How will falling fertility rates hurt the economy? With Melissa Kearney

In rich countries around the world, we are having fewer and fewer children. In the US, fertility rates are now below the replacement rate of 2.1, or what it would take to sustain a constant population. This is a slow but massively important trend, socially, culturally and economically. An aging and shrinking population has consequences for the workforce, the public finances and the environment. This week we are going to ask, how do falling fertility rates and aging affect the economy? And what can we do about it? This is the economics show with Simea Keynes. I'm joined this week by Melissa Carney, Director of the Aspen Economic Strategy Group, which recently put out a series, Demographic Headwinds, the economic consequences of lower birth rates and longer lives in the US. She's joining me from Chevy Chase, Maryland. Melissa, hello. Hi, thanks for having me. It is great to have you with me. Okay, on a scale of 1 to 10, how big of an economic challenge is the current trend in US fertility? Oh, that's a hard one. I don't want to sound like an alarmist and put this close to 10, but I definitely am going to put it above the median of 5. And the reason is, because if this is something we don't address, we will be facing potentially very large changes in our society and our economy that have sort of it seems snuck up on us. So I don't want to sound like I'm saying, oh my goodness, this is definitely going to cause an economic crisis. But it is something that people should be paying attention to in the consequences are potentially quite massive. All right, so higher than 5, can I pin you down on a specific number? I'm not sure why do you want to, why do you want to bend me down? I think we do on the show. You have to, you have to commit. Okay, I will say that this is a seven. How about that? That is exactly what I wanted. Okay, I want to return to why this is going to be a problem. But, but first of all, can we just pin down what exactly is going on with demographics right now? There is a bit of a debate in demography circles about what exactly is happening with the fertility rate. Birth rates have gone down quite a lot for women in their 20s and 30s. And there is some question about, well, maybe they'll catch up later on. Could you explain what the controversy is there? So, demographers like to look at completed fertility. How many children has a woman had over her lifetime by the time she reaches the end of her child bearing years roughly age 45. And that has been pretty steadily in the US just above the magic replacement number of 2.1, meaning that on average across a cohort, women were having the number of children that would allow for natural reproduction of the population. What has happened in younger cohorts, women who are still cycling through their reproductive years, is that they have experienced a decline in the number of children at each age and arise in the likelihood that their childless through the ages we can observe. So, what folks like me have said is gosh 50% of US women are childless at age 30. That's pretty much unprecedented. What is the likelihood that they're going to catch up to their fertility of cohorts above them? You know, the cohort born in the mid to late 70s, only 30% of them are childless at age 30. So, this is a really big gap at younger ages. Now, the more sanguine demographers say, you know, we don't know what's going to happen. They might catch up. For me, when I'm looking at the data, I don't see any reason to think that that's likely to happen. What we know from other high-income countries that have experienced a decline in birth before the US is that more recent cohorts of women are not catching up. That birth rates are down in a sustained way. None of the pressures or cultural changes or reasons that seem to be driving these declines look like they're going to reverse any time soon. So, to have the current sort of cohort of people in their 20s and 30s catch up, we'd have to have a really dramatic increase in child-bearing post-age 30 that would have to happen for reasons that we can't quite anticipate. And so, I'm less optimistic than some other demographers. So, I'm going to ask about policy responses later. But first of all, I just want to really dive into this issue of whether this is a problem economically. So, if you had to summarize why the fact that we've got falling fertility in Asian society is a challenge economically, how would you do that? So, you know, a lot of people react to this immediately by saying, fundamentally, this is the wrong question. It's not a problem if women don't want to have kids. So, I just want to say at the outset of this conversation, when we look at survey data of people's intended or desired fertility, we do not see a large increase in the share of women saying they want to stay a child less. We do not see across high-income countries a change in stated ideal fertility. Most people still say, including young adults, today, that they want to have about two kids. So, the first reason you might actually think this is a problem is because there's something about modern society and high-income countries that's making it hard for people to achieve the fertility that they would like, have the families they would like. So, it's not just about the consequences for our economic system. I think we also should be asking if something we're doing in society is making it too hard for people to feel like they can form families in a way that would advance their well-being. Setting the side questions about individual well-being, if we want to look at more the economic consequences of a declining birth rate, demographics are super important to our fiscal systems and to the functioning of our economy. So, let's start with why economists worry about declining birth rates, which lead to declining population growth. And we have had the smallest population growth in peacetime history over the past decade in the US. So, we're already seeing a decline in our population growth. When we have a declining population, when we have an aging population, a larger and larger share of the population is older. Smaller