Flexible working is key to reversing today’s collapse in fertility rates

Women in most parts of the world are not having enough children to replace our population. This is one of the great issues of our time, but is hardly ever discussed.

Yet the issue is very topical, with Chinese births falling to a 60-year low last year.  Only 15.23 million babies were born, the lowest level since 1961 when the population was 654 million, less than half today’s 1.4bn. Soon, deaths will start to overtake births – as they have already in Japan.

It used to be thought that China was a special case due to its “one child policy”, pictured above. But this law was relaxed in 2015.  And although births did rise in 2016, as some couples took advantage of the new law, forecasts that births could reach 23m in 2018 have proved completely wrong.

FERTILITY RATES HAVE COLLAPSED AROUND THE WORLD

China is not alone, however, in seeing its fertility rates collapse, as the chart of the world’s 10 largest economies confirms.  It shows the number of babies/woman being born since 1950, based on UN Population Division data:

  • Asia.  China’s rate has fallen from 6 to 1.6; India from 5.9 to 2.2; Japan from 3 to 1.5
  • Americas.  Brazil has fallen from 6.1 to 1.7; Canada from 3.6 to 1.6; USA from 3.3 to 1.9
  • Europe. The UK has fallen from 2.2 to 1.9; Italy from 2.4 to 1.5; France from 2.8 to 2; Germany from 2.1 to 1.5

So only India is now above the replacement level of 2.1 babies/woman. And probably this will change within the next 5 – 10 years as latest national data shows that 12 states are already below replacement levels, whilst urban areas are at just 1.8 babies/woman.

Of course, part of the reason is increasing life expectancy – women don’t  need to have a baby every year to ensure someone is there to look after them when they grow old.

This was critical even 200 years ago, when life expectancy was just 30 years. But after the discovery of smallpox vaccination, Rising life expectancy enabled the Industrial Revolution to occur and today, life expectancy has more than doubled.

In turn, of course, today’s ageing populations are creating major headwinds for growth, as I discussed in Economic policy needs to focus on impact of the 100-year life.  This is particularly critical in wealthier countries, given that the West faces a demographic deficit as population ages.,

But another key – and related – issue is the collapse in fertility rates itself.

POLICIES HAVE TO CHANGE IF FERTILITY RATES ARE TO RECOVER 

It is easy to forget today that it is only within the last 100 years that men began to accept that women could play a full role in society.  It was exactly a century ago, for example, that resistance to the idea of women voting began to crumble.

The catalyst for change was World War 1. With men having gone to fight, women had to be allowed to leave the home and go to work.  And when the men came back, they felt unable to stop the move to allow women to vote.  But this didn’t stop men enforcing marriage bars until the 1960s.

These meant that Western women would routinely lose their job when they got married, on the grounds that “it was the man’s job to earn the income, whilst the woman stayed at home with the children“.  And, of course, women’s lives and ambitions were still restricted in a vast number of ways.

THE COST OF HAVING CHILDREN IS TOO HIGH FOR MANY WOMEN

Today, the collapse of fertility rates should be seen as a critical issue for society.  Of course, not every woman wants to have children. But for those that do, there are at least 2 types of cost that currently discourage them.

One “cost” is simply the high cost of living.  In China, for example, Caixin notes that

“High parenting costs are severely inhibiting. For example, in a typical Chinese middle-class family, the average annual cost of raising a child is about 30,000 yuan ($4,400).”

This is higher than China’s average per capita disposable income at just $4165 in 2018, according to government data.

But there is another “cost” that women have to face if they want to have children.  This is that job conditions are still based on the pre-1960 pattern. As a recent survey by the UK parenting site, Mumsnet, reports:

“Three-quarters of parents found flexible working — including part-time hours, job shares and reduced hours during school holidays — more important to them than perks such as health insurance and gym membership, and more than half of them valued it over getting a pay rise.”

