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Population, Environment, and Economics

 

 

A Surprising Fact About

the Economic Impact of Population Growth

 

By David Sirkin

 

August 1992, revised April 1995

 

It is widely believed that the economic impact of population growth is much greater in less developed countries than in the wealthy industrialized nations.  After all, the U.S. population growth rate of 1 percent, the highest in the industrialized world, is small compared with the 2 to 3 percent growth rates in most less developed countries.  However, there is a surprising fact that magnifies the effect of population growth in rich countries.  The surprising fact is that population growth has a greater lowering effect on per capita accumulated assets in rich countries than in poor countries.

The basic argument is simply this.  People added to the population, whether babies or immigrants, bring nothing or next to nothing with them into the country.  When their assets (nothing or next to nothing) are averaged in with everyone else's assets, the assets per person falls, by an amount proportional to the assets per person prior to the population increase.  [It must be noted that the costs to a nation of births and adult immigrant arrivals are not the same.  For example, a birth requires an investment in the form of education and other child-rearing costs before the individual can be productive, whereas an educated adult immigrant does not.  In fact the latter represents a loss of investment for the country of origin, especially if the individual is a young adult with most of her productive years to be spent in the receiving country.]

To see how this works on a small scale,  consider first an imaginary group of nomadic hunter-gatherers with very few possessions.  Suppose that for generations they have a stable group size.  The birth rate is always about the same as the death rate.  Then rather suddenly, due to an increase in births, the size of the group increases by one household.  What does the new household need in order to live the same kind of life as the rest?  A tent, some primitive tools and weapons, jugs and baskets, clothes.  That is about it.  All in all about a month's work for two people, maybe not even that much.

Now consider an imaginary wealthy hamlet in a developed country.  Each family lives on an estate in a mansion.  Both the grounds and the mansion on each estate have been constantly improved over a period of about two hundred years.  Works of art, jewelry, books, and other valuable possessions have been accumulated over the years.  Suppose again that for generations each family has produced on average two children, and they have married only the children of other families in the hamlet.  Thus every child has always inherited an estate.  As the estates have been steadily improved, each generation has been slightly wealthier than the previous one.  Then, rather suddenly, two of the families have more than the usual number of children.  An additional household comes into being, and its members must be provided for.  Even assuming that there is some unused forest land at the edge of the hamlet that can be given to them, could two people build an estate to match the others in one month's time?  No way.  They will be relatively poor, and therefore will bring down the average assets per person of the hamlet.  Of course, their relatives could give them sizable fractions of their assets, in which case the new household would not be as poor, but neither would their relatives be as rich.  Or, all the people in the hamlet could decide to devote many hours of their time for a period of several years to build a luxurious estate for the new household.  There is no way of avoiding it:  a wealthy family or a wealthy community pays a high price for an increase in its numbers.  [Note however that the existing households do not necessarily suffer when a new household is added; in fact they may actually benefit, because the members of the new household may provide services that might otherwise not be available -- or provide previously available services at a lower price.  Assuming that the hamlet can accommodate the greater number of households without improvement or enlargement of public buildings or infrastructure, the existing households will pay a price only if they give some of their assets or time to the new household.  Nevertheless, the average assets per household of the whole hamlet suffers an immediate drop as soon as the new household comes into existence.  This drop is unavoidable.  Even if the new household has a high annual income, it lacks the accumulated assets of the other households.]

The difference in the cost of providing for offspring in a wealthy society and in a poor society is understood by families.  A peasant family in India today realizes that an extra child brings little costs and much benefits: labor and security.  (This is the vicious circle.  When population increases rapidly, it is more difficult for individual assets to accumulate.  As long as people remain poor, they see no reason not to have many children.)  A middle class family in a developed country realizes that an extra child means many extra costs, and less inheritance to pass on per child (awareness and concern about the inheritance aspect is perhaps more widespread in Europe than in the United States).  That is the basis for the "demographic transition" that occurs when a country becomes more affluent.

The same principles apply to nations as to families and small groups.  Also, in the real world, new people require not only private possessions, but additions to infrastructure and public buildings: roads, hospitals, schools, libraries, and so on.  According to one set of projections, to accommodate the population growth in California from 1990 to 2020, the construction of one elementary school should be completed every day of the year for 10 years (increase in elementary school enrollment is projected to average about 212 per day over the 30-year period).  It is now widely recognized among economists that the infrastructural demands of urbanization are extremely costly for a developing nation.  What seems largely to have gone unnoted is that the expansion of infrastructure demanded by population growth in a developed country is akin to a continuous, ongoing process of urbanization, and it is also extremely costly.

The greater the per-capita assets, and the greater the population growth rate, the greater is the portion of the per-capita GNP that must be devoted to accommodating new people.  For example, a greater percentage of the GNP will be in the construction of new homes.  When there is a sudden increase in population, this effect becomes clearly apparent.  For example, the former West Germans are today economically burdened by unification, because the former East Germans have less accumulated assets, a lower standard of living, and a backward infrastructure that needs to be improved and modernized to bring it up to the standards of the West.

