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.
The US 10-year Treasury bond is the benchmark for global interest rates and stock markets. And for the past 30 years it has been heading steadily downwards as the chart shows:
- US inflation rates finally peaked at 13.6% in 1980 (having been just 1.3% in 1960) as the BabyBoomers began to move en masse into the Wealth Creator 25 – 54 age group
- Instead of simply boosting demand, as during the 1960s-1970s, they began to work and create new supply
- This meant supply/demand began to rebalance and interest rates then peaked at 16% in 1981
By 1983, the average Western Boomer (born between 1946-1970) had arrived in the Wealth Creator cohort, which dominates consumer spending, and the economy really began to hum. There was a final inflation scare in 1984, when US inflation suddenly jumped from 3% to 5%, but after that the trend was downwards all the way.
The Boomers were the largest and wealthiest generation that the world had ever seen. Their move to become Wealth Creators completely transformed the inflation outlook, as more and more Boomers joined the workforce. And they transformed the economy by moving it into the NICE era of Non-Inflationary Constant Expansion.
Central bankers took credit for this move, claiming it was due to monetary policy. But in reality, people are the key element in an economy, not monetary policy. You can’t have an economy without people. And sadly, the idea that the US Fed Chairman Alan Greenspan had somehow become a Maestro, blinded everyone to 2 key issues for the future:
- Life expectancy was rising rapidly, meaning that the Boomers would not normally die just after retirement. Instead, they would likely live for another 15 – 20 years after reaching age 65
- From 1970, fertility rates had fallen below replacement level (2.1 babies/woman) across the Western world
This combination of a rise in life expectancy and a collapse in fertility rates was creating a timebomb for the economy.
THE RISE IN LIFE EXPECTANCY AND COLLAPSE OF FERTILITY RATES CREATED AN ECONOMIC TIMEBOMB
Western economies are based on consumer spending. And spending declines once people reach the age of 55 – they already own most of what they need, and their incomes decline as they approach retirement, as the second chart shows:
- There were 65m US Wealth Creator households in 2000, who spent an average of $62k ($2017)
- There were only 36m in the 55+ cohort, who spent just $45k each
- In 2017, there were 66m Wealth Creators (almost the same as in 2000) who spent $64k each
- But there were now 56m in the 55+ cohort, who spent just $51k each
The rise in 55+ spending was also only temporary, as large numbers of Boomers have just reached 55+ and have not yet retired. Spending by those aged 74+ was down by nearly 50% versus the peak spending 45-54 age group.
BELIEF IN MONETARISM LED TO THE DOTCOM AND SUBPRIME DISASTERS
The dot-com crash in 2000 should have been a wake-up call for the failure of monetarism. It also, after all, marked the moment when the oldest Boomers began to join the 55+ cohort. But instead, policymakers thought monetarism could solve “the problem” and cut interest rates to boost the housing market – causing the subprime crash in 2008.
One might have thought – as we wrote in Boom, Gloom and the New Normal in 2011 – that this disaster would have destroyed the monetarism myth. But no. Abandoning monetarism would have led to a difficult conversation with voters about the need for everyone to retrain in their 50s, and prepare to take on new, and less physically demanding, roles.
Instead, policymakers tried to replace lost BabyBoomer demand by printing vast amounts of free money via the Quantitative Easing and Zero Interest Rate Policies. Their aim was to avoid deflation, as inflation had fallen to just 0.6% in 2010 – although why this was a “bad thing” was never explained. But in reality, they were running uphill, and the pace of the climb was becoming more vertical, as the average Western Boomer joined the 55+ cohort in 2013.
Of course, flooding the market with cheap money boosted asset prices, as they intended. Stock markets and house prices soared for a second time. But it also created a major new risk. More and more investors began to panic as they hunted through the markets, trying to obtain a decent “return on capital”. They assumed central banks would never let markets fall, and so gave up worrying about the risk of making a dud investment.
INTEREST RATES ARE NOW HEADED HIGHER AS PEOPLE WORRY ABOUT RETURN OF CAPITAL
The end of the Bitcoin bubble has highlighted the fact that that risk and reward are normally related. Most investments that offer potentially high rewards are also high risk – a lot has to go right, for them to make the possible return. This process of price discovery – the balance of risk and reward – is the key role of markets.