Tech companies seem particularly bad in this area, as one mother wrote recently about working at Facebook:

“I love my job, but I love my baby even more. When I told Facebook I wanted to work from home part-time, HR was firm: You can’t work from home, you can’t work part-time, and you can’t take extra unpaid leave…..Zuckerberg said he was sorry I was leaving.

Most companies still operate a version of the same out-of-date policies. It’s time that they, and governments, began to wake up to the consequences. Common sense tells us that everyone would benefit from introducing more flexible working arrangements. And it is also the only way that we will get back to replacing our population, before it is too late.

Central banks’ reliance on defunct economic theory makes people worry their children will be worse off than themselves

“Average UK wages in 2022 could still be lower than in 2008” 
UK Office for Budget Responsibility

While Western stock markets boom under the influence of central bank money-printing, wages for ordinary people are not doing so well.  So it is no wonder that Populism is rising, as voters worry their children will be worse off than themselves at a similar age.

The chart above is the key to the story.  It shows births in the G7 countries (Canada, France, Germany, Italy, Japan, UK, USA) since 1921.  They are important as until recently, they represented around 50% of the global economy.  Equally important is the fact that consumer spending represents 60% – 70% of total GDP in each country.

As the chart shows, the absolute number of consumers saw a massive boost during what became known as the BabyBoom after the end of World War 2:

  • The US Boom lasted from 1946 – 1964, and saw a 52% increase in births versus the previous 18 years
  • The Boom lasted longer in the other G7 countries, from 1946 – 1970, but was less intense
  • In total, there were 33 million more G7 births in 1946 – 1970 versus the previous 25 years
  • This was the equivalent of adding a new G7 country the size of Canada to the global economy

Today’s dominant economic theories were also developed during the BabyBoom period, as academics tried to understand the major changes that were taking place in the economy:

  • Milton Friedman’s classic ‘A Monetary History of the United States’ was published in 1963, and led him to argue that “inflation is always and everywhere a monetary phenomenon”  
  • Franco Modigliani’s ‘The Life Cycle Hypothesis of Saving‘ was published in 1966, and argued that consumers deliberately balanced out their spending through their lives

Today’s problem is that although both theories appeared to fit the facts when written, they were wrong. 

We cannot blame them, as nobody during the 1960s realised the extraordinary nature of the BabyBoom.  The word “BabyBoom” was only invented after it had finished, in 1970, according to the Oxford English Dictionary.

Friedman had no way of knowing that the number of US babies had risen by such an extraordinary amount.  As these babies grew up, they created major inflation as demand massively outgrew supply.  But once they entered the Wealth Creator 25 – 54 age cohort in large numbers and began working, supply began to catch up – and inflation to fall.

Similarly, Modigliani had no way of knowing that people’s spending began to decline dramatically after the age 55, as average US life expectancy during the BabyBoom was only around 68 years.

But today, average US life expectancy is over 10 years higher.  And as the second chart shows, the number of households in the 55+ age group is rocketing, up by 55% since 2000.  At 56m, it is fast approaching the 66m households in the critical 25 – 54 Wealth Creator cohort, who dominate consumer spending:

  • Each Wealth Creator household spent an average of $64k in 2017, versus just $51k for those aged 55+
  • Even this $51k figure is flattered by the large number of Boomers moving out of the Wealth Creator cohort
  • Someone aged 56 spends almost the same as when they were 55.  But at 75+, they are spending 47% less
  • Older people already own most of what they need, and their incomes decline as they approach retirement

Unfortunately, today’s central bankers still base policy on these theories, just as Keynes’ warned:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”.

The result is seen in the third chart from the Brookings Institute.  It highlights how labour’s share of income has collapsed from 64% in 2000 to 57% today.  The date is particularly significant, given that the oldest Boomers (born in 1946), reached 55 in 2001 and the average US Boomer became 55 in 2010.

  • Fed Chairman Alan Greenspan tried to compensate for this paradigm shift from 2003 by boosting house prices – but this only led to the 2008 subprime crisis which nearly collapsed the global economy
  • Since then, Fed Chairs Ben Bernanke and Janet Yellen have focused on boosting the stock market, as Bernanke noted in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

But fewer Americans own stocks than houses – only 54% versus 64% for homes.  So “printing babies” cannot work.