share is of working age. There are pressures on the smaller share of the population to take care of the older share of the population. And the share of the US population that's 65 and over has increased a great deal. So, it's gone from like 11 to 12 percent 20 years ago to closer to 18 percent now and that will keep rising. So, the US, not just the US, but high-income countries, we have this major baby boom in the middle of the 20th century. So, the population pyramid now is really inverted. Where we have more older people, that share of the population is growing because it was a large cohort and age expectancy is increasing. And you have fewer workers coming up behind them and increasingly fewer workers. So, that's puts pressure on our fiscal systems. How do we take care of all these older people? How do we continue to pay for Social Security and Medicare? It also has the potential to mean less economic growth and less economic dynamism. And so, we worry about that too. We worry that an older shrinking population is one with less innovation, fewer new ideas, fewer technological breakthroughs. And that has the potential consequences of decreasing living standards for all people. The worry is about a shrinking population and a less dynamic economy that delivers the continued increase in living standards that we've become accustomed to. Okay, so that's the general overview. Is there an issue though among those that you mentioned where you are more worried than the average? So, if I think just about what worries me about aging in particular, I can't help but worry about the very real fiscal consequences of our ballooning entitlement expenditures. So, we already spend 35% of federal outlays on mandatory spending on people over the age of 65. Meanwhile, we've got young families struggling to make ends meet, right? And we've got a decline in fertility and our government spending five to one on a per capita basis on the elderly to kids. And so, this is generational wedge where more and more of our nation's resources are going to take care of the elderly. While we're having fewer and fewer babies, which is not the way, you know, sort of a forward looking dynamic economy society looks like that mismatch and that increasing burden and the lack of investment in kids. I'm worried that sort of to be a forward looking society, one where people are optimistic and feel like they can have kids, we actually need to be spending much more on kids. But our aging population is taking up more and more of our resources. So, is that a fair comparison? I think you just said five to one. I mean, the elderly arguably have higher needs in some cases than kids. Does that include, say, pension spending where they've saved up and are now getting social security might have very complex health problems, which hopefully five year old won't have. and lead it's not surprising that our healthcare spending on the elderly is more than it is on kids because you're exactly right. Their health care needs are greater. But the income that we redistribute to the elderly, no, it is absolutely not true that they have greater needs than kids. Our child poverty rates are high, and there are very, very long-term consequences of child poverty. We wouldn't have a spending problem on the elderly if all we did was raise the elderly out of poverty. A lot of this, a lot of the social security and Medicare spending, frankly, goes to elderly adults who are well over the poverty line. So if you look at income maintenance, children have much higher needs, and they're more likely to be living in poor circumstances. It's just the health care that sort of makes more sense. The income is because we've made a policy choice that we are going to send tens of thousands of dollars a year to people over the age of 65 who have above median income, who don't really need income support. They just feel like they've been promised that because at one point, they contributed to the social security system. So just on these fiscal challenges, do you think that increasing the fertility rate would help? So in the African Economic Strategy Group volume, we have a very nice paper that's based on simulation exercise that Lisa, Dattling, and Luke Purdue have done showing that the unsustainable debt trajectory that the US is on is really entirely due to entitlement spending to people over the age of 65. And it's really driven by the fact that we have this very large cohort of retirees, and they are living longer. And that's well known to people who study these kinds of things that it's really the aging of the population and entitlement spending that's driving the continued rise in our debt. What they do show also, though, that's really important to realize is that even if we manage to turn around fertility rates in the next decade, and we started having more babies, that doesn't solve the immediate fiscal challenges we have. Because the new cohort, the new births, those kids basically are collectors of spending for the next 20 years, and they don't start paying in taxes as workers for another 20 years. So the point here is, even if we were to turn around for fertility rates immediately, that doesn't help our fiscal challenges coming from the very large share of over age 65 government benefit recipients now. OK, so that's at the national level. Are there any nuances that we should be taking into account at the state and local level? Yeah, so declining fertility poses a very different set of issues for state and local governments. Now, more spending on kids happens at the state and local level because they're spending on K through 12 schools and to some extent, higher education. And so those are the institutions that really serve kids in our country, the government institutions. What's very interesting is that, you know, in a paper in this new Aspen Economic Strategy Group, Jeff Clemens points out that as local areas continue to experience a decline in births and a decline in K through 12 enrollment, and ultimately, it's decline in the number of people available for the local tax base and working age population, towns are going to have to unwind their commitment to public goods and services, and