially in rural areas), but the
enormous gains seen by the bulk of the population probably meant that
there was more tolerance for waste than in a context where say, a
declining workforce was leading to stagnant or declining living
standards.

The other point is simply the flip side of Krugman’s point about the
massive investment spending in China. This is a waste of resources
that can in principle be converted to meet the needs of the elderly
population. In other words, if anyone believed the not enough workers
story, we can point to all the people and resources tied up in nearly
pointless investment projects. They could instead be building
hospitals, retirement facilities, and in other ways producing the
goods and services demanded by a growing elderly population. Of
course, China couldn’t accomplish this sort of conversion overnight,
but its population isn’t aging overnight.

Again, if China can undertake this sort of conversion is a political
question. Maybe people more expert on China’s politics can answer
it, but it clearly is not an issue of too few workers to meet the
demands of an aging population.

One final issue: as I have pointed out on many occasions, the impact
of even modest rates
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swamp the impact of demographics. China’s productivity growth has
slowed in recent years, but even at a pace of 3-4 percent annually
(what we have been seeing in recent years), it should easily be able
to produce enough so that in ten or twenty years both workers and
retirees can enjoy much higher living standards than they do today.

Whether its productivity growth will continue at recent rates, or slow
further, is an open question, but anyone claiming that it will not
have enough output to be able to support its retirees is predicting a
massive slowing of productivity growth. For what it’s worth, the
International Monetary Fund (I.M.F) is projecting that China continues
to sustain strong productivity growth. It projects
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GDP growth will average more than 4.5 percent annually even as its
workforce shrinks.  

The I.M.F. projection can of course be wrong, but clearly it does not
accept the declining population crisis story. For now, that one is
best filed under “fiction.”  

[1]
[[link removed]] There
is also the silliness around turning negative. There is very little
difference to the economy if its population or labor force is
shrinking slowly, say 0.2 percent a year, or growing by the same
amount. We saw the same hysteria around the issue of deflation, as
though economies would somehow face a crisis if their rate of
inflation was a small negative number instead of a small positive
number. The lesson that actually serious people everywhere know, is
that crossing zero doesn’t matter.

_DEAN BAKER co-founded CEPR in 1999. His areas of research include
housing and macroeconomics, intellectual property, Social Security,
Medicare and European labor markets. He is the author of several
books, including Rigged: How Globalization and the Rules of the
Modern Economy Were Structured to Make the Rich Richer
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commentary on economic reporting. He received his B.A. from Swarthmore
College and his Ph.D. in Economics from the University of Michigan._

_His analyses have appeared in many major publications, including
the Atlantic Monthly, the Washington Post, the London Financial
Times, and the New York Daily News._

_The CENTER FOR ECONOMIC AND POLICY RESEARCH (CEPR) was established in
1999 to promote democratic debate on the most important economic and
social issues that affect people’s lives. In order for citizens to
effectively exercise their voices in a democracy, they should be
informed about the problems and choices that they face. CEPR is
committed to presenting issues in an accurate and understandable
manner, so that the public is better prepared to choose among the
various policy options._

_ CEPR is a non-profit 501(c)(3) organization, and your entire
contribution is tax-deductible to the fullest extent of the law.
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* China
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* population
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* Economic Growth
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* productivity
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* Worker Shortage
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* Retirees
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