The Simple Solution to the Coming Demographic Challenge

Newspapers have been reporting on the demographic challenges in Asian nations like China, Japan and South Korea. Some expect China’s population, for example, to be cut in half by 2100. If current trends continue, some of the same problems will sooner or later hit the United States, and they won’t be fixed with family-style entitlement policies that cost huge amounts of money and distort the economy without increasing fertility.

A far better priority would be immigration reform that lets more people in alongside regulatory reforms to boost housing, energy and food production.

Let’s first review some of the challenges of aging populations. The New York Times recently reported data on Asia’s demographic struggles. It sums up the problem this way: “A growing percentage of people in Japan, South Korea and China are over 65, and those countries’ economies are suffering because of a lack of available workers. Governments are struggling to find the money to support retirees.”

A shrinking workforce is a big deal. Having fewer workers means that working hours per capita will be longer — including longer hours for older, manual-labor workers. It will also spur a further decline in productivity. Eventually wages and innovation will decline — a decline that will be even steeper if the government and labor unions continue to resist productivity-enhancing automation and free trade.

Politicians’ go-to answers are not the fix. Productivity is likely to fall further if the U.S. government implements policies like universal and generous child tax credits, subsidized child care, federal paid leave or “baby bonuses.” These are known for creating disincentives to work without much impact on fertility. They’re also expensive. That, in turn, increases the likelihood of future tax hikes. The result will be slower economic growth and worsening opportunities for our children and grandchildren.

And forget about boosting education to produce more highly skilled workers in industries such as tech and health care if that means pouring more money into the same public schools that are failing today’s children. Innovation will also be lessened if government officials continue to punish the necessary investments with higher taxes on capital and more stringent regulations that mean fewer factories, machines or housing.

I’ve already hinted at many of the policies that would better address the demographic challenge. These also include deregulating energy, zoning and land use and agriculture as well as freeing capital to more creatively finance private-sector innovation. But even under the best policy regime, the size of the population matters.

For one thing, while market-friendly policies will not artificially tamp down population, they alone may not increase population and, hence, the size of the future workforce. Failing to increase America’s working-age population will make it challenging to sustain programs like Social Security. Shortly after the program was created in 1935, there were 42 workers per retiree. Today this ratio is 3-to-1 and heading toward 2-to-1. Good luck to those two workers who will be crushed under the weight of their taxes without much hope of benefits.

Birth rates have been dropping since the end of the postwar baby boom in the late 1950s.

While we Americans still have enough children to replace ourselves, we don’t have enough to grow the population. We leave this growth to immigrants, who tend to have more kids than do native-born Americans. Restrictionist immigration policies would reverse this trend while expansionist policies would make everything easier for us. It would certainly make paying for older folks’ retirements and medical care easier.

Maybe most importantly, more people mean more brains. That translates into more innovation followed by more growth. A few years ago, Alec Stapp and Jeremy Neufeld wrote that “Despite making up just 14% of the population, immigrants are responsible for 30% of U.S. patents and 38% of U.S. Nobel Prizes in science. A team of Stanford economists recently estimated that nearly three quarters of all U.S. innovation since 1976 can be attributed to high-skilled immigration.”

We could certainly use many more immigrant doctors, nurses, engineers and other professionals, but lower-skilled immigrants are also vital. Let’s not forget that these workers kept the economy going during the pandemic as the computer class worked from home. Immigrants’ children have also been proven to be upwardly mobile. So, we should let them in, too.

The bottom line is that we need more immigrants, and we need them now. If we wait until we’re in the dire straits now suffered by China and Japan, it will be too late.


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