that is a really hard thing to do. So specifically, let's just think about schools. In a lot of local areas, well rural areas in the US have been dealing with declining school enrollment for the past quarter century. That's going to become more and more common across the US as birth rates decline. It's really hard to figure out how to consolidate schools, how to close schools. More local areas are also going to encounter this when it comes to hospitals and local transit systems. Those are all systems that have very large fixed capital and labor costs. And as you have fewer people, the per capita cost of running these types of public goods and services increases non-linearly. And so this is going to be a real challenge that more and more state and local governments are going to have to deal with unfunded pensions and health care expenses. Those two are going to be large sort of legacy burdens on an increasingly smaller local and state populations. This is going to lead to some very messy state and local public finance. Do you think there are any areas where people fret about the economics of our aging population, but actually the problems are probably overblown? Well, the aging of the population, that is upon us, right? Largely because we have this very large baby boom cohort with us right now. The problems of sort of declining working age or younger population, they could be overblown in the sense that they're not destiny. We could get ahead of this and react to this. We could invest in our talent, our youth, our technologies and make it such that even if we have a declining older population, we still maintain living standards and have a very dynamic society. For me, though, what I see is we're not doing that. We're not saying, oh, we're going to have fewer kids, less invest more in them. Again, this relates to the fact that we spend way more spending on the elderly. We're just not investing in these forward-looking things that would sort of work against these demographic headwinds. The other thing to point out is the idea of a declining population is a long-term proposition. In another paper in this ASG series, one of the authors, Kevin Kirk, points out that declining population that happens across generations, not immediately. And so the alarmist ideas of humanity going extinct, those aren't zero probability events given current fertility trends globally. But those are way, way, way down the road. Do you think there's any scope for an AI-fueled productivity boom to just fix this? I mean, potentially innovations like AI can make us more productive. And so we won't need as many workers or people to maintain our output. Will AI make the kind of innovative breakthroughs in the way we form our institutions or organize our business productions that ingenious people have done? I don't know. I pay attention to the AI debate. I know there are optimists. I know there are skeptics. I have no inside information. I think the idea that, well, we're just going to be a bunch of AI-driven robots. Now I'm going to sound just to be in, but let's just go there. There are people who are sanguine who think, well, people are a problem for the planet. And robots are going to take our jobs anyway. The idea that we're just going to be-- we're going to yields the planet to AI-driven robots and plants and animals. To me, that's not an optimistic or encouraging view of where we're headed. I remember when I was a bit younger, having friends who would say that they weren't going to have kids because of the environmental consequences. When there's a finite planet, finite resources, it would be an irresponsible thing to do. What's your take on that line of thinking? At the end of the day, many, many generations from now, if there aren't people consuming or producing on the planet, will our environment be better off, probably? But I guess fundamentally, at some point to care about that sort of long-term thing you have to take a stand on is humanity worth preserving. And I'm just going to stipulate here not as an economist, but as a person, my normative values, yes. Much more immediately, the idea that fewer babies are going to help us address our environmental or climate challenges just doesn't hold up. And here, Kevin Curif does a really nice job in the paper he's written for us. Mike Duryso and Dean Spieres do a really nice job making this point in their recent book after the spike, pointing out that the climate challenges and environmental challenges related to emissions that we experience now, those require innovations and responses in the near term. Fewer babies today are not going to in any way, meaningfully affect our emissions, our plants' temperature, the population decline that will eventually come from falling birth rates is too far down the road to address our immediate climate challenges. So I hear this all the time from college age kids. They've heard this in their environmental classes that if they want to help the environment don't have kids. To my normative view, that's incredibly sad and not very kind advice to give a young person who might want to have family, but it also just as a matter of fact, is not supported by sort of climate models and really it comes down to a mismatch of timeline. - Okay, well with my two kids and a lot of nappies in landfill, I'm gonna feel better about that. - You can feel better. - Okay, let's talk now about the workforce, right? So within offices, what does all of this demographic change mean for the structure of the workplace? So focusing more on the aging of the population, the increased longevity of the population, moving away from the decline in fertility for a moment, what economists have documented is that this has led to what the authors, Nikola Bianchi and Mateo Paradiso refer to as congestion effects in the labor market. These older workers are holding on to higher paying managerial positions for longer and that's crowding out opportunities for younger workers to advance and earn higher wages. This is well documented now in the US labor market and in other high income countries. The older generation, people over age 50 who are holding onto their jobs for longer, are the winners in this