July 18, 2018 / 10:09 AM / 2 years ago

Breakingviews - Hadas: Global case of baby fever is easily cured

LONDON (Reuters Breakingviews) - It’s time for governments to accept a basic truth of the 21st century political economy: Children are an economic drag for parents. Political authorities can take some comfort, however. Low birth rates do not cause serious economic problems.

A mother kisses her newborn baby inside a ward in Dr. Jose Fabella Memorial Hospital, in Quiapo city, metro Manila, Philippines May 12, 2018, ahead of Mother's Day celebrations. REUTERS/Romeo Ranoco

Worldwide, fertility rates have been falling steadily for decades. The average woman must bear 2.1 children for native-born populations to stay constant. From 1975 to 1980, national birth rates were below this replacement level in countries which accounted for 22 percent of the world’s population, according to the Oxford University-based website Our World in Data. By the 2005 to 2010 stretch, the proportion had risen to nearly half.

The downward fertility trend persists in much of the world. In Turkey, for example, the national birth rate fell from 2.3 to 2.1 between 2005 and 2015. In the United States, the decline was from 2.1 to 1.9. Elsewhere, there has been stability at a low level. The Chinese birth rate has been at 1.6 since 2005. In South Korea and Japan, the average has inched up, but only from 1.2 to 1.3 and from 1.3 to 1.4, respectively.

The threat of shrinking populations alarms many leaders. Vladimir Putin has been particularly vocal. In 2006, when Russia’s birth rate was 1.4, the nation’s president called demographic decline “the most acute problem facing our country today”.

Putin introduced major subsidies for parents. Russian fertility subsequently increased, but hardly enough to matter. The 1.7 rate of 2015 remained well below the replacement level. And an 11 percent decline in births in 2017 suggests the effects of governmental birth subsidies are fading.

That pattern is common. After the Hungarian government brought in some of the world’s most generous child subsidies, the average birth rate increased only from 1.2 to 1.5. The plain fact is that governments cannot pay people to have more babies. Lower taxes, more subsidised childcare, easier access to housing and so forth do little, and not for long.

The economic logic is impeccable. No government can afford to give parents enough money to keep children from being more cost than benefit. Kids are expensive to feed, and middle-class offspring these days absolutely need expensive holidays, extra schooling and a panoply of consumer goods.

For whatever immeasurable happiness parenting may provide, it does not bring much long-term economic gain. When kids grow up and start working for pay, they rarely put much into the extended family’s coffers. If anything, they take up residence in parental attics for longer and welcome a bit of assistance stepping onto the housing ladder. Older people also now expect support from personal savings and government benefits, not their children.

Child-rearing also hurts incomes. Moms and dads often find that the commitments of time and worry slow professional advancement. Fewer children inevitably equate to lesser impediments.

All in all, it is clear that in this modern world most people will only have children because they want to. Since monetary considerations are secondary, what economists would call the subsidy-elasticity of demand is very low.

That may sound like bad news for governments. Certainly, the dreams of Putin and Hungarian Prime Minister Viktor Orbán of landscapes filled with big happy native families are unlikely to be fulfilled. And even if China’s Communist Party changes from penalizing extra births to subsidising them – as health officials are considering, according to a report last week in the South China Morning Post – it will almost certainly rule over an ageing and stagnating population.

Demographic decline does not imply falling prosperity, however. If anything, it is easier to improve average lifestyles with shrinking populations. Without population growth, there is less need for expensive investments in housing, infrastructure and capital goods.

True, a higher portion of the smaller populations will be elderly people who need pensions and labour-intensive assistance. Even so, there are already well-developed systems to provide them with money, healthcare and specialised residences. The forthcoming shift in age groupings will mostly mean more of the same.

Some people worry the shift will be unbearably large. They expect a shortage of care workers and recommend more immigration. That sounds excessive. It should be possible to rebalance service sectors to match needs. The rapid pace of job destruction from automation should help.

What is true is that governments will have to do some serious governing. One task is to persuade citizens to pay higher taxes to support people too old to work.

Some financial muscle also will be necessary. If nominal GDP growth stops or turns into a decline, money for debt payments is bound to be in short supply. Governments may have to maintain economic confidence when debts go bad.

That could be a lot of work, and politically problematic. Mature markets, where the demographic challenges are greatest, have been building up trouble. Between 1997 and 2017, the ratio of debt to GDP increased from an already worrying 266 percent to a stunning 382 percent, according to the Institute of International Finance.

In theory, though, the task should be manageable. After all, powerful governments can give financial regulators and central banks all the authority they need. And it should be easier to rearrange the money system than to push up birth rates.

Any multinational deleveraging will undoubtedly be socially challenging. That just means now is a good time to start figuring out how to deliver more practical solutions than babies.


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