Left to themselves, markets will price risk properly. But they have been swamped for the past decade by central bank liquidity and their crucial role has been temporarily destroyed. Now, the fact that the US 10-year bond has broken out of its 30-year downtrend tells us that markets they are finally starting to regain their role.
How high will interest rates now go? We cannot yet know, and we can also be sure they will not move in a straight line as central banks will continue to intervene. But as more and more investments, like Bitcoin, prove to be duds, so more and more investors will start to worry about return of capital when they invest.
4% therefore looks like the next level for rates, as we are now trading within the blue bars on the chart. It may not take very long for this level to be reached, given the fact that the world now has a record $233tn of debt – 3x the size of the global economy. After that, we shall have to wait and see.
I strongly believe that forecasts should be monitored, which is why I always review the previous Annual Budget forecast before issuing the next Outlook, and always publish the complete list of Annual Budget Outlooks.
I now plan to begin monitoring my blog forecasts, using the percentage mechanism highlighted in Philip Tetlock’s masterly “Superforecasting” book. The first forecasts relate to last week’s post on US polyethylene exports and today’s forecast for the US 10-year Treasury bond. I will change confidence levels as and when circumstances change.
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“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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The Financial Times has kindly printed my letter below
, welcoming the Fed’s decision to address the impact of demographics, but arguing that it needs to focus on demand issues, given the impact of today’s ageing populations.
Sir, It is good to see the US Federal Reserve is finally beginning to address the impact of demographics on the economy, after years of denying its relevance. But as John Authers confirms in his excellent analysis of the Fed’s new research paper (“The effects of ageing”, The Big Read, October 26), its continued focus on supply-side issues means it is looking down the wrong end of the telescope.
The Fed’s approach might have made sense in the past, when demand was on a growth trajectory as the baby boomers joined the 25-54 cohort, which drives wealth creation. But today’s problem is growing overcapacity, not lack of supply, given that the ageing baby boomers already own most of what they need, while their incomes are declining as they enter retirement.
The problem is that the Fed’s economic models were developed at a time when the population effectively contained only two main segments — the under-25s and the 25-54 cohort. From a policy perspective, the number of over-55s was too small to be of interest. But this is no longer true, as increasing life expectancy means the baby boomers can now hope to live for another 20 years after reaching retirement age.
Equally important is that since 1970, fertility rates have been below the replacement level of 2.1 babies per woman in the developed world. Thus the relative size of the wealth creator cohort has been reducing for the past 45 years, while the numbers in the 55-plus cohort have been increasing. The result is that the ageing baby boomers are now nearly a third of the developed world’s population.
Policymakers therefore need to urgently refocus on the demand-side implications of ageing, if they want to craft suitable policies for this New Normal world.
Companies and investors often say “we don’t need to think about demographics – its too far in the future to matter”. This might have been true 20 years ago, but not today. As European chlorine industry demand confirms, the truth is that “history catches up with us”.
The reason is simple. Europe stopped having enough babies to replace its population with the end of the BabyBoom in 1970. Today, women have just 1.7 babies each, compared to the 2.7 babies/woman seen in the early 1960′s. Replacement rate would be 2.1 babies. And this, of course, matters enormously for demand:
- Consumption is around 2/3rds of GDP in developed economies
- And it is those in the ‘wealth creator’ 25 – 54 age group who drive spending and economic growth
Of course, the overall European population is still expanding today. But this is mainly because of the dramatic increase in life expectancy. This means someone aged 65 can now expect to live for 20 years in retirement. And older people contribute much less to GDP growth
- They already own most of what they need
- And their incomes decline as they enter retirement.
The chart above of chlorine production and operating rates highlights the impact of these two developments for demand. The reason is that chlorine, and its co-product caustic soda, are essential products in modern society. Based on salt, they are used in applications ranging from construction through to water treatment, detergents and pharmaceuticals. Based on Eurochlor data it shows:
- Annual chlorine production on the left, and operating rates (%) on the right since 2007, with Q1 2015 annualised
- In 2007, production was 10.7MT (black line) and operating rates averaged 84.5% (red)
- They have never been close to this level since, with 2010 the peak year at 10MT and 79% operating rates
The key is the decline in construction and therefore PVC demand.
