Demography is Destiny

A global tectonic shift is afoot that promises to rival the Industrial Revolution in historical impact. It’s a change that won’t be particularly noticeable for a number of years, but within a few decades the world will look astonishingly different politically, economically, and culturally. Surprisingly, I’m not talking about advances in artificial intelligence but rather collapsing birth rates that are poised to end global population growth much sooner than expected and result in the oldest society in history.

In 1968 the biologist Paul Ehrlich published the highly influential book, The Population Bomb, which detailed the significant ecological and civilizational risks of overpopulation should the extraordinarily high global total fertility rate (TFR) continue. At that time the average woman had five children. Ehrlich’s fears proved unfounded, as the TFR fell to 3.7 in 1980, 3.3 in 1990, 2.8 in 2000, 2.6 in 2010, and 2.25 as of 2023. Given that the replacement fertility rate needed to sustain the global population is around 2.1, there doesn’t seem to be much of a problem yet. Unfortunately, the decline in births is accelerating, and most of the world is already well below that 2.1 replacement rate – in many cases, alarmingly so.

In Asia, China’s TFR more than a decade after the relaxation of its one child policy is still just 1.03. South Korea’s fertility rate is a catastrophic 0.72, among the lowest in the world, and even Japan at a relatively better 1.21 isn’t coming close to replacing its population. All three countries are already experiencing total population declines that will only speed up in the coming decades.

In the Eurozone, 3.88 million babies were born in 2022 (most recent data). This represents a significant decline compared to the 5.1 million births in the region back in 1990. The EU’s average fertility rate is now just 1.46, with some countries like Spain (1.16), Italy (1.24), and Poland (1.18) doing far worse. The total EU population is still growing slightly, but this is due to significant foreign migration, particularly the more than 6 million Ukrainian refugees who’ve settled in Europe since the war with Russia began in 2022.

The most surprising drops in fertility have been in developing countries. For example, take a look at Brazil (1.59) and Mexico (1.60), which now shockingly have lower fertility rates than the U.S. at 1.62! Latin America overall is already below replacement fertility.

Even India and the Middle East are seeing plunging fertility. A Lancet study in 2021 estimated that India’s fertility rate was already below replacement at 1.91. Given global trends, it’s likely declined further since then. Or how about Iran with a TFR of just 1.67 or Turkey at 1.51?
One of the only places in the world that still has a relatively high fertility rate is Africa, where the average TFR is about 4.2. However, like everywhere else, African fertility is on a downward trajectory. In addition, the continent’s replacement TFR is likely around 2.5-3.5 given its much higher child mortality and lower life expectancies. Thus, even Africa may not see as much population growth as demographers expect in the coming decades.

South Korea is a case study in how while overall population numbers aren’t currently suggesting much to worry about (very modest declines), the generational data under the hood looks catastrophic. For instance, the number of 1-year olds in South Korea is currently just 25% of the number of 50-year-olds. Assuming the country’s TFR remains 0.72 and there’s no change in life expectancy or immigration, a back of the envelope calculation projecting South Korea’s population (currently about 51 million) going forward would look something like this: 2045 – 43 million, 2065 – 29 million, 2085 – 15 million, 2105 – 6 million. If something doesn’t drastically change, South Korea as a country and people basically won’t exist in 80 years. Much of the rest of the developed world is facing a similar prospect although on a slower timeline.

From an investment standpoint there are two questions: Will fertility rates keep falling, and what does this mean for the global economy?

I expect that fertility will continue declining and that the TFR rates around 1.0 in Asia and southern Europe foreshadow where much of the rest of the world is headed. My pessimism stems from the cultural changes of the last 50 years that have elevated material wealth and consumption, as opposed to large families, as the primary indicators of social status. In fact, having lots of children makes it practically and financially impossible for most parents to do the things – like travel or dining out – society now deems essential for achieving “the good life.”

Relatedly, marriage, if it occurs at all, is now considered something to pursue after financial and professional stability is achieved. But historically marriage would have been one of the first steps towards adulthood where a young couple would then build a life and family together. The shift to later marriages dramatically shortens the reproductive window, which studies show has a profoundly negative effect on the number of children most couples have.

Governments from Norway to Hungary have already passed incredibly family friendly policies like extensive parental leave, subsidized childcare, tax breaks, and even outright payments, but nothing has meaningfully moved the dial. As global cultures become increasingly interconnected, I expect this shift in values towards materialism and fewer/later marriages to reinforce the trend of declining fertility everywhere young people have access to the Internet.

What does this mean for the economy and by extension the financial markets? Economic growth is just a function of increases in the number of workers and improvements in their labor productivity. We’ve always lived in a world marked by a rapidly growing global population, which has consistently fueled economic expansion. Once the supply of workers stops expanding, however, growth will become entirely dependent on rising productivity. When the number of workers starts contracting, the historic population tailwind we’ve enjoyed since the Industrial Revolution will turn into a headwind. Economies will need productivity growth just to keep from shrinking, let alone continuing to expand. Notably, the working age population is already contracting in many Asian countries and Europe. The U.S. would be in the same boat without immigration.

