THE SATURDAY ESSAY
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Updated February 2, 2013, 7:10 p.m. ET
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America's Baby Bust
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The nation's falling fertility rate is the root cause of many of our problems. And it's only getting worse.
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By JONATHAN V. LAST

 
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Americans are not reproducing enough, and the long-term consequences are dire, says Jonathan V. Last, author of "What To Expect When No One's Expecting," in a discussion with WSJ Weekend Review editor Gary Rosen.

 
For more than three decades, Chinese women have been subjected to their country's brutal one-child policy. Those who try to have more children have been subjected to fines and forced abortions. Their houses have been razed and their husbands fired from their jobs. As a result, Chinese women have a fertility rate of 1.54. Here in America, white, college-educated women—a good proxy for the middle class—have a fertility rate of 1.6. America has its very own one-child policy. And we have chosen it for ourselves.


Forget the debt ceiling. Forget the fiscal cliff, the sequestration cliff and the entitlement cliff. Those are all just symptoms. What America really faces is a demographic cliff: The root cause of most of our problems is our declining fertility rate.


The fertility rate is the number of children an average woman bears over the course of her life. The replacement rate is 2.1. If the average woman has more children than that, population grows.


Fewer, and it contracts. Today, America's total fertility rate is 1.93, according to the latest figures from the Centers for Disease Control and Prevention; it hasn't been above the replacement rate in a sustained way since the early 1970s.


The nation's falling fertility rate underlies many of our most difficult problems. Once a country's fertility rate falls consistently below replacement, its age profile begins to shift. You get more old people than young people. And eventually, as the bloated cohort of old people dies off, population begins to contract. This dual problem—a population that is disproportionately old and shrinking overall—has enormous economic, political and cultural consequences.



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97% of the world's population now lives in countries where the fertility rate is falling.


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For two generations we've been lectured about the dangers of overpopulation. But the conventional wisdom on this issue is wrong, twice. First, global population growth is slowing to a halt and will begin to shrink within 60 years. Second, as the work of economists Esther Boserups and Julian Simon demonstrated, growing populations lead to increased innovation and conservation. Think about it: Since 1970, commodity prices have continued to fall and America's environment has become much cleaner and more sustainable—even though our population has increased by more than 50%. Human ingenuity, it turns out, is the most precious resource.

 
Low-fertility societies don't innovate because their incentives for consumption tilt overwhelmingly toward health care. They don't invest aggressively because, with the average age skewing higher, capital shifts to preserving and extending life and then begins drawing down. They cannot sustain social-security programs because they don't have enough workers to pay for the retirees. They cannot project power because they lack the money to pay for defense and the military-age manpower to serve in their armed forces.


There has been a great deal of political talk in recent years about whether America, once regarded as the shining city on a hill, is in decline. But decline isn't about whether Democrats or Republicans hold power; it isn't about political ideology at all. At its most basic, it's about the sustainability of human capital. Whether Barack Obama or Mitt Romney took the oath of office last month, we would still be declining in the most important sensedemographically. It is what drives everything else.


If our fertility rate were higher—say 2.5, or even 2.2many of our problems would be a lot more manageable. But our fertility rate isn't going up any time soon. In fact, it's probably heading lower. Much lower.


America's fertility rate began falling almost as soon as the nation was founded. In 1800, the average white American woman had seven children. (The first reliable data on black fertility begin in the 1850s.) Since then, our fertility rate has floated consistently downward, with only one major moment of increase—the baby boom. In 1940, America's fertility rate was already skirting the replacement level, but after the war it jumped and remained elevated for a generation. Then, beginning in 1970, it began to sink like a stone.


There's a constellation of reasons for this decline: Middle-class wages began a long period of stagnation. College became a universal experience for most Americans, which not only pushed people into marrying later but made having children more expensive. Women began attending college in equal (and then greater) numbers than men. More important, women began branching out into careers beyond teaching and nursing. And the combination of the birth-control pill and the rise of cohabitation broke the iron triangle linking sex, marriage and childbearing.