The real issue is that the dramatic increase in life expectancy has created a paradigm change in our life cycle:

  • It is no longer based on our being born, educated, working, retiring and then dying
  • Instead, we have a new stage, where we are born, educated, work, and then retrain in our 50s/60s, before working again until we retire and then die

This transition would have been a difficult challenge to manage at the best of times. And having now gone in the wrong direction for the past 15 years,  we are, as I warned last year, much closer to the point when it becomes:

“Obvious that the Fed could not possibly control the economic fortunes of 321m Americans. Common sense tells us that demographics, not monetary policy, drive demand. Unfortunately, vast amounts of time and money have been wasted as a result. The path back to fiscal sanity will be very hard indeed.”

 

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Today’s New Normal world – the challenge of the 100-year life

MORI Nov162016 saw the start of the Great Reckoning for the failure of stimulus policies.

Political and social issues are now beginning to dominate the landscape.  As we saw in the UK’s Brexit vote to leave the European Union, voters no longer see economics as the sole issue in elections.  This paradigm shift was then followed by Donald Trump winning the US Presidency and Italy voting against premier Renzi’s constitutional reforms.

Polls confirm this, as the Ipsos MORI chart above shows.  Most people feel the current economic/political/social system is no longer working for them.  Worryingly, given the votes due in 2017, the survey also highlights that French voters (89%), Italians (82%) and Germans (69%) are even more upset than American (63%) and British voters (60%).

Voters are increasingly giving up on the “consensus wisdom” that ignores demographics, and which believes the world can somehow go back to the constant growth seen during the BabyBoomer-led SuperCycle.  As I wrote in August:

“The critical issue is that central banks have been in denial about the changes taking place in demand patterns as a result of ageing populations and falling fertility rates. Their Federal Reserve/US-type forecasting models still assume that raising interest rates will reduce demand, and lowering them will release this pent-up demand. But today’s increasing life expectancy and falling fertility rates are completely changing historical demand patterns. We are no longer in a world where the vast majority of the adult population belongs to the Wealth Creator cohort of those aged 25–54, which dominates consumer spending:

□  Increasing life expectancy means people no longer routinely die around pension age. Instead, a whole New Old generation of people in the low spending, low earning 55+ generation is emerging for the first time in history. The average western BabyBoomer can now expect to live for another 20 years on reaching the age of 65
□  Fertility rates in the developed world have fallen by 40% since 1950. They have also been below replacement levels (2.1 babies per woman) for the past 45 years. Inevitably, therefore, this has reduced the relative numbers of those in today’s Wealth Creator cohort, just as the New Old generation is expanding exponentially

“You cannot print babies” should be the motto hanging on every central bankers’ wall. Unfortunately, it is too late to quickly reverse their demographic myopia. Instead, the Great Unwinding is now set to evolve into the Great Reckoning. Investors, companies and individuals must prepare for heightened levels of volatility, as markets continue their return to being based on the fundamentals of supply and demand, rather than central bank liquidity.”

2017 is therefore likely to be a difficult year, contrary to the optimism of Western stock markets, as the landscape becomes ever more uncertain.  But the world has been through difficult years in the past.  And in time, no doubt, the need to adapt to the positive impact of  today’s demographic changes will become more obvious.  The issue is simple:

Today, Western life expectancy is around 80, and is around 20 years at age 65.  Due to the collapse of fertility rates, a G7 economy such as Italy has nearly as many people in the New Old 55+ cohort as in the Wealth Creator 25 – 54 cohort.  Another new stage therefore needs to be added to our life cycle – whereby we are born, are educated, work, and then retrain in our 50s/60s, before working again until we retire and then die.  

We need new leaders, with the vision and common sense required to help explain and manage this New Normal world, so that the benefits of the 100-year life are understood and welcomed.