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Population, Environment, and Economics



Recession does not make us poorer; population growth does

Current US population growth rate lowers per-capita wealth by an amount equal to the destructive effect of four Hurricane Katrinas per year!

by David Sirkin

29 September 2008; last revision: 11 October 2008

[Preface: One of President George Bush's pet projects is to increase oil extraction. He opportunistically used a recent storm (Gustav) that hit the Gulf coast as a reason or reminder to increase US oil drilling. Similarly, my longtime pet issue is population growth, and I can see almost any major economic or environmental process or new development as a reason or reminder to try to contain or even reduce our numbers, both in the US and worldwide.]

Recession is defined by economists in terms of sustained shrinking of the economy; that is, a decrease in GDP. We are all supposed to be at least a little concerned about recession, because it is associated with job losses and other economic hardships for a sizable portion of the population. But it is wrong to assume that economic growth implies we are getting richer, while a contraction means we are growing poorer. It is possible for a country to have a growing economy (GDP increasing), but to be getting poorer (per-capita wealth decreasing). This can happen if the population is growing. It is also possible for a country to have a shrinking economy (a recession), but to be getting richer. This can happen if the population is not growing. Theoretically, it can happen even if the population is growing, but in that case it is more difficult for it to happen (and the faster the population is growing, the more difficult it gets). Recession is an arbitrary milestone, like choosing the summer solstice for the beginning of summer. It may or may not be the point at which inhabitants of a country start to get poorer.

If the population of a country is growing, eventually the per-capita usable* GDP has to increase in order for per-capita wealth to increase further. As we will see, whether or not per-capita GDP has to increase, and by how much, for per-capita wealth to increase over a given time period depends on the starting points of per-capita wealth and per-capita GDP and on the percent increase in population over that time period.

It is likely that with continued population growth during a recession, the US in fact is experiencing currently a decrease in per-capita wealth.

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If population is not growing, the economy can grow and shrink. Throughout such business cycles, total wealth can increase. Even during periods of shrinkage, individuals, businesses, other private and governmental organizations can continue to increase their wealth as long as the rate of usable production does not fall below the rate of consumption (including deterioration and destruction of property), which should occur only at infrequent intervals, such as when large-scale disasters or wars occur.

In contrast, if population is growing, additional requirements must be met for per-capita wealth to increase over a given time period. A growing population requires a rate of usable production that is sufficient to provide new inhabitants with private and public assets in the amount of the average of the existing population, in addition to sufficing to offset consumption, before total per-capita wealth can increase (see A surprising fact). Ultimately, increasing per-capita wealth with a growing population is an unsustainable process. It becomes increasingly difficult as per-capita wealth increases and the ratio of population size to land area and other natural resources decreases.

Growth affords possibilities for a small percent of the population to make huge fortunes (for this reason, an end to significant long-term economic growth is unthinkable to Wall Street), but like any other pyramid scheme, the rest of the population pays and suffers for it, and it is ultimately unsustainable. One of the reasons is that in a growing population that is also getting richer, an increase in per-capita income is required to achieve each further increase in per-capita wealth (see A surprising fact, which explains that although Malthus's pessimistic effect of population growth is popularly thought of as being a problem for poor countries, the effect is actually much greater in rich countries). Whenever per-capita income stops increasing, some time afterwards a plateau will occur in per-capita wealth. The plateau occurs when the per-capita income is just enough to create the additional wealth needed for an increasingly large population to maintain its per-capita wealth. From this point, every time there is a dip in per-capita income, which occurs every time the economic growth rate falls below the population growth rate (including but not limited to periods of recession, in which the economic growth rate is negative), per-capita wealth will decrease. Note also, that after a plateau in per-capita wealth is reached, if the population growth rate increases, then if per-capita income does not also increase, there will be a drop in per-capita wealth. The drop will occur because the per-capita income needed to maintain a given per-capita wealth assumes a steady population growth rate. Increasing the population growth rate means increasing the number of people in any given time period for whom wealth has to be created to maintain a given per-capita wealth. That means a higher cost, and hence a higher per-capita income (or per-capita usable GDP).

The effect of population growth on wealth that I have described is summarized in the 2006 World Bank study, Where is the Wealth of Nations?, by the equation: (change in per-capita wealth) = (change in total wealth divided by population size) – [(population growth rate) x (per-capita wealth)]. The last term, in square brackets, is referred to as a “Malthusian term.”