This is only a partial list, and many of these developments are clearly positive. But even a social development that represents a net good can carry a serious cost.

 

By 1973, the U.S. was below the replacement rate, as was nearly every other Western country. Since then, the phenomenon of fertility collapse has spread around the globe: 97% of the world's population now lives in countries where the fertility rate is falling.


If you want to see what happens to a country once it hurls itself off the demographic cliff, look at Japan, with a fertility rate of 1.3. In the 1980s, everyone assumed the Japanese were on a path to owning the world. But the country's robust economic facade concealed a crumbling demographic structure.


The Japanese fertility rate began dipping beneath the replacement rate in 1960 for a number of complicated reasons (including a postwar push by the West to lower Japan's fertility rate, the soaring cost of having children and an overall decline in the marriage rate). By the 1980s, it was already clear that the country would eventually undergo a population contraction. In 1984, demographer Naohiro Ogawa warned that, "Owing to a decrease in the growth rate of the labor forceJapan's economy is likely to slow down." He predicted annual growth rates of 1% or even 0% in the first quarter of the 2000s.


 
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Today, America's total fertility rate is 1.93, below the replacement rate of 2.1.

 
From 1950 to 1973, Japan's total-factor productivity—a good measure of economic dynamism—increased by an average of 5.4% per year. From 1990 to 2006, it increased by just 0.63% per year. Since 1991, Japan's rate of GDP growth has exceeded 2.5% in only four years; its annual rate of growth has averaged 1.03%.


Because of its dismal fertility rate, Japan's population peaked in 2008; it has already shrunk by a million since then. Last year, for the first time, the Japanese bought more adult diapers than diapers for babies, and more than half the country was categorized as "depopulated marginal land." At the current fertility rate, by 2100 Japan's population will be less than half what it is now.


Can we keep the U.S. from becoming Japan? We have some advantages that the Japanese lack, beginning with a welcoming attitude toward immigration and robust religious faith, both of which buoy fertility. But in the long run, the answer is, probably not.


Conservatives like to think that if we could just provide the right tax incentives for childbearing, then Americans might go back to having children the way they did 40 years ago. Liberals like to think that if we would just be more like Franceoffer state-run day care and other programs so women wouldn't have to choose between working and motherhood—it would solve the problem. But the evidence suggests that neither path offers more than marginal gains. France, for example, hasn't been able to stay at the replacement rate, even with all its day-care spending.


Which leaves us with outsourcing our fertility. We've received a massive influx of immigrants from south of the border since the late 1970s. Immigration has kept America from careening over the demographic cliff. Today, there are roughly 38 million people in the U.S. who were born elsewhere. (Two-thirds of them are here legally.) To put that in perspective, consider that just four million babies are born annually in the U.S.


If you strip these immigrants—and their relatively high fertility rates—from our population profile, America suddenly looks an awful lot like continental Europe, which has a fertility rate of 1.5., if not quite as demographically terminal as Japan.


Relying on immigration to prop up our fertility rate also presents several problems, the most important of which is that it's unlikely to last. Historically, countries with fertility rates below replacement level start to face their own labor shortages, and they send fewer people abroad.


In Latin America, the rates of fertility decline are even more extreme than in the U.S. Many countries in South America are already below replacement level, and they send very few immigrants our way. And every other country in Central and South America is on a steep dive toward the replacement line.

 

That is what's happened in Mexico. In 1970, the Mexican fertility rate was 6.72. Today, it's just at replacement, a drop of 72% in 40 years. Mexico used to send us several hundred thousand immigrants a year. For the last three years, there has been a net immigration of zero. Some of this decrease is probably related to the recent recession, but much of it is likely the result of a structural shift.


