Commentary: Productivity Can Make Up The Gap

Demographics will not mean doom if we focus on fostering innovation

The ghost of the Reverend Thomas Malthus is once again haunting the globe -- but with a new twist. More than 200 years ago, Malthus predicted that galloping population growth would eventually outrun the available food supply, even in prosperous societies. The result, he argued, would be a widespread fall in living standards.

Today we are seeing the rise of another set of gloomy economists, who might be called "reverse Malthusians." Rather than worry about global overpopulation, they warn darkly of the dangers of a world with too few babies, not enough working people, and an aging population. Like Malthus, they fear a demographic crisis could lead to a dismal future.

Yet they greatly underestimate the ability of technological and economic trends to overcome demographic shifts. It's the same mistake Malthus made: He didn't see that the advances of the Industrial Revolution, applied correctly, could lift incomes faster than population growth. Similarly, productivity growth over the next 50 years could blunt the impact of aging societies.

In fact, average living standards, as measured by gross domestic product per capita, could double by 2050 in most industrialized countries. That's true even in demographically challenged nations such as Japan and Germany. Policymakers still must revamp the financing of government pension systems, but even that task could be less arduous than many expect.

Consider Japan, where the working-age population is expected to shrink by 36% from 2000 to 2050. That decline sounds like a recipe for disaster, especially since the number of people 65 and over is predicted to rise at the same time.

The good news is that productivity gains over that stretch could easily compensate for the workforce drop. Since 1980, productivity growth in Japan has averaged 2% annually. If that pattern continues, output per worker will rise by a compounded 169% by 2050, and Japan's GDP will grow by 72%.

True, the Japanese economy in 2050 will be supporting a larger number of elderly people and their expensive health-care needs. But the number of children and middle-aged families will drop as well. Take it all together, and the historical norm of 2% annual productivity growth could boost average income per capita in Japan by 71% by 2050 -- not a bad outcome.

Japan is not unique. If the U.S. and Britain can keep up their historical productivity-growth rates, their living standards will double by 2050. France, like Japan, has to boost its long-term productivity growth by only a few tenths of a percentage point to make up for its aging population. Among the large industrialized countries, the one in the biggest trouble is Germany. But even there, the rate of productivity growth needed to double living standards by 2050 is only half a percentage point higher than its historical average.

Still, productivity is not a total panacea, and for a simple reason: Most pension systems, including U.S. Social Security, tie old-age benefits to wages. This means that strong productivity growth will push up wages and boost tax revenues going into the pension system -- but benefits to retirees will rise as well. If the elderly are numerous enough, higher productivity may even worsen the financial position of the pension system. The best way out of this trap is to rejigger the rules so that old-age benefits reflect some -- but not all -- of productivity and wage gains.

Demographic factors loom larger if future productivity growth falls short. That means that we should focus on the factors that encourage innovation, such as education and research and development, rather than fixating on the aging population. Our destiny, and that of our children, will be be determined by technology, not demographics.

By Michael J. Mandel

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