Applying this formula, the study presents a table showing that almost every country in Africa was getting poorer, as defined by having a negative change in per-capita wealth, as of the year 2000. The authors explain that for population growth rates greater than 1.5% per year, the Malthusian effect is difficult to overcome; such rapidly growing countries are “on a treadmill,” needing high rates of increase in total wealth just to maintain their per-capita wealth. In such countries the Malthusian term in the equation is large because the population growth rate is large. In a rich country the Malthusian term can be large even with a more modest population growth rate because the per-capita wealth is large (this is the point I have elaborated in A surprising fact). So a rich country with a modest population growth rate is also on a treadmill, needing a high rate of increase in total wealth in order to maintain per-capita wealth. A fixed, or constant, per-capita usable GDP places a limit on the first term on the right side of the equation (change in total wealth divided by population size, which could also be called wealth production per capita). Then, with a fixed population growth rate, per-capita wealth can increase only up to the point at which the second (Malthusian) term equals the first, because then change in per-capita wealth equals zero. At this point we have what I have referred to above as a plateau in per-capita wealth, and we are on the treadmill. Any decrease in the per-capita usable GDP, causing a decrease in the wealth production per capita, will make the change in per-capita wealth negative. We will be falling behind; in other words, getting poorer. Notice that if the population growth rate is zero, the Malthusian term disappears, and per-capita wealth will continue to increase for any positive wealth production per-capita. If the population is shrinking, that is, if the population growth rate is negative, the Malthusian term becomes positive, and then per-capita wealth can increase even when the total wealth of the country decreases somewhat.

It seems likely that due to a fairly steady US population growth rate of about one percent per year since 1965, we have been coming close to reaching plateau levels in per-capita wealth. That is, at any given point in time, the per-capita wealth is likely to have been close to the maximum for the prevailing per-capita usable GDP. In that case, the ability to achieve continued increases in per-capita wealth has had to depend on continued increases in per-capita usable GDP. The per-capita GDP has in fact been increasing for many years, so if at least some of the GDP growth has been in usable GDP, and not just in unusable GDP, such as the healthcare sector, then we have been having the possibility, during the last many years, to increase per-capita wealth. However, with continued population growth, and with per-capita wealth likely close to plateau** value, the possibility to increase or even to maintain per-capita wealth is sensitive to perturbations, including others besides a decrease in usable per-capita GDP or an increase in population growth rate mentioned above. These other perturbations include diversions of GDP to deal with disasters such as hurricanes, or for military or other war-related consumption, increases in amount of GDP used for domestic consumption due to price increases, for example fuel, food, and housing price increases, and increased resources devoted to protection of the environment, which our awareness of increased stresses put on the environment of a finitely large nation and a finitely large world by an ever-growing national and world economy has lately demanded. At the moment, several of such perturbations are occurring, and at the same time that we are having a dip in GDP (recession) and hence an even bigger dip in per-capita GDP (since population growth has not halted). Therefore, it is very likely that at the moment we are in fact experiencing a decrease in per-capita wealth.

Let us go back now to the situation that exists in a country that does not have population growth. In such a country, per-capita wealth can continue to increase virtually indefinitely, with plateaus and decreases occurring only during very severe recessions or destructive catastrophes, when per-capita usable GDP falls below per-capita consumption, deterioration, and destruction. (Note that the virtually indefinite increase in wealth could include wealth of publicly owned corporations, meaning that stock values would have a general tendency to increase in value, but no where near as much of such a tendency as in countries with large economic growth fueled by population growth—the US, most of the time—or by rapid technological advance and dissemination—China, India, Russia, etc., in recent years.) We in the US are watching as one by one countries that not long ago were inarguably poorer than the US overtake us in per-capita wealth as their populations stop growing: these include most western European countries and Japan. Japanese leaders have reportedly resigned themselves to falling to third place in economic size among nations, expecting China to overtake them soon. They have rejected the route of inviting in large numbers of immigrants in order to achieve greater economic growth. Never mind that they have arrived at this stance partly out of reluctance to disturb their ethnic and cultural near-homogeneity. The result is that Japan will continue to grow in prosperity even if it ceases to grow much in economic size.

