Contrary to what many people think

China's declining population is bad news for the world

The birth shortage in China will increase the tax burden on young workers in the interest of taking care of the elderly who do not work.

Getty

There are reasons to doubt China's ability to manage a declining working-age population, which could cause persistent economic weakness.

China's population declined last year, for the first time since the mass deaths associated with the late Chinese leader Mao Zedong's disastrous Great Leap Forward in the 1960s.

But why do we consider this a problem?

After all, in the 1960s and 1970s, many people worried that the world was facing an overpopulation crisis, and China was one of the biggest sources of this pressure.

And the Chinese government itself tried to limit population growth through its famous one-child policy.

The question is: why isn't population decline good news, an indication that China, and the world in general, will have fewer people who depend on limited resources on this planet?

The answer is that population decline creates two main problems for economic management, and these two problems can be solved if there is intellectual clarity and political will.

But will China rise to the challenge?

This is far from obvious.

an indicator of aging

The first problem is that population decline is also an indicator of aging, and in every society we depend on the young to support the elderly.

In the United States, the three big social programs are Social Security, Medicare, and Medicaid.

The first two explicitly target the elderly, and even the third program spends most of its money on elderly Americans and the disabled.

In each case, funding for these programs ultimately depends on taxes paid by working-age adults, and concerns about America's long-term financial future stem largely from the rising old-age dependency ratio, which means that the number of older people outnumbers those of working age. .

China's social safety net is relatively underdeveloped compared to ours. Older Chinese nonetheless depend on government handouts, especially state pensions.

The elderly dependency ratio in China is skyrocketing.

This means that China will either have to inflict a lot of economic pain on its elderly, and raise taxes sharply on its younger citizens, or both.

The other problem is more subtle, but also dangerous. To maintain full employment, society must keep public spending high enough to keep pace with the productive capacity of the economy.

Some might think that a shrinking population would reduce the cost and would make this task easier.

But the population decline - and especially the working-age population - is followed by a reduction in some important types of spending, especially investment spending.

After all, if the number of workers is declining, there will be less need to build new factories, buildings, offices, etc.;

If the number of families is declining, there is not much need for new housing construction.

The result is that a society with a declining working-age population suffers from persistent economic weakness.

This point is particularly clear in the case of Japan. Its working-age population peaked in the mid-1990s, and the country has faced deflation since then. Despite decades of ultra-low interest rates, it has more recently faced other rich countries whose demographics are similar. Japan's demography has similar problems.

To be fair to the Japanese, it can be said that they handled the issue of population decline well, and avoided mass unemployment, in part, by propping up their economy with deficit spending.

This led to high levels of public debt, but there was no hint of investors losing faith in Japan's solvency.

But can China — whose working-age population has declined since 2015 — manage things equally well?

There are good reasons to be suspicious.

Paul Krugman - political and economic analyst

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