The writer is the director of the Aspen Economic Strategy group and the Neil Moskowitz professor of economics at the University of Maryland
The US faces a demographic challenge that many other high-income countries have been facing for decades: below replacement level fertility. As American adults are choosing to have fewer children than previous generations did, the nation faces the prospect of slower population growth. Though some celebrate a decline in births as good news for the planet, a slowdown in population growth also poses fiscal and economic challenges that cannot be ignored.
Luckily, the recipe for stimulating economic growth plays to America’s historic strengths: welcoming immigrant labour and establishing the institutional conditions in which innovation can flourish.
To maintain the size of a country’s population without migration, there needs to be a total of 2.1 children born per woman, on average. This number is captured in a statistic called the “total fertility rate.” The US total fertility rate is now around 1.66, which reflects a rapid and precipitous drop over the past 15 years. As recently as 2007, the US total fertility rate was 2.12. This decrease in births has contributed to a slowdown in US population growth.
The size of America’s working age population has been stagnant for over a decade. If fertility continues to decline or stabilises at a low level, then without a substantial increase in immigration, the working-age population will soon begin to shrink. This means fewer workers, which means lower economic output overall. But it also could mean less economic output per person and lower standards of living. A shrinking working age population poses challenges too for the solvency of the US social security system, which, if fertility continues to fall, will be in even worse fiscal shape than official government projections assume.
The US, along with many other high-income countries, saw fertility rates drop to below replacement levels in the 1980s. While the fertility rates of other high-income countries have remained well below 2 since that time, the US fertility rate climbed to above 2 during the 1990s and remained elevated well into the 2000s. Now the US looks to be on a path of convergence toward the sustained lower levels of total fertility in other high-income countries. Even in Scandinavian countries, with their especially generous systems of public support, the total fertility rate is far below replacement level.
The stubbornness with which fertility rates have remained low in other advanced economies probably suggests that the current low level of fertility in the US is not an aberration, but rather, is here to stay. The country needs to be prepared to face the demographic reality of slower population growth head on.
In response to sustained low levels of fertility, many other countries have implemented pronatalist policies, aiming to make it more financially attractive or feasible for people to have children. For example, in 2003, France announced a bonus of €800 for each baby born. In 2007, Spain introduced a baby bonus of €2,500 per child. In China after decades of a one-child policy, the country is now providing financial incentives and tax credits for having more children.
Incremental pronatalist policies, such as expanded child tax credits, more generous childcare subsidies or expanded paid family leave, might have at best a modest effect on the aggregate US fertility rate. It is unlikely though that total fertility rate would return to replacement level in the near future.
Ensuring the vibrancy of the US economy will therefore require letting more foreign-born workers into the country. America’s demographic outlook makes it all the more imperative that we fix our broken immigration system. However, the politics of doing so are difficult. Federal policy will have to be designed in a way that recognises that increased immigration, while in the nation’s interest, might negatively affect certain communities, at least in the short run.
Immigration reform is the most obvious and immediate policy response to the challenge of falling birth rates and slower population growth. Others include dedicated steps to promote scientific innovation, as well as a range of efforts to bolster human capital.
In uncertain economic times, a divided Congress must come together with the White House to temper the impacts of stagnating population growth with smart policy. The pursuit of immigration reform and a robust plan to boost innovation must be at the top of the agenda when the new Congress convenes in January.