context. And the ones who are losing are the ones who are delaying their career advancement, not advancing into managerial positions. The wage gap between older and younger workers has widened in favor of older workers in recent years. Relate this to what we also know is happening outside of firms, younger adults are having a harder time entering the housing market and increasing wealth. And others have shown that the wealth gap has also increased in recent decades, favoring again, the elderly. This is consequential for individual workers and again, these age groups of workers. There's another implication here. The basis of showing that older companies, older workforces are less dynamic. There's fewer startups, there's less business dynamism. And so you also potentially have this aggregate macroeconomic effect that an older workforce just simply isn't as dynamic. Here we say this in topics like immigration, there's a site called the lump of labor fallacy. So if one person takes a job that doesn't necessarily mean that there isn't another job for someone else, right? There shouldn't be a zero-sum thing, but the way you're describing it does make it sound like zero-sum, you know, winners and losers. So why is this different to other areas of the labor market where the lump of labor fallacy is real? It really comes down to whether new jobs are being created. So immigration is a great example. In a lot of places where local labor markets have experienced an increase in less skilled immigrants, new jobs are created. Like so one example that economists will often give is like gardeners or landscapers. You create new jobs for the new people. So it raises a great question why in this context that, you know, Bianca and Paradiso have documented why are firms not simply creating new jobs for the younger workers and firms that are able to do that obviously won't have as much of a challenge. I mean, just what they show empirically is basically the way firms have tended to, let's say, make space for now what's been an increase in older workers because people are retiring much later is they've just held on to management positions longer. So it's a little bit different than just the number of jobs and it's really about advancement to managerial jobs in a particular firm. And so, you know, one way to think about this is you just don't keep adding managers. You don't keep adding managing partners. You just don't keep adding the people at the top with the highest wages. Those are sort of fixed or they're not growing as fast as the increase in older workers, not retiring and younger workers. Just take an extreme example that will feel very familiar to people. Certainly for academics, there's only so many tenured slots in a department. And when people don't retire before the age of 75 anymore, what happens is young PhDs aren't getting those jobs. I think this is top of mind because the Harvard Crimson recently had an article showing that now, I think it was like 40% of tenured faculty at Harvard were above the age of 65. And that is a dramatic change from just 20 years ago. Again, it's not like Harvard's growing company is this really, but they're not just going to keep adding to their number of tenured faculty slots. Another obvious example that will make this concrete is look at Congress. We've got people holding on to their positions after the age of we can even go higher than 65 to 80. They're not creating new spots and just take that to a firm and you see how this congestion, it's really about the upward trajectory that's getting crowded out. One would hope there would be a difference between companies and say academia or Congress and that they should be dynamic. If you've got older workers hogging these top spots, that's not helping younger workers progress. Is there any sense in which this is an optimal strategy for productivity or. Oh sure, sure. I'm not suggesting that firms aren't doing things that are not in their best interest. So older workers with more experience, with more knowledge, with more leadership capability, it's in firms interest to hold on to them. Otherwise they would let them go. You could see my firms do this, but there are costs to the younger workers. So the key here, of course, is not. Nobody's saying that there should be forced retirement, but the trick is for business leaders and policy makers to think about how do we capitalize on this increased longevity and this good thing of older workers being able to be productive and hold on to these jobs longer while also being forward-looking, realizing that it's in companies and our economies and our societies, long-term interest also be investing in young people, in young workers, in a pipeline of talent and alleviating some of the wage pressures that have led to. Well, accumulation pressures and potentially even home ownership pressures on younger adults. Okay. Well, let's go to a break now. And when we get back, I want to ask what policy makers should be doing about any of this. We are back from the break. Okay. Are there any more sort of specific policy recommendations you would have for addressing that challenge, I suppose, of an aging population as it applies to the workforce? I believe it to forward-looking business leaders to be mindful of this and to think about, "Okay, how do I make sure that I'm creating a pipeline of talent and I'm nurturing the next generation of leaders in our business?" All of the impetus seems to be in the other direction of bolstering the sort of wealth and income of the elderly and I can't underscore this enough. I am all for making sure that we minimize elderly poverty, et cetera. But what I'm referring to is when you look at more tax breaks for people over age 65, at the same time as we know young families are struggling and we know young families are feeling like they can't afford to have kids or also knowing that sort of we're going to have fewer kids coming through and fewer workforce is when all of the forward-looking momentum would suggest that we need to be putting more energy and more investments into younger people in society, policymakers from the state to the federal level just seem to be going in the opposite direction. Now