It might be tempting to believe that humanity would be better off with fewer people on the planet. In the 14th century, after the Black Plague killed 30-60% of the European population, those that survived did indeed grow richer. Farmland became cheaper, and labor shortages significantly boosted the wages of surviving workers and artisans. But this isn’t a good analog for plunging fertility in the modern world because 1) The Black Plague hit the elderly harder making 14th century European populations somewhat younger while today’s plummeting fertility makes our society much older, and 2) intellectual capital, not scarce natural resources like farmland, is the biggest driver of wealth in the modern world. As the economist, Bryan Caplan, explained in his book Selfish Reasons to Have More Kids (2011):

“The total number of people on Earth and the average standard of living skyrocketed over the last two centuries. The world has never been more populous or more prosperous than it is today. By historical standards, almost everything is cheap. This would be an amazing coincidence if population growth were an important cause of poverty. Indeed, it makes you wonder: is our population a cause of our prosperity? The answer is almost certainly yes. The main source of progress is new ideas. We are richer today than we were 100 years ago because we learned so much. We learned ways for one farmer to feed hundreds of people, we learned how to fly, we learned how to make iPhones. The sweetest thing about ideas is how cheap they are to share. A million people, or seven billion, can enjoy the latest discovery. If seven castaways wash up on a desert island, how many will be creative geniuses? On Gilligan’s Island the answer is one (“The Professor”) but few groups of seven random strangers would be so well endowed. As the population of the island grows from seven to 7,000 or 7 million the chance that Thomas Edison, Bill Gates, Beethoven, or the Professor resides there sharply improves. Once you hit a population of 7 billion – the island will be home to 7,000 innovators who are literally one in a million.”

Even before significant population declines occur, the aging of our society will impact our potential for innovation and the vitality of our culture. Consider that on July 4, 1776, the ages of some of our Founding Fathers were as follows: James Monroe (18), Alexander Hamilton (21), James Madison (25), Thomas Jefferson (33), John Adams (40), and George Washington (44). Shakespeare was already a successful playwright by his mid-20s. Mozart composed his first symphony at 8 and died at 35. Alexander the Great was just 21 when he crossed the Hellespont with almost 100,000 men and destroyed a Persian army at the battle of Granicus. When thinking of historical figures, we may picture wise old kings and queens, distinguished statesmen, or perhaps curmudgeonly inventors and artists. But the individuals we read about in the history books were often shockingly young. Changing the world requires a lot of energy, something in shorter supply as we age.

From a financial perspective, in the not-too-distant future as investors we need to start rethinking our models of how the world works. There won’t be an ever-increasing supply of new workers and consumers to buoy the global economy. Birthrates in emerging markets are nearly as bad – and in Asia’s case worse – than developed countries. When valuing most stocks, we can no longer assume perpetual growth. Some other possible implications that come to mind:

• Secular growth companies’ stocks (those not reliant on underlying economic expansion for revenue growth) will be in high demand. Industries that benefit from aging populations (e.g. healthcare, travel, and entertainment), companies with innovative business models and products, and those that help increase labor productivity will outperform over the long term. But the average company will struggle to expand.
• Slower economic growth and older investors searching for yield will increase demand for bonds and likely drive interest rates back down to rock-bottom levels again (when bond prices rise their yield to maturity falls).
• Real estate in areas losing population (basically everywhere except premier cities where the young congregate and luxury destinations like beach or skiing towns) will be poor investments. They’re already, for instance, giving houses away for free in places like the Italian and Japanese countryside.
• With wealth concentrating in an aging/increasingly retired population, young people will have a tremendous opportunity to bargain for higher wages or start new businesses (though finding employees themselves will be difficult).
• Crime is going to fall, as it’s disproportionately committed by the youth.
• Relatedly, political violence and wars should become less frequent, as rigid ideologies and the willingness to physically fight for them are more common with the young.
• Climate change, resource depletion, and other environmental issues will become less pressing concerns with little or negative population growth.
• Youth culture will exert less influence on society, leading to a slowdown in the sort of rapid cultural shifts we saw in the 20th century. This trend has actually already begun. Think of how different music and fashion were each decade from about WW2 through the 1990s. There’s been far less change over the last two decades. I can only think of a couple music and movie stars under the age of 30 that today would be considered household names.

In general, a rapidly aging society will lead to a more stable but also less energetic and exciting world. Seeking opportunity, the smartest and most enterprising youth will likely migrate from other countries to the U.S., negatively impacting progress in those regions. For America, the ability to attract and assimilate the best and brightest from around the world, as well as its relatively stronger fertility rate, will help it not just maintain but grow its economic and geopolitical dominance.