Home > Uncategorized > Weekend read – Combatting Global Warming: The Solution to China’s Demographic “Crisis”

Weekend read – Combatting Global Warming: The Solution to China’s Demographic “Crisis”

from Dean Baker

There have been numerous news articles in recent years telling us that China faces a demographic crisis. The basic story is that the market reforms put in place in the late 1970s, together with the country’s one-child policy, led to many fewer children being born in the last four decades. As a result, the number of current workers entering retirement exceeds the size of the cohorts entering the workforce, leading to a stagnant or declining workforce. This is supposed to be a crisis.

I used the word “supposed” because it is not in any way obvious that a declining workforce is any sort of crisis. We see shifts of population all the time, which can lead many cities or regions to have a decline in their population or workforce, even if the country as a whole does not. That doesn’t necessarily mean a crisis for the areas losing population unless of course the population decline is due to the loss of a major employer.

A drop in the growth rate of the workforce, or an actual decline, will likely mean slower GDP growth, but so what? A country’s standard of living is determined by its income per capita (along with many other factors), not its absolute level of GDP. India’s GDP is almost eight times Denmark’s, but Denmark is the far richer country. The reason is that India has more than two hundred times as many people.

If a country’s growth rate is slower because the growth rate of its workforce slows, that is hardly a disaster. People can still be seeing improvements in their standard of living, and in the case of China, these improvements would still be quite rapid even if its annual growth rate slowed by 2-3 percentage points from its recent pace of more than 6.0 percent annually.

There is a common argument that countries with aging populations, like China, will suffer because each worker will have to support a larger number of retirees. It is easy to show that this view is silly. Even a modest rate of productivity growth will swamp the impact of a declining ratio of workers to retirees. With output per worker increasing, both workers and retirees can enjoy rising living standards even as the ratio of workers to retirees fall.

That should not sound surprising. The ratio of workers to retirees has been falling in the United States for the last two decades, yet we have seen substantial increases in living standards, even if the wealthy have gotten the bulk of these gains. The idea that China’s declining ratio of workers to retirees poses a supply-side problem, where it cannot produce enough goods and services to support its population, is absurd on its face.

The Problem of Secular Stagnation

It turns out that the major problem of an aging population is not too much demand, but rather too little. Older people tend to spend less money than people in their working years. Also, when a country’s workforce is not growing, companies need to spend less money on investment. Employers need more capital when they hire more workers. This could mean desks and computers, or it could be machinery in a factory, or a truck on the road. The more workers companies hire, the more capital they need, which means more investment.

But if the workforce stagnates, then companies need to spend less on investment. They will still modernize their equipment and replace worn out items, but they don’t have to invest to accommodate the needs of a larger workforce.

With both consumption and investment falling relative to GDP, economies will face the problem of inadequate demand. In principle, the economy is capable of producing more goods and services than households and businesses are prepared to buy. This is the situation that we faced in the Great Depression, and again, on a smaller scale, in the Great Recession. It means mass unemployment. In the Great Depression, unemployment peaked at 25 percent of the workforce.

It is ironic that the economists warning about the implications of an aging population not only got the magnitude of the problem wrong, they even got the direction wrong. With our aging population, we don’t have to worry about too much demand, we have to worry about too little. This is yet another example of the old saying that economists are not very good at economics.

Spending Money: The Cure for Secular Stagnation

We discovered the cure for secular stagnation in the 1930s: the government has to spend money to make up for the failure to spend by the private sector. President Roosevelt embraced this strategy to a limited extent with his New Deal programs. These put millions of people back to work while modernizing our housing and infrastructure.

Of course, the government spending program that really got the economy back to full employment was World War II. With the country united behind the need to defeat Germany and Japan, budget deficits ceased being an issue. We saw record low unemployment rates in the war years as tens of millions of workers were either serving in the military or producing the food, clothes, and weapons needed by the military.

The war provided the political support for massive spending (and budget deficits), but it was the spending that got the economy to full employment. Money spent on civilian uses will create jobs every bit as well as money spent on the military.

This brings us back to China’s demographic crisis and global warming. As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

Currently, over 62 percent of China’s population lives in urban areas. The figure for most wealthy countries is close to 80 percent, but the pace of shift for China will be much slower going forward than in the past. In 1980, less than 20 percent of its population was urban.

This means that China’s big problem going forward is to find a way to spend a very large amount of money. For simplicity, let’s say that their needed spending on capital formation falls to 23 percent of GDP, roughly splitting the difference between Japan and the United States. This would mean that China’s government has to figure out what to do with 20 percent of its GDP.