As for the Hispanic immigrants who are already here, we can't count on their demographic help forever. They've been doing the heavy lifting for a long time: While the nation as a whole has a fertility rate of 1.93, the Hispanic-American fertility rate is 2.35. But recent data from the Pew Center suggest that the fertility rate for Hispanic immigrants is falling at an incredible rate. To take just one example, in the three years between 2007 and 2010, the birthrate for Mexican-born Americans dropped by an astonishing 23%.


In the face of this decline, the only thing that will preserve America's place in the world is if all AmericansDemocrats, Republicans, Hispanics, blacks, whites, Jews, Christians and atheistsdecide to have more babies.


The problem is that, while making babies is fun, raising them isn't. A raft of research shows that if you take two people who are identical in every way except for childbearing status, the parent will be on average about six percentage points less likely to be "very happy" than the nonparent. (That's just for one child. Knock off two more points for each additional bundle of joy.)


But then, parenting has probably never been a barrel of laughs. There have been lots of changes in American life over the last 40 years that have nudged our fertility rate downward. High on the list is the idea that "happiness" is the lodestar of a life well-lived. If we're going to reverse this decline, we'll need to reintroduce into American culture the notion that human flourishing ranges wider and deeper than calculations of mere happiness.


We'll need smart pronatalist policies, too. The government cannot persuade Americans to have children they do not want, but it can help them to have the children they do want. Here are three starting points:


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Corbis; Photo Illustration by Keith A. Webb/The Wall Street Journal



Immigration has helped make up for America's dropping birth rate.


 
Social Security. In the U.S., the Social Security system has taken on most of the burden for caring for elderly adults, a duty that traditionally fell to grown-up children. A perverse effect of putting government in the business of eldercare has been to reduce the incentives to have children in the first place. One RAND study suggested that Social Security depresses the American fertility rate by as much as 0.5.


Looking to dismantle this roadblock, some analysts have suggested flattening the tax code to just two brackets and significantly raising the child tax credit. Others suggest exempting parents from payroll taxes for Social Security and Medicare while they are raising children—perhaps by a third for their first child, two-thirds for the second, and then completely for a third child. (Once the children turn 18, the parents would go back to paying their full share.)


Regardless of the particulars, the underlying theory is the same: To reduce the tax burden for people who take on the costs of creating new taxpayers (otherwise known as children).


College. Higher education dampens fertility in all sorts of ways. It delays marriage, incurs debt, increases the opportunity costs of childbearing and significantly increases the expense of raising a child. If you doubt that the economics of the university system are broken, consider this: Since 1960, the real cost of goods in nearly every other sector of American life has dropped. Meanwhile, the real cost of college has increased by more than 1,000%.


If college were another industry, everyone would be campaigning for reform. Instead, politicians are trying to push every kid in America into the current exorbitantly expensive system. How could we get college costs under control? For one, we could begin to eliminate college's role as a credentialing machine by allowing employers to give their own tests to prospective workers. Alternately, we could encourage the university system to be more responsive to market forces by creating a no-frills, federal degree-granting body that awards certificates to students who pass exams in a given subject.


The Dirt Gap. A big factor in family formation is the cost of land: It determines not just housing expenses but also the costs of transportation, entertainment, baby sitting, school and pretty much everything else. And while intensely urban areasLos Angeles, New York, Washington, Chicago—have the highest concentrations of jobs, they come with high land costs. Improving the highway system and boosting opportunities for telecommuting would go a long way in helping families to live in lower-cost areas.


These ideas are just a start; other measures certainly will be needed to avert a demographic disaster in the U.S. If we want to continue leading the world, we simply must figure out a way to have more babies.



—Mr. Last is a senior writer at the Weekly Standard and author of "What to Expect When No One's Expecting: American's Coming Demographic Disaster" (Encounter), from which this essay is adapted.



February 10, 2013 7:12 pm

US must do more than focus on deficit

By Lawrence Summers


A broader, growth-centred agenda is needed to propel the economy, says Lawrence Summers


There should be little disagreement across the political spectrum that growth and job creation remain America’s most serious national challenge. Ahead of President Barack Obama’s first State of the Union speech of his second term, and further fiscal negotiations in Washington, the US needs to think again about its priorities for economic policy.


