The population gap

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For now, economic conditions are worse in the United States than in Europe or Asia, which is not surprising. After all, the made-in-America sub-prime mortgage crisis precipitated the current slowdown. Recent turmoil on Wall Street has spilled over somewhat into global financial markets, but automatic adjustments in trade and capital flows may yet protect the rest of the world from importing the worst of our near-term economic woes.

Today’s more promising conditions in Europe and elsewhere should not, however, be confused with a permanent re-ordering of the economic pecking order. Over the medium and long term, the United States retains an important economic advantage over much of the rest of the world. That advantage is a growing population of younger workers. In contrast, Europe and Japan are on the verge of an unprecedented labor-force contraction, which will slow their economies markedly in the years ahead.

The size of a country’s economy depends fundamentally on two factors: how much each worker, on average, can produce and the absolute size of the active workforce. Business investment in new technology, modern production plants and better equipment are crucial, as these investments increase worker productivity, which in turn boosts total output, as measured by gross domestic product (GDP).

But a vibrant economy is just as dependent on a ready supply of skilled workers as it is on continuous capital investment. The National Center for Health Statistics reported in January that there were 4.3 million births in the United States in 2006, the most since 1961. We are now experiencing something of a baby boomlet in this country, with the fertility rate inching up to 2.1 children per woman — the magic level needed to sustain a population across generations.

Some time around 2030, those babies born in recent years will become indispensable participants in our economy, earning a living, producing goods and services and paying taxes. And we will need every bit of their output to meet the consumption needs of an aging population. Projections for Social Security show the number of Americans age 65 and older will nearly double in the next two decades, rising from 38 million in 2006 to 70 million in 2030. Thanks to our relatively high fertility rates, these same projections show the number of Americans aged 20 to 64 will increase from 183 million in 2006 to 201 million in 2030.

Even with a growing workforce, these projections point to an increase in financial stress. The ratio of the elderly population to the working-age population in the United States will rise from .21 in 2006 to .35 in 2030; and it will get worse from there.

But the situation is far worse in Europe and Japan. According to the European Commission, in 2004 the countries of the European Union (EU) had, in total, a fertility rate of around 1.5 children per woman, with some countries as high as 1.8 and others as low as 1.2. Japan’s birth rate stands at about 1.3 children per woman, according to U.N. estimates.

For a time, a low birth rate can actually improve total economic output, as fewer births mean higher labor-force participation among women. But, as time passes, a persistently low birth rate will overwhelm other factors, including efforts to encourage delayed retirement. Inevitably, with low birth rates, there comes a day of reckoning when the number of new labor force entrants falls short of workforce exits.

In Europe, that day of reckoning is fast approaching. The European Commission expects the available pool of working-age residents in the EU — those between the ages of 15 and 64 — to begin falling after 2011 and total employment to start declining after 2017. By 2050 the Commission projects the working-age population in the EU to have fallen by more than 50 million people compared to its 2011 peak, or nearly 17 percent. Japan’s working-age population is set to drop a stunning 40 percent between 2004 and 2050, according to the U.N.

The steady decline in total employment will take an increasing toll on economic production in Europe and Japan. The European Commission expects workforce contraction to eventually cut potential growth in the EU region by half of a percentage point every year.

The economic value of low marginal tax rates, narrow fiscal deficits and free trade is widely understood. More policy-makers around the world must also realize that helping families raise the next generation of productive workers is crucial for continued prosperity as well.

James C. Capretta, a former associate director at the Office of Management and Budget (2001-04), is a fellow at the Ethics and Public Policy Center.

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