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Economic Mis-Conceptions

us census population 3 millionAs of today, (10/17) the population of the United States have grown to 300 million people. The Census Bureau's population clock rolled over to the big number this morning at 7:46, Eastern Time.
This column was written by John Tamny.
The Brookings Institution's William Frey says a growing population is needed "to maintain the youth and vitality of our labor force." With a birthrate of 2.1 children per woman, the U.S. is said to be right at the number necessary to maintain its current population figures. According to an article in last Friday's Wall Street Journal, countries with birthrates lower than ours face "a critical shortfall of children" that "will undermine economic growth and public finances as a dwindling work force struggles to support a growing pool of retirees who are living longer."

In response to the alleged economic crisis that will result from low birthrates, governments around the world are offering up subsidies to reverse the shortfall. Mothers in Estonia are paid the equivalent of $1,560 per month for a more-than-one-year period as an incentive to have more children. Other countries in Europe, including the Nordic nations and France, have for years subsidized childbirth to maintain stable populations, while in 2004 Australia introduced legislation offering families $3,000 per newborn.

Government efforts to stimulate childbirth at first glance make a lot of sense. Adam Smith used a pin factory in the Wealth of Nations to explain how more workers (and more "hands") allow for increased specialization and higher levels of economic growth. Human beings are capital, and the more we have, the more wealth we'll be able to create.

Still, the economic story of the U.S. suggests that world governments are overreaching once again. If rising birthrates were essential for economic growth, there would be no need for taxpayer-financed handouts to maintain rising birthrates. More realistically, citizens of the world possess an acute understanding of the infant-replacement rates necessary to achieve increasing standards of living. founder and CEO Marc Benioff predicts that 25 million white-collar jobs could vanish due to software innovations over the next 10 years. While human capital will by definition make what Benioff assumes possible, the technological advances of the future, irrespective of population growth or contraction, are what will make it possible for the existing world population to create more wealth and economic growth, and with fewer "hands."

Contrasting the stories of General Motors and Google helps reveal how this is already happening. Founded in the early part of the 20th century, GM presently employs 765,000 and has a market cap of $19 billion. Wealth creation per employee works out to roughly $25,000. Conversely, Google employs roughly 9,300 people, yet possesses a market cap of $143 billion. Wealth creation per employee at Google works out to over $15 million.

On a broader scope, it makes perfect sense that birthrates in the U.S. were higher in the past. Indeed, with a population of 100 million in 1915, GDP per capita (in 2000 dollars) was roughly $5,000. High birthrates and population growth were necessary to achieve a very basic standard of living. The U.S. population has tripled since 1915, but GDP per capita has risen eightfold to $40,000 over that timeframe. And if Benioff's prediction proves even partially true, the latter number will continue to rise relative to population growth as technological advances allow average productivity per citizen to rise.

The story gets even better when you consider the entrance of Chinese and Indian workers (to name but two worker groups) into the worldwide labor pool. The hand-wringing over low birthrates in certain countries corresponds with the presumption that these economies are closed, with economic activity limited to what occurs within in each country. But the global economic story since World War II is one of countries allowing increased cross-border trade and, as such, the economic specialization that is essential to economic productivity per person.

While high birthrates are welcome for the human capital they provide, the argument that low birthrates foretell economic doom is simplistic at best. Indeed, if simple population growth were the main driver of prosperity, India already would have the largest economy and the highest standard of living in the world. That poverty there remains at unspeakable levels for many shows the folly of that assertion. Among OECD nations, Mexico has the highest birthrate at 2.4 per female, yet no one would mistake Mexico's largely stagnant economy for the economic miracle that has occurred in South Korea where the birthrate is 1.1 per female.

Government subsidization of childbirth is the equivalent of the State of Illinois putting books in homes in an effort to improve educational outcomes. In truth, books in homes are merely an indicator of positive educational outcomes, as opposed to the cause. Similarly, while higher birthrates can correlate with strong economic growth, technological advances indicate that we'll continue to do and create more with much less.

Instead of subsidizing childbirth, governments should actively seek to lower trade barriers to insure that local advances become worldwide innovations. Childbirth will take care of itself, on an as-needed basis.

John Tamny is a writer in Washington, D.C.

By John Tamny
Reprinted with permission from National Review Online