This is an incredible amount of money. In 2021, 20 percent of China’s GDP would be $5.4 trillion. According to the I.M.F.’s projections, the annual amount would be almost $8 trillion in 2026. Over the next decade, it would be more than $80 trillion, that’s more than 20 times the original $3.5 trillion Build Back Better plan. In short, it’s real money.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States.  And, China also has more than twice as many electric cars on the road as any other country.

This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions. Of course, no one expects that the country will spend anything like $80 trillion over the next decade reducing greenhouse gas emissions, but it certainly can commit considerable resources to this effort. In addition to the benefits to the environment, this spending will help China’s economy grow and keep its workforce employed.

This is one of the opportunities created by China’s supposed demographic crisis. The issue is that because of the aging of the population it faces the prospect of a huge shortfall of demand in the economy. This is a good problem for a country to have, if its leadership is adept at managing its resources.

There are many grounds on which to criticize China’s government. It severely represses minority populations, most extremely the Uighurs, many of whom have been imprisoned for months or even years. It also does not respect freedom of speech, freedom of the press, or basic labor rights. But there is no doubt that it has done an outstanding job in managing its economy over the last four decades in a way that has led to an enormous improvement in living standards for the overwhelming majority of its population.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.

  1. November 7, 2021 at 1:39 am

    As Dean says, economists are not very good at economics. It’s a useful article, but even Dean forgets what an economy is for. It is for providing the material goods we want.

    If there is a ‘shortfall in demand’, this is seen as a big problem, because ‘unemployment’, ‘depression’, whatever. Well, what if working hours were reduced and people had more time for the better things in their lives?

    A ‘shortfall in demand’ implies an excess of production. At a time when the planet is being destroyed by an excess of production, it makes rather more sense to reduce production if no-one really wants it.

    Then there is language: something that is unchanging is called ‘stagnant’ (shudder). What’s wrong with ‘steady’?

    Jane O’Sullivan in Australia has analysed the large cost of population increase that most economists are apparently incapable of doing. She points out that if there are relatively more old people in the population then there are relatively fewer children needing support, education, etc.

    The whole subject is permeated by silliness (what a surprise), but it probably comes back to big business wanting cheap labour, which an ageing population won’t supply.

    • Meta Capitalism
      November 8, 2021 at 2:43 am

      I could not agree more with Geoff. How we frame an issue, the words we use, matter.

  2. Ikonoclast
    November 7, 2021 at 10:33 am

    There is only one crisis really, the ecological crisis. It doesn’t matter what China or anybody else does now. It is already far too late. The world really needed to change course right from 1972 when the Limits to Growth warning was given. Up until perhaps 1990, a climate code red style mobilization to move to a completely sustainable global economy could have worked. After three more decades of doubling down on consumer capitalism there is no hope at all. The damage is far too great. Capitalism now hath made its masterpiece.

    For sure, it’s hard to admit this to oneself and people should keep trying to do things. Every well thought out effort at sustainability postpones catastrophe a little bit. Life is suffering. Existence is limitation. Every day above ground feels like a Pyrrhic victory.

    • November 7, 2021 at 11:26 pm

      Ik why are you even at your keyboard writing that stuff? If you believed it you would just go and hide in a hole or something.

      I think the chances of avoiding the full catastrophe are diminishing fast, but we don’t know where the tipping point is. If we don’t try, then we do know the chance is zero.

      • Ikonoclast
        November 8, 2021 at 9:47 pm

        Comments are declining on this blog. People ARE hiding in their holes. Holes can be comfortably furnished. Just ask a hobbit. Of course, when the holes cease to be furnished and the supermarket shelves are empty then things get a little less comfortable.

        You will note I wrote, “Every well thought out effort at sustainability postpones catastrophe a little bit.” That is the essential nature of life in an existentialist sense: postponing catastrophe for a little while. “Life is suffering. Existence is limitation.” These are Buddhist concepts. “Every day above ground is a Pyrrhic victory”. That was an attempt at black humor, not original and perhaps it fell flat.

        I simply happen to think we need less cheer-leading and more realism. Over-optimism and lack of hard-nosed realism have been our real problem all along, IMHO.

  3. Craig
    November 9, 2021 at 6:12 pm

    The only way to confront climate change is to change the monetary and financial paradigm. Why won’t/can’t enterprise get on the bandwagon of climate change? In a word …cost. The costs of the current monetary and financial paradigm of Debt Only are tremendous. Reduce those costs with a new paradigm of Monetary Gifting that serves the interests of enterprise and can be utilized to direct industrial policy toward the green goals of fighting climate change (reducing the costs to consumers of green products like EVs and green homes by 75% with twin 50% discounts/debt jubilees at retail sale and at the point of note signing) and the internal combustion and petroleum industries will be innovated out of existence.