As the chart on the left shows, based on Eurostat data, this peaked in 2007 and has never recovered. Part of the reason is the end of the speculative rush to build second homes in countries such as Spain. Vast numbers of these apartments have never been occupied, and the local population in most holiday resorts is not big enough to fill the gap.
The other reason, of course, is the ageing population and lack of babies.
Young adults normally provide major support for construction markets. They have to set up home for the first time, and then they often need to have bigger homes when they start a family. Equally, employers have to build offices and factories where they can work.
But older people already have somewhere to live, and are instead leaving work to retire. They might in the past have thought about buying holiday homes, but today they are increasingly concerned about having sufficient savings for their retirement.
The relative lack of young people since 1970 has enormous consequences for future economic growth. As the head of Copenhagen’s University Hospital’s fertility clinic warned last year:
“We have for many years addressed the very important issues of how to avoid becoming pregnant, how to avoid sexual diseases, how kids have a right to their own bodies, but we totally forgot to tell them we cannot have children forever.”
These demographic changes mean that Europe’s adult population is increasingly being dominated by people in the 55+ generation for the first time in history. Even in 1950, life expectancy at birth was roughly equal to retirement age at 65 years.
The result, as European chlorine demand confirms, is that the European economy has gone ex-growth. And as the European Central Bank is just beginning to realise, you can print money, but you can’t print babies.
“We have for many years addressed the very important issues of how to avoid becoming pregnant, how to avoid sexual diseases, how kids have a right to their own bodies, but we totally forgot to tell them we cannot have children forever.”
Suddenly, and it does seem to be a sudden realisation, Western countries are beginning to wake up to the fact that they are highly likely to face a problem of declining populations. Thus the head of Copenhagen University Hospital’s fertility clinic sounded the alarm in a Bloomberg interview this week, and added:
“A woman’s fertility diminishes as her eggs, present since birth, have tasted every cigarette and every glass of wine that she’s ever had.
“Men need to know that if they want to party till they’re 45, they’re going to miss the train, because when they wake up and want a family, their wives will no longer be able to conceive.”
Denmark is not alone in worrying about what will happen to its future population. As the chart above shows, based on UN Population Division data:
- Fertility rates have collapsed by 50% globally since 1950 to average just 2.5 children per woman (blue)
- Rates are down 40% in the More Developed countries to just 1.71 (red)
- They have also fallen 58% in the Less Developed countries to 2.56 children (green)
Countries need an average of 2.1 children per woman just to replace their populations. But the Developed world has been below this level since the end of the BabyBoom in 1970 (and Japan has been below it since 1955). This means it has been 45 years since the West’s populations were replacing themselves.
Globally, there is also no room for complacency. The UN figure quoted above of 2.56 children is their Medium forecast, based on a ‘best guess’ that the decline is slowing. But it will be 10 years before we know if this is right. They also produce a Low forecast, based on the view that Less Developed countries will continue to follow the Western pattern.
If the Low forecast turns out to be right, and we simply cannot know today, the World is already below replacement level at 2.05 children per woman.
THE ECONOMY SLOWS AS “YOU CAN’T PRINT BABIES”
These changes, of course, don’t just affect our personal lives. As we discuss in Boom, Gloom and the New Normal, the world went through a growth SuperCycle from the mid-1980s. This was when the vast number of BabyBoom babies reached the Wealth Creator 25 – 54 age range, when earnings and spending peak.
But now, we are on the downside of this curve. As the yellow line shows on the chart, fertility rates over the past 25 years have been at record lows. So for the next few years, no matter what now happens to birth rates, there will be relatively few young people joining the Wealth Creator generation.
We therefore don’t need to be rocket scientists to understand why the global economy is slowing. The simple truth, as Denmark has suddenly realised, is that the central banks can’t print babies.
And only babies, when they grow up, can create demand.