The US economy grew at a rate of 1.5 per cent in 2012. Last week, the independent Congressional Budget Office projected that growth will be only 1.4 per cent during 2013 – and that unemployment will rise. While the CBO says growth will accelerate in 2014 and beyond, it nonetheless predicts that unemployment will remain above 7 per cent until 2016.


A weak economy and limited job creation make growth in middle class incomes all but impossible, pressure budgets by restricting tax revenues, and threaten essential private and public investments in education and innovation. Worse, it undermines the American example at a dangerous time in the world.


We can do better. With strains from the financial crisis receding and huge investment opportunities in energy, housing and reshored manufacturing, the US has a moment of opportunity unlike any in a long time. The economy could soon enter a virtuous cycle of confidence, growth and deficit reduction, much as it did in the 1990s. But this will require moving the national economic debate beyond its near total preoccupation with federal budget restraint.


Yes, medium-term fiscal restraint is necessary to contain financial risks. But it is not sufficient. Unlike the 1990s, when reduced deficits stimulated investment by bringing down capital costs, fiscal restraint cannot be relied on to provide stimulus now when long-term US Treasuries yield below 2 per cent.


A broader, growth-centred agenda is needed to propel the economy to its “escape velocity”.



First, as the president has recognised, budget cuts implicit in the fiscalsequester scheduled to begin in March should be spread over time. The economy is already taking a significant hit from increases in payroll taxes. Further across-the-board and sudden slashing of military and civilian spending will hurt the economy – and do serious damage to military readiness.


Second, the president and Congress should fix a firm deadline of the end of this year to address the international aspects of corporate tax reform. We are now in the worst of all worlds with US companies having nearly $2tn in cash sitting abroad, because of tax burdens on bringing it home and the perception that relief may be on the way. Ideally, the international tax system should be reformed in a way that is revenue-neutral but increases the attractiveness of bringing foreign profits home. This would be accomplished by replacing the current high rate of tax levied only on repatriated profits with a much lower tax levied on all global profits. If this is not going to happen, this should be made clear so business does not keep planning for an amnesty that will not come.


Third, no American should be satisfied with the nation’s system of housing finance. After a period when cheap mortgages were too available, the pendulum has swung too far and lack of finance is holding the economy back. The clearest evidence of this is the growing number of lower- and middle-income families paying rents to the private equity firms that own their homes at rates such as 8 per cent of valuefar above what a mortgage would cost.


Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, have historically provided support to the mortgage market in difficult times. It is high time they were forced to step up to support would-be lenders.


Fourth, the transformation of the North American energy sector must be accelerated. This will have economic and environmental benefits. Those weighing the decision about whether to approve the Keystone pipeline, which would run between the tar sands of western Canada and Nebraska, must recognise that any Canadian oil not flowing to the US will probably flow to Asia, where it will be burnt with fewer environmental protections.


Natural gas exploitation, too, can bring huge environmental benefits. Replacing coal with natural gas has much more scope to cut greenhouse gas emissions than more fashionable efforts to promote renewables. A period of record low capital costs and high unemployment is the best possible time to accelerate the replacement cycle for environmentally untenable coal-fired power plants. More generally, both production of natural gas and its use in industry should be a substantial job creator for the US for years.


More items could be added to this list, including innovations in regulation and finance with respect to infrastructure investment. Unlike deficit reduction, where all the choices are painful, measures to spur growth can benefit all Americans as well as help the federal budget. Growth and job creation are, after all, the ultimate ends of economic policy. They, at least as much as fiscal issues, should become the focus of our national economic conversation.



The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary




Copyright The Financial Times Limited 2013.