    If you’re not looking at the above empirical, mathematical facts you’re condemning your children and grand children to chaos and probably early death.

    Get with the friggin’ program will ya!

  4. Ken Zimmerman
    November 17, 2021 at 9:05 am

    Economic life is the activities through which people produce, circulate and consume things, the ways that people and societies secure their subsistence or provision themselves. It is important to note, though, that ‘things’ is an expansive term. It includes material objects, but also includes the immaterial: labor, services, knowledge and myth, names and charms, magic, math, ideas, and so on. In different times and places, different ones of these will be important resources in social life, and when they are important they come within the purview of economic anthropologists.

    In other words, where some economists have identified economic life in terms of the sorts of mental calculus that people use and the decisions that they make (for example, utility maximization), which stresses the form of thought of the person being studied, most economic anthropologists would identify it in terms of the make up of the activity; even those who attend to the mental calculus are likely to do so in ways that differ from what is found in formal economics (for example, Gudeman 1986; Gudeman and Rivera 1991). This substance includes markets in the conventional sense, whether village markets in the Western Pacific or stock markets in the First World. However, these markets are only a sub-set of economic life, and in accord with their tendency to see the interconnections in social life, economic anthropologists tend to situate things like markets or other forms of circulation, or production or consumption, in larger social and cultural frames, in order to see how markets, to continue the example, affect and are affected by other areas of life.

    Anthropologist Stephen Gudeman argues  “…that  economy  consists  of two realms,  which  I  call community and  market.  Both  facets  make  up  economy,  for  humans  are  motivated by  social  fulfillment,  curiosity,  and  the  pleasure  of  mastery,  as  well  as instrumental  purpose,  competition,  and  the  accumulation  of gains.  By community,  I  refer  to  real,  on-the-ground  associations  and  to  imagined  solidarities  that  people  experience.  Market  designates  anonymous, short-term  exchanges.  We  might  call  these  two  aspects  of  economy, the  Up-close  and  the  Far-distant.  In  one  guise,  economy  is  local  and specific,  constituted  through  social  relationships  and  contextually  defined  values.  In  the  other,  it  is  impersonal,  even  global,  and  abstracted from  social  context;  this  dimension  consists  of  separated  but  interacting  agents.  Both  realms  are  ever-present  but  we  bring  now  one,  now the  other  into  the  foreground  in  practice  and  ideology.  The  relation ship  is  complex:  sometimes  the  two  faces  of economy  are  separated,  at other  times  they  are  mutually  dependent,  opposed  or  interactive.  But always  their  shifting  relation  is  filled  with  tension.”  Gudeman explores the  dialectical  relation  of  economy’s  two  realms.

    Gudeman works to  “…portray  the  multiplicity  of  the  community realm  with  its  grounding  in  local  values,  and  show  how  it  and  market are  connected  in  institutions  and  practices.  The  motor  of  capitalism  is profit-making,  but  I suggest  that  even  the  most  market-driven actor — the  national  or  global  corporation — mixes  the  two  realms  and relies  on  the  presence  of  communal  relations  and  resources  for  its  success.  Economic  anthropology,  I  think,  uniquely  displays  the  double face  of  economy  and  the  importance  of  the  up-close.  The  politics  of this  book  stem  from  this  demonstration  of the  importance  of the  communal  realm,  thus  obliging  us  to  rethink  our  ways  of  distributing  new wealth.” (2001)

    This contextualization operates at a more general level as well. So, while anthropologists would recognize the growing importance of the economy in how people in Western societies understand their world over the past couple of centuries (Dumont 1977), they would not take the nature of ‘the economy’ as given or its growing importance as self-evident (for example, Carrier 1997; Carrier and Miller 1998; Dilley 1992; Friedland and Robertson 1990). This indicates that for many economic anthropologists, it is not just economic life that merits investigation. So too does the idea of economy, its contents, contexts and saliences, and the uses to which it is put.

    To reword the above, economic life is whatever people in their everyday lives conclude is necessary to produce, circulate and consume in order to secure their subsistence or provision themselves. Economists and other social scientists have no greater part in these choices than their fellow society members. Nor can they be allowed to ‘over rule’ societal choices or substitute their answers for these choices. These scientists can of course seek to describe how the choice s were made. These choices may at times conflict with other choices (e.g., laws, moral codes, religious doctrines). These can only be worked out in the general process of constructing societies and cultures in all their aspects. Societies and culture are always worked out as a whole. Never piecemeal.

    Economists are committed to never recognizing any of this. Which makes them not just useless as social scientists but propagandists for a dead end in understanding economic life. It also helps us better understand why economists are helpless in viewing or fixing people’s concerns about maintaining and provisioning themselves consistent with a humane and healthy standard of life.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: