Peak-population investing

There’s an interesting debate going on between Steve Randy Waldman, Karl Smith, Scott Sumner, Evan Soltas, Mark Sadkowski (and more).

It started when Waldman proposed a simple but elegant argument that the 1970s great inflation period may have driven not so much by expansionary monetary policy but rather population demographics: namely the baby boom and the entrance of female workers into the economy.

Loosely speaking, the theory suggests that exogenous population booms tend to increase the number of workers that an economy needs to absorb without yet having the growth to satisfy them. This is very different to population booms fuelled by voluntary migration, since those trends are related to existing job opportunities.

On that basis, exogenous population booms tend to create greater worker competition in the economy, something which then leads to a fall in real wages.

Another way of thinking about it is that there are more people receiving relatively low wages for activities which are yet to create the underlying output that they can be redeemed for. There is, in other words, something of a supply shock hitting the system.

With the usual correlation not causation caveats in place, it’s a tempting proposition not least because many high inflation economies in recent decades have tended to be associated with growing populations.

As Waldman explains it:

Prior to a population boom, the median new worker supplies her labor for a particular bundle of goods and services. But in the population boom, because of the diminishing marginal productivity of labor (holding K constant), the median new worker cannot produce enough in real terms to purchase the same bundle. The worker’s demand curve has not changed at all: she remains willing to trade one unit of salary for one unit of consumption bundle, just as her predecessor did. But that trade is no longer available to her, because she herself is unable to supply real production in sufficient quantity to purchase those goods, despite expending her fullest effort. This is a supply shock, from the worker’s perspective, not a demand shock. The population boom is a shock to her ability to supply, which would be reflected by inflation of the cost of goods relative to the numeraire of her labor.

Whether you believe the rationale behind the theory is correct or not, it’s a useful entry point to introduce the latest note from Deutsche Bank on population trends.

In the note, Sanjeev Sanyal, global strategist at the bank, debunks the popular narrative that population growth is still raging away unchecked.

In fact, he suggests, a major shift in the demographic trajectory of the world may be about to take place more quickly than expected. That is to say, population growth may be closer to peaking point than we thought.

From Sanyal:

In our view, global fertility will fall to the replacement rate in less than fifteen years. Population may keep growing for a few more decades from rising longevity but, reproductively speaking, our species will no longer be expanding. We forecast that world population will peak at around 8.7bn in 2055 and will then decline to 8bn by 2100. Thus, world population could peak half a century sooner and, by 2100, stand 2.8bn below what the UN currently predicts.

Developed countries have long had low birth rates but the largest declines in fertility are in developing countries with the Chinese, Russians, Koreans and Brazilians no longer replacing themselves. A large decline in the Chinese workforce is now unavoidable irrespective of the removal of the one-child policy. Due to a skewed gender ratio, we found that China no longer has enough child-bearing age women to stabilize its population.

—–

China’s transformation from being the “factory to the world” to being “investor to the world” will create opportunities for younger countries like Indonesia, Philippines and, most importantly, India. Interestingly, United States is likely to enjoy a growing workforce into the 2050s (i.e. longer than most emerging markets) although falling birth-rates among immigrants will dampen the trajectory. We also think that Germany will prove surprisingly good at absorbing immigrants and will do much better than the UN’s dire demographic projections.

To wit, the UN’s current population growth projections:

As compared with those of Deutsche Bank:

As Sanyal adds:

Given the above trends, we feel that the world’s overall fertility rate will fall to replacement rate by 2025. In other words, reproductively speaking, our species will no longer be expanding – a major turning point in history. Of course, overall world population will still expand for a couple more decades due to momentum in the age structure and rising longevity, but this lagged effect will ultimately ease off unless we discover the elixir of immortality. Thus, we forecast that world population will peak around 2055 at 8.7bn and will then decline to 8.0bn by 2100. In other words, our forecasts suggest that world population will peak at least half a century sooner than the UN expects and that by 2100, and that level will be 2.8bn below the UN’s prediction. This is obviously a radically different view of the world. 

Keeping Waldman’s workforce argument in mind, we do wonder to what degree replacement-rate world population growth — if it really does take place as soon as 2025 — might then augur the exact opposite of a great inflation effect?

Probably one for the steady-state economists to debate.

For the full Deutsche note, see the usual place.

Related links:
Beyond scarcity series – FT Alphaville