In her recent column, “What's wrong with market economics and GDP?” Hazel Henderson has noted that the superiority of the US's recent (last 5 years) economic progress over that of Japan as measured by growth of GDP (2.9 % annual rate for the US vs. 2.1% for Japan) disappears if progress is instead measured as growth of per-capita income (roughly the same as per-capita GDP) (1.9 % for the US vs. 2.1 % for Japan) because the US's population has been growing, while Japan's has been shrinking slightly (2008 annual rate -0.14%). (See also Tyler Cowen's post on similar comparisons among other countries.) If one goes a step further and measures progress in terms of potential to increase per-capita wealth, the US's rate of progress probably will be seen to have been behind Japan's: If, as is likely, the US's per-capita wealth has been staying close to the plateau value for a given per-capita GDP (a plateau or ceiling exists because a portion of per-capita usable GDP must be used to maintain the existing per-capita wealth in a rich country if it has a growing population before any of it can be used to increase per-capita wealth, as explained above), then it can have a marginal increase limited by the increase in per-capita usable GDP. So with a GDP per capita of $46,000, and assuming about half of the annual increase in GDP per capita is usable, then the US's increase in per-capita wealth has been limited to about 1% of per-capita GDP, or $460 per year. According to the equation mentioned a few paragraphs above, and using a value of 1% for US population growth rate and an estimate from the World Bank for per-capita tangible wealth in 2000 of $95,000, this would require an increase in total wealth equal to about 3% of GDP (or $1380 per capita): $460 ~= $1380 – $950. This amount of increase in per-capita wealth ($460) represents a percent increase of about 0.5% per year. Japan, on the other hand, does not have a growing population, so its per-capita wealth is not limited by the Malthusian plateau values. Therefore, it is likely that much more than 1% of its per-capita GDP of $34,000 may be used to increase wealth. Let's assume that 5%, or $1,700, of it can be added to per-capita wealth. (This 5% is possibly an underestimate, given that the investment rate in Japan during the last few years has been about 23% of GDP. However, only a fraction of the amount invested ultimately manifests as a net increase in tangible wealth.) With a per-capita tangible wealth of about $150,000, Japan therefore would have a percent increase in per-capita wealth of 1.1% per year. Even if we assume only 3% of GDP is added to total wealth, to use the same percentage used in the calculation above for the US, Japan would have an increase in per-capita wealth of about $1000, or 0.7%, still higher than the US's in both absolute and percentage amounts. Whatever the exact numbers are, if the per-capita tangible wealth values above for 2000 are good enough for us to say that Japan had a greater per-capita tangible wealth than the US as of 2000, then Japan overtook the US in tangible wealth per-capita some time in recent decades. It might have occurred at some time since 1980, when Japan's population growth rate started to fall below ours, thus reducing its Malthusian term in changes of wealth. No doubt there were other factors, including Japan's higher investment rate, that contributed to its overtaking us, but the difference in population growth rates between our two countries must have had a significant effect.

We may continue to hold on to our place as the world's largest economy, staying ahead of China, India, and Russia. We may do it unwittingly, or else our future leaders may encourage high rates of immigration in order to continue to have rapid population growth fuel rapid economic growth. Some of our leaders may be motivated not only by a desire to keep the US preeminent in economic and military might, but also by a desire to maintain opportunities for themselves and their political supporters to make large fortunes. At some point, as it becomes clearer to more and more people that population growth is preventing us from getting richer (as defined in terms of per-capita wealth), and may even be making us poorer, some deception by our future leaders may be required. They will have to deceive the bulk of the population, who will be losers in an economy that will be increasingly a pyramid scheme. Perhaps they will deceive themselves as well rather than admit to the harm they will be causing.

Our economists and leaders have long had the hubris to believe that the whole world, as well as our nation (the US), could escape the Malthusian trap, as long as we have ever-increasing productivity fueled by technological advances. But now we are increasingly coming up against the limits of what our planet of finite size can support. And, as I have explained here (see also A surprising fact), after a country achieves a fairly high level of prosperity, the Malthusian effect of population growth becomes increasingly difficult to overcome.

A good perspective on the effect of population growth can be gained by recognizing its similarities to the effect of catastrophes. As EU Commissioner of Economic Policy Joaquín Almunia (as reported by Hazel Henderson) has pointed out, a war or natural disaster, such as a hurricane or a flood, clearly has a negative impact on well-being, and yet it often has a positive effect on the GDP, presumably due to the increased demands on labor and capital for clean-up, repair, and rebuilding. The net economic effect must of course be considered negative: there is a period of time during which people have to do without their homes as well as the public facilities that were damaged or destroyed: schools, roads, parks, hospitals, etc. Their migration will result in temporary increased crowding and utilization in untouched or relatively untouched areas. Then, by the time the repair and rebuilding is finished, the total amount of labor and other resources that will have been required will represent a significant diversion of such resources from endeavors that increase wealth, raise living standards, or otherwise improve the quality of life of the nation's inhabitants. So having disasters is not a good way to get rich.