The U.S. annual population growth rate of 1 percent may not seem like much, but it means one additional person added to each group of four every 18 years.  It means there is almost a 30 percent increase in the number of households every generation (25 years).  This is the rate at which we are splitting our national inheritance.  It has to be a significant drag on prosperity.

 All of this does not mean that population growth always causes a drop in standard of living.  In our own country we have witnessed growth in prosperity simultaneous with growth in population for most of our history (almost steadily until 1973).  Industrialization and technological advance are powerful forces for increasing wealth that are not easily overwhelmed by population growth.  Nevertheless, population growth has caused standards of living to decline in some developing countries and the same may be happening now in the U.S.  Our country has changed.  Early frontiersmen in America did not have a lot more than primitive hunter-gatherers.  A new family settling the frontier could build a log cabin as good as its neighbors' in a few weeks.  We are now much more wealthy in terms of accumulated private capital and public infrastructure, and therefore population growth has a bigger negative effect on prosperity now than it did in the early history of our country.

A negative effect of population on prosperity may seem incongruous in view of the undeniable positive connection between population growth and economic growth.  More mouths to feed and more hands to work almost invariably lead to an expansion of the economy.  Under certain circumstances, population growth may even contribute to per-capita economic growth.  But it is very unlikely, because of the effect I have explained of accumulated public and private assets, that population growth in a wealthy industrialized country has a positive effect on per-capita assets or on the average quality of life.

The common sense of the above is only clear when we recognize that having more work to do is a burden rather than a blessing.  We do recognize it when we are forced to rebuild after a hurricane or other disaster, but today, when our population is growing fairly rapidly, we are not as much aware of extra work to be done as we are of an apparent surplus of workers.  However, the increase in the labor supply could be dealt with by shortening work hours (which would be a logical thing to do in view of the fact that a large number of layoffs have resulted from the use of labor-saving technologies) and increasing public works projects to make the necessary improvements and additions to our infrastructure that are required by a larger population.  More people do represent more work to be done, but much of it will not be done unless the government is committed to having it done.  Even when the government is so committed, it can be difficult for economic growth and job creation to keep pace with population growth when the latter is rapid.  When public spending on infrastructure, education, and social services is low, and does not keep up with population increases, it is natural that an oversupply of labor results. It is a boon to the wealthy (cheap labor), but a hardship for the poor (low wages, high unemployment).  When such a situation exists for a period of years, the income disparity between rich and poor increases, and classes become more distinct.

Ongoing population growth forces us to make the following choice: either we do not provide much for the increases in our numbers, and allow an ever growing lower class to be ever more miserable and ever more distant from the upper classes (the "Brazilianization" of the U.S. -- the path we have been following in recent years), or we distribute the burden of providing for new people among some or all of the people already here.  That burden is probably much greater than most of us have realized.

While we have been considering the effect on prosperity of population growth irrespective of initial population size, we should not forget that population size, even if stable, also has an effect.  If the population is too small, it cannot support diverse industries, adequate public transportation, and other services.  However, when the population gets to be too large, the country's natural resources may become overburdened, and an increased percentage of the GNP must be devoted to waste management, other environmental problems, and to developing energy resources.  It is likely that we have already  exceeded the population size at which our prosperity can be maximized.

Anyone can see that if the entire population of China or India or even Mexico suddenly were added to the U.S., there would be a sudden large drop in the average accumulated assets, including shared assets, per person of people living in the U.S.  What has been attempted in the above analysis is an elaboration of how a more gradual increase in population results in a gradual tendency for the average accumulated assets per person to decrease, which, if not offset sufficiently by other trends, could cause a gradual decline in living standards.

The argument presented here rests on an assumption that inherited assets are important for well-being and quality of life.  I have begged the question of what the relative contributions of inherited assets and accumulated income from work are to the well-being of the average person over his lifetime.  However, in regard to this question, one thing is certain.  The more wealthy a person is, the more likely are inherited assets to have made a major contribution.  Many poor people inherit next to nothing.  The same must be true for nations.  The more wealthy a nation is, the more inherited assets, both natural and human-built, are likely to contribute to the quality of life of the population.  As argued above, population growth is a factor that tends to decrease the inherited assets per person.  Therefore, in a rich nation, it tends to decrease either the quality of life, the relative contribution of inherited assets to the quality of life, or, most likely, both.

There is, and will be, a lot of denial among our people, for various reasons, that population growth is a detriment to our prosperity.  Some people are opposed to contraception and abortion on moral and religious grounds, and some employers want an endless supply of cheap labor.  There is also a small number of people who would actually like to see a massive influx of people into the U.S. bring our standard of living closer to the world average.  They feel that it is wrong for the U.S. to enjoy a very high standard of living when other countries are so poor.  The usefulness of such a leveling could be debated.  It could be argued, for example, that the U.S. could better help the world's poor by remaining a rich country, maintaining a capacity for surplus food production, and being more generous with foreign aid, and that lowering living standards by increasing population would probably not reduce total U.S. consumption of the world's natural resources or total U.S. impact on the global environment.

 

 

 

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