A shrinking population might actually be a good thing

Chris Gay is a contributing columnist for The Globe and Mail. He is a former Wall Street Journal staffer and writes the newsletter Figure at Center.

There aren’t many things that generate as much existential hand-wringing as global warming and artificial intelligence, but low fertility rates come pretty close.

Birth rates in much of the world have fallen below replacement levels, portending gradual population shrinkage in many advanced economies. China is losing the fastest in terms of absolute numbers: The United Nations projects its population falling to just under 1.3 billion in 2050, from around 1.4 billion today.

Smaller populations, many fear, will have disastrous economic consequences separate from those associated with worsening dependency ratios (that is, fewer working-age people to support younger and older segments of the population). With fewer available workers and fewer consumers to buy their output, economies would seem destined to shrink and living standards to fall. Data provider Implan reported in February that slowing population growth is “breaking the U.S. economy,” costing the country US$104-billion in added value last year.

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But these fears ignore a concept familiar to anyone who’s sat through Economics 101: What powers economic growth is not just numbers of workers and consumers, but increasing productivity – more output per unit of input.

The textbook example is agriculture. In 1870, half the U.S. population worked in farming to feed a country of 38 million; now, less than 2 per cent works to feed 340 million. A century ago, a third of Canadians were farmers, as against 1.3 per cent in 2023.

So, a question for birth-rate alarmists: Unless someone has pulled the plug on productivity gains, why should anyone worry about shrinking populations? Indeed, shouldn’t we welcome them? Who could object to smaller populations in which everyone gets a bigger piece of a growing pie?

The idea that stable or shrinking populations mean stagnant economies goes back a way. American economist Alvin Hansen proposed in 1938 that slow U.S. population growth was exacerbating a permanent state that he termed “secular stagnation” – sluggish long-term growth unrelated to the business cycle. Hansen was writing late in the Great Depression, when U.S. population growth had reached an all-time low and immigration was severely restricted. Subsequent events proved him spectacularly wrong.

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Hansen contemporaries John Maynard Keynes and Joseph Schumpeter argued that population decline need not impair growth. That’s a controversial view today, but there are arguments in its favour.

For starters, a host of countries have seen their total and per capita output rise in the first two decades of this century even as their populations shrank. The Overpopulation Project, which describes itself as a non-profit demographic-environmental research group, argues that shrinkage itself could have pro-growth consequences. It could, for example, raise wages, increase labour participation and lower the unemployment rate. That, in turn, could increase the propensity to consume among lower-income households now earning higher wages.

A recent paper co-authored by Nobel economist Daron Acemoglu (who also co-wrote Why Nations Fail) argues that slowing population growth actually presages faster economic growth, partly in response to labour scarcity, which prompts adoption of labour-saving technologies that can increase gross domestic product.

“In cross-country data, declining birth rates lead to higher total factor productivity (TFP), larger capital stocks, a shift toward exports in high-tech industries, and more labour-saving patenting,” the authors write.

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Smaller populations may trigger benefits not directly tied to increased productivity. Shrinking urban populations may reduce commuting times, increase leisure time and by extension raise leisure spending. Lower urban density could reduce crime rates and enable cuts in public spending on local security, freeing up government funds for more productive uses.

Outside of cities, per capita farmland could increase, helping to raise agricultural productivity. Shrinking population implies fewer resources needed for housing and other infrastructure – public roads, schools, utilities – reducing financial burdens on local governments. It might also help allay that bane of modern life, suburban sprawl, which, apart from adverse environmental consequences and exasperated commuters, has disfigured much of the landscape.

Then we come to the vast productivity potential of AI, which, assuming it doesn’t turn us all into paper clips, should make folks less worried, not more, about falling birth rates. A paper published this year by the National Bureau of Economic Research shows that while business executives surveyed report little AI impact so far on employment and productivity, they expect it to contribute significantly over the next three years, adding an average of 1.4 per cent to productivity and 0.8 per cent to overall output. (They also project it will cut employment at their companies by 0.7 per cent – not exactly the extinction event many workers fear.)

“The more the merrier” is a nice sentiment, but in a world of finite resources and infinite human ingenuity, it may turn out that fewer are merrier still.