New people added to the population need the same things built for them as those who have been made homeless by a disaster. They add to the labor supply, but they also consume food and other commodities, and utilize services, which diminishes the net increase in available labor. The addition of new people, because of the demands they have for housing, schools, roads, etc. has a positive effect on the GDP (and on the per-capita GDP) similar to that of a catastrophe, except that it is a continuous process, rather than a discrete event. Likewise, the addition of new people causes a similar diversion of labor and other resources to construction of new homes and other buildings and infrastructure, and away from endeavors that increase per-capita wealth or otherwise improve the quality of life. (If the amount or value of buildings and infrastructure per new person is to be the same as the prevailing per-capita building and infrastructure value, then the diversion will be larger the larger the prevailing per-capita value is. This point is explained and elaborated more in A surprising fact.) The US population growth rate has been close to one percent per year. With the current population of 300 million, that means about 3 million new people per year. Hurricane Katrina was the costliest hurricane in US history. The number of people made homeless by Katrina was about 750,000 (assuming 275,000 homes destroyed and about 2.75 persons per home). So our population growth is harming us, in terms of our potential wealth or overall economic well-being, as much as four Katrinas a year (this is probably an underestimate, since larger buildings and portions of infrastructure were probably not damaged by Katrina in proportion to the number of homes damaged). And it is happening year after year! This is also no way to get rich!

Note that the disaster-like effects of population growth are easy to see; they are commonplace observations. The “damage” is noticeable when construction of public buildings and infrastructure lags behind population growth. We notice then, for example, increased school crowding and increased highway traffic congestion. The diversion to “rebuilding” is visible when we see new housing developments and other buildings being built on land that just before had been farmland or wilderness, and when new roads are built or existing ones widened.

We can easily compete with India and China, staying ahead of them as the world's largest economy. All that is necessary is to increase immigration to allow in more workers of every type, including well-educated ones, who will take some of the best jobs that we are unable to educate enough of our own children to fill. They will soon be consumers as well, making our economy more “vital” as it grows more rapidly. We must recognize, however, that although such growth would help us maintain our preeminence as the world's economic and military leader, it would also bring our per-capita wealth down. On the public wealth side we would see, for example, our own transportation and education systems being increasingly unable to keep up with population growth, making it more difficult and time-consuming to get where we are going, and putting adequate educational opportunities out of reach of an even greater proportion of the nation's children. By choosing to compete with China instead of with Denmark, we are rejecting the road towards a better average quality of life, a population that is more educated, civilized, and able to enjoy a high standard of living and more leisure time. Instead we will be choosing a road that might hasten the arrival of an apocalypse as we contribute to a worldwide economic growth that courts environmental catastrophe or an Armageddon between nations of huge populations forced to fight each other over dwindling resources. By that time our nation would very likely be inhabited overwhelmingly by uneducated, poor, miserable, human beings forced to use most of their energies in daily toils for subsistence, if not struggles for survival. If we persist in choosing this direction towards continued economic and military preeminence, we should think about what kind of a society, what way of life we would be defending in an Armageddon.

No, the better road for America to take is the one on which we strive to end our population growth soon, and accept that economic growth may also end soon thereafter. Choosing that road will allow us once again to increase per-capita wealth steadily, improve and expand our infrastructure for business, education, and recreation. Our population will gradually become wealthier, better educated and more enlightened, more productive and creative, and have more time and ability to enjoy recreational and cultural activities. We can join other countries that are also achieving high standards of living for their entire populations. A collective bulwark of civilization can lead the whole world towards light rather than darkness, a near utopia instead of an apocalypse. The way is to stop population growth in our own country and ultimately in the world. The choice must be made very soon, as the possibility of ever achieving a near-utopian world is slipping from our grasp as we head further down the road of eroding standards of living and environmental destruction.

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* ”Usable GDP,” as I would like to define it, refers to components of the GDP that could possibly be used to increase the total real material wealth of the country. “Usable” goods and services would include construction, farming, and manufacturing. “Non-usable” goods and services would include legal work, healthcare, insurance, accounting, public transportation (building the systems, including the vehicles, would be “usable,” but running them would be “non-usable”), and education. (Example: In the entertainment industry, films and some television programs would be usable, but live entertainment would be non-usable.) As far as I know, usable GDP is not something that economists have attempted to measure. In general, it should be proportional to total GDP, but the percentage of GDP that is usable may vary substantially over time and from one country to another.

** As long as per-capita usable GDP keeps increasing, the plateau value continues to be raised, so no plateau in per-capita wealth is actually observed. Only if per-capita usable GDP were to cease to grow for a sufficiently long period of time while population growth continued at a steady rate would the plateau cease to be merely theoretical and actually be observed.



Population, Environment, and Economics
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