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The most obvious solution to this problem is immigration. The problem is that Japan and most European countries have severe cultural problems integrating immigrants. The Japanese don't try, for the most part, and the Europeans who have tried — particularly with migrants from the Islamic world — have found it difficult. The United States also has a birthrate for white women at about 1.9, meaning that the Caucasian population is contracting, but the African-American and Hispanic populations compensate for that. In addition, the United States is an efficient manager of immigration, despite current controversies.
Two points must be made on immigration. First, the American solution of relying on immigration will mean a substantial change in what has been the historical sore point in American culture: race. The United States can maintain its population only if the white population becomes a minority in the long run. The second point is that some of the historical sources of immigration to the United States, particularly Mexico, are exporting fewer immigrants. As Mexico moves up the economic scale, emigration to the United States will decline. Therefore, the third tier of countries where there is still surplus population will have to be the source for immigrants. Europe and Japan have no viable model for integrating migrants.
The Effects of Population on GDP
But the real question is whether a declining population matters. Assume that there is a smooth downward curve of population, with it decreasing by 20 percent. If the downward curve in gross domestic product matched the downward curve in population, per capita GDP would be unchanged. By this simplest measure, the only way there would be a problem is if GDP fell more than population, or fell completely out of sync with the population, creating negative and positive bubbles. That would be destabilizing.
But there is no reason to think that GDP would fall along with population. The capital base of society, its productive plant as broadly understood, will not dissolve as population declines. Moreover, assume that population fell but GDP fell less — or even grew. Per capita GDP would rise and, by that measure, the population would be more prosperous than before.
One of the key variables mitigating the problem of decreasing population would be continuing advances in technology to increase productivity. We can call this automation or robotics, but growths in individual working productivity have been occurring in all productive environments from the beginning of industrialization, and the rate of growth has been intensifying. Given the smooth and predictable decline in population, there is no reason to believe, at the very least, that GDP would not fall less than population. In other words, with a declining population in advanced industrial societies, even leaving immigration out as a factor, per capita GDP would be expected to grow.
Changes in the Relationship Between Labor and Capital
A declining population would have another and more radical impact. World population was steady until the middle of the 16th century. The rate of growth increased in about 1750 and moved up steadily until the beginning of the 20th century, when it surged. Put another way, beginning with European imperialism and culminating in the 20th century, the population has always been growing.
For the past 500 years or so, the population has grown at an increasing rate. That means that throughout the history of modern industrialism and capitalism, there has always been a surplus of labor. There has also been a shortage of capital in the sense that capital was more expensive than labor by equivalent quanta, and given the constant production of more humans, supply tended to depress the price of labor.
For the first time in 500 years, this situation is reversing itself. First, fewer humans are being born, which means the labor force will contract and the price of all sorts of labor will increase. This has never happened before in the history of industrial man. In the past, the scarce essential element has been capital. But now capital, understood in its precise meaning as the means of production, will be in surplus, while labor will be at a premium. The economic plant in place now and created over the next generation will not evaporate. At most, it is underutilized, and that means a decline in the return on capital. Put in terms of the analog, money, it means that we will be entering a period where money will be cheap and labor increasingly expensive.