Thursday, April 23, 2009

The Population Fizzle

America has a demographics problem. Oh, it’s not as bad as Europe’s or Japan’s or Russia’s, but it is a serious problem that promises to get much worse. We hear about it occasionally when, say, entitlements are discussed. As in, “Who’s going to pay for all that?” Early in G. W. Bush’s first term we were told that Social Security would be bankrupt in a few decades, and Medicare was an even worse problem. Bush tried to introduce reforms but was shot down by a bipartisan congress.

The issue stems from demographics. When SS was introduced the US population resembled a stable pyramid with relatively few retirees at the top and the mass of workers underneath. If the Feds had left the SS money in a bank account the compound interest would be sufficient to pay future retirees for a long time. But, like all governments, they spent the money; thus payments to retirees depend on the FICA deposits of current workers. The problem is we haven’t enough workers to fund the entitlements of the rapidly aging population. The formerly stable pyramid is being morphed into a highly unstable inverted pyramid. And the consequences are dire.

Note that the problem is a relative scarcity of young people compared to a glut of older people. And the solution is contrary to that proposed by environmentalists and other fanatics. Reducing the population will not help unless you kill off the old folks. In America we have tried to stave off the problem by allowing massive (illegal) immigration. Those workers from destitute Latin American countries will “do the work that Americans will not do” and contribute to the SS system, but disproportionately use the resources of all the social services. Also, their children, after spending time in our public education system, tend to lack the work ethics of their parents and tend to be less educated and less able to contribute to the general welfare compared to US natives. Immigration is not the long term answer.

The politicians have been able to ignore the problem since it is in the long term compared to their political careers. But there are grave near term consequences that were not generally expected.

In a recent article “Demographics and Depression” by David P. Goldman (First Things, May, 2009), the root cause of our current economic crisis is traced to the same demographics trend that threatens our entitlement systems. Everyone knows that the housing bubble bursting was the trigger that caused the economy to go south. But why did it burst in the first place. The answer lies simply in the immutable laws of supply and demand.

The prime owners of family homes are families, those with two parents and children. Well the number of such families has stayed constant at about 25 million since the late nineteen sixties while the US population has grown by 50%, from 200 million to 300 million. During those decades the number of single parent families has tripled and the number of elderly has doubled (to 30% today). But the former cannot usually afford a family home and the latter want or need to downsize.

At the same time the number of family homes (with 3 or more bedrooms) in the US has doubled from about 36 million to 72 million. The 25 million nuclear families just do not need 72 million family homes. Thus: the bursting bubble. All the gimmicks (subprime loans, unverified incomes, mortgage-backed securities, etc, etc) that were used to get unqualified people into homes they did not need prolonged the bubble but could not overturn the laws of economics.

So, what is the solution? Goldman points out that “credit markets tend to derive from the cycle of human life. Young people need to borrow capital to start families and businesses; old people need to earn income on the capital they have saved.” But there are not enough young people. Americans need to get married and have babies! It is your patriotic duty. (Hint to John and Mark, our two single thirty-something sons.)

And the government can actually help. (Hint to President Obama). Goldman proposes several measures: (1) Cut taxes on families; (2) Shift the burden of social insurance more to the childless; (3) change the immigration laws (to allow many more productive people in their prime earning years to enter.) I will add, fix the educational system and focus on achievement, character and job skills.

Ps: Happy Earth Day – It keeps getting better and better, despite global warming.


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