you were saying earlier that we really need to frame this as enabling people to have the family sizes that they want, right? So this isn't about pressuring anyone to have more kids than they feel comfortable with. The general feeling in this area is that nothing works, right? We've got subsidies, we've got paper and to leave and it's just really difficult in the empirical work that there is to find examples of interventions that really move the needle. Then you have the advocates for bigger interventions, you say, "Oh, we just haven't tried the big stuff, right? It's obviously not going to work if we just do one tweak because it's the whole package." Right, so you really just have to do everything at the same time and only then will you see a change. What is your sense of what if anything works? I agree entirely with your read of the evidence here, high income countries across Europe in Asia. They have tried to address declining birth rates. They have implemented pro-natalist policies like baby bonuses, expanded child tax credits, expanded paid leave. I agree with you that that's done very, very little. I think fundamentally, probably shouldn't be surprised that a few extra thousand dollars or a few additional months of leave when a kid is born doesn't really meaningfully change the calculus for somebody trying to decide, "Do I want to commit to a parenting lifestyle and be responsible for another person for at least 18 years?" So these incremental things really haven't worked. Now, what I'm about to say next requires some humility on my part as an economist. It's hard to imagine this turning around without sort of a cultural shift or changes in social and the worms. So my read again with my colleague, Philippine, we've done a lot of work on this. What we suggest is probably the single best explanation, which is like a catch-all explanation for why fertility is down in the U.S. and other high income countries is because of shifting priorities. This isn't a value statement. This is when you look at the way the more recent cohorts of young adults are choosing to spend their time and money in their 20s and 30s. They're spending more time and money on establishing their career, on working, on leisure pursuits, and they're choosing parenthood to a much lesser degree. Now, again, as I said earlier, in surveys, people still say they want to have about two kids, but they're sort of taking a gamble hoping that that'll happen in their late 30s. So if you just think about what young people seem to be prioritizing, both marriage and having kids are way down to the extent that this makes people happier because there's an expanded choice set, as you were saying. We certainly don't want to eliminate choices to force people to pick having kids. But all of these sort of cultural forces, peer effects, pressures of parents. they're all just pushing towards lower fertility regime and it will take sort of massive social changes, I think, to change that in a meaningful way. Have you seen this paper by an economist called Ben, I think it's Queer, who has written something about housing and fertility, right? And he's built this huge model and essentially concludes that changes in the housing market have contributed up to half of the decline in fertility rates over the past few decades. Have you seen this paper, what do you think about it? I think, directionally, the finding that housing costs have depressed fertility is probably right. I know quite by the magnitudes. Lisa, do you know, Dottling and I have a recent paper showing that the introduction of the modern mortgage in the mid-20th century, the VHA and the VA innovations, that made home ownership accessible to young couples and you saw a dramatic increase in the US in the share of people under age 45 owning a home. And what we find is that was an amplifying effect of contributing effect to the baby boom, which is super interesting. It's like the reverse experiment. Like we made home ownership much more accessible to young people and it led to an increase in births and by our calculations, that mechanism can explain about 10% of the excess versus associated with the baby boom. So it's really interesting to think about that period versus now. Home ownership became readily accessible in a period where there were a lot of other forces also pushing towards earlier family formation and higher fertility. There was an increase in incomes, people were optimistic. That was the cultural milieu. Now you're in a world where all of these forces are sort of pushing away from child-bearing parenthood. And there have been restrictions on access to care, but also credit to housing market entry in the past 15 years, corresponding with the decline in fertility. So I do think, again, based on the evidence that this barrier to accessing home ownership is yet another amplifying force in the downward direction. Do you think there are any bad ideas, bad policy ideas being bounded around to fix the fertility problem? I will tell you one thing I worry about. And this is more from the perspective, actually, of women's well-being. I worry that the well-meaning push to say to young people, to women in particular, you know what? Everybody frees your eggs. You know, and invest in your career, we will pay for you to freeze your eggs, and then you can have kids later at age 40 after you've achieved partner status or whatever it is. I worry that that feels like a pronatalist policy, making it easier for older women to have the fertility they desire, but I'm just worried that this sets up a false promise. It feels like a pronatalist policy, but it actually is going to induce more people to delay who will ultimately wind up unable to have the children they would want to have. Melissa, this has been great. Thank you so much for joining me. Thanks for having me. [MUSIC PLAYING] That is all for this week. You have been listening to the Economics Show with Samaritans. If you enjoyed the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Amisha Frankel-Dovall, with original music from Green Turner, and sound design from Samantha Javenko. Senior producer was Michaela Tindara. I'm Samaritans. Thanks for listening. [Music]