Markets Insight

February 11, 2013 12:24 pm
 
Fix gold to establish a fair dollar level
 
Currency exchange needs to be established at realistic values
 
 

In a global economy still recovering from the 2008 crisis, boosting economic growth has become a key priority. The discussion among central bankers has focused on using currency depreciation to boost export competitiveness, production and employment.


This is by no means a novel idea. Competitive devaluations were repeatedly used during the 1930s to gain competitive advantage – until the trading partner also devalued, negating the impact of the first devaluation. Such currency wars, or beggar thy neighbourpolicies, prolonged and deepened the Great Depression. More recently, incremental resort to quantitative easing by the US Federal Reserve has weakened the dollar on a trade-weighted basis.


In 2010, Brazil’s finance minister Guido Mantega complained about the massive capital inflows resulting from the US measures, strengthening the real and making exports expensive. Cuts in interest rates by Brazil’s central bank since mid-2011 to weaken the currency ended up increasing inflationary pressures.


Bank of England governor Mervyn King warned about currency wars last month, but said at the same time that the pound has to depreciate to foster growth. Shinzo Abe, Japanese prime minister, has also pushed his country’s central bank to target a doubling of the inflation rate to 2 per cent by weakening the yen.


The ongoing exchange rate battles run counter to a basic concept in mathematical logic. When n numbers add up to a specific target, only n-1 of them can be independently determined. The nth figure is the anchor that gives the remaining numbers the flexibility to vary and be set at desired levels. With the exchange rate itself having little intrinsic value, fixing it would allow governments to use monetary and fiscal measures to target desired levels of employment and inflation.


In the post-second world war era, it was the exchange rate that served as the anchor enabling western market economies and Japan to facilitate a greater role for the private sector domestically, and to pursue freer trade externally, reviving the global economy. The desired goals were growth (raised to an acceptable level), global trade (returned to normality after war-related disruptions), and inflation (kept low). Similarly, despite the eurozone’s imperfect structure, the single currency encouraged the free flow of capital across national borders, boosted growth prospects and kept inflationary pressures low.


While adherence to the discipline of fixed exchange rates was a major factor in the global prosperity of the 1960s, breaking the rules ended in disaster. US president Richard Nixon’s decision in August 1971 to delink the dollar from gold allowed global inflation to surge and precipitated a recession. Nixon had set the nth input adrift, leaving the global economy without an anchor.

 

The pursuit of an exchange rate level as a target in itself has also resulted in misplaced priorities. The US Treasury and Senate have spent the past 15 years criticising Chinese authorities for not permitting a bigger appreciation of the yuan.


This was time wasted. Foreign exports to China did gain competitiveness in recent years, but due to increased Chinese wage costs rather than from a stronger yuan.


Instead of focusing on the yuan’s exchange rate with the dollar, foreign negotiators should have pushed China to open its markets to foreign competition, and to reduce restrictions on foreign capital inflows. Trying to force Chinese monetary authorities to move the exchange rate faster shifted the focus of western governments from the need for structural reforms in the Chinese economy.


As central banks in the US, Europe, Japan and China wrestle with recession or slower growth, they will find that competitive monetary easing measures, and uncertainty about exchange rates, hold back rather than promote recovery. Providing the security that comes from fixed exchange rates, and pursuing policies compatible with those rates, would be more effective in reviving growth.


In a move away from the current situation of extreme currency volatility to one involving fixed exchange rates, global markets would gain most benefit from the rates being set at appropriate levels.


A first step would be to fix the price of gold in dollar terms at near its current level of $1,675, with assured convertibility. To ensure that currencies are neither over- nor undervalued, the consumption basket (or the hypothetical loaf of bread) should be valued at roughly similar levels in different currencies at fixed rates against the dollar.


When currencies are established at realistic values, investors and exporters will see the exchange rates as durable. This will promote increased capital flows across financial markets, and encourage longer-term investment in projects such as infrastructure.



Komal Sri-Kumar is president of Sri-Kumar Global Strategies

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Copyright The Financial Times Limited 2013