To grow an economy with a shrinking workforce is to battle against the odds.

By Lyle Dunne

The Global Financial Crisis offers an extensive choice of demonology: the banks; rogue traders; PC requirements to provide mortgages to those incapable of making payments; China – or “the market” in general.

(Not that they’re necessarily mutually exclusive: while some theorists instinctively reach for Occam’s Razor, those of us with more Baroque imaginations are attracted to lines like “for any given phenomenon, there’s always a simple, straightforward explanation – and it’s always wrong”.)

Reading this column in the Atlantic Monthly made me focus on another: demographics. And it also brought home the idea that the Global Financial Crisis was more than men in suits buying and selling sub-prime mortgages (as depicted in Margin Call, a recent film which was excellent in its portrayal of Wall Street in crisis — but perhaps less generous than it might have been in sharing the blame for the GFC around.)

The demographic idea is a simple one, although its ramifications are more complex.

First, it’s interesting that the Southern European nations who are in the most economic trouble are those which have the lowest fertility rates – although the relationship between the two is not straightforward, as we’ll see.

Total Fertility Rates (TFR) measure the average number of children per woman in a country; replacement fertility is a TFR of 2.1 (It doesn’t necessarily mark the divide between rising and falling population in the short term: there are the effects of migration, and previous “bulges” like the baby boomers. But it’s a guide to whether the population is growing or shrinking in the long term.)

According to World Bank data, Australia’s TFR is now (or was in 2010, the date of the most recent data) a respectable 1.9, just behind the UK and France on 2.0, Ireland the US, both on 2.1, and New Zealand — until recently the only Western nation apart from the USA with replacement level scores – on 2.2. The Scandinavian countries are on similar levels, clustering around 2.0. (At the top of the table are Muslim countries like Afghanistan, 6.3, and sub-Saharan African countries like Niger, 7.1.)

For any given phenomenon, there’s always a simple, straightforward explanation – and it’s always wrong.

At the other end of the scale, Spain, Italy and Greece (with Japan) all score 1.4; Portugal is even worse (1.3).

Returning to the GFC, broadly speaking, these countries are in trouble because their governments spend more than they collect in tax – not a new phenomenon. But in a crisis like the current one, there’s less economic activity to tax, but more demands for welfare, exacerbating the situation. This means they have to borrow more money, to pay the interest on earlier loans, increasing the debt yet further – you know how it works. When the debt gets large enough, people doubt that it will be repaid, and this is reflected in credit ratings, interest rates and bond yields, compounding the problem still further.

You can get out of this by cutting spending – in theory. But as we’ve seen in Greece in particular, cutbacks to the welfare state in a deep recession are almost impossible to implement. (I recall a similar phenomenon in France a few years ago when a proposal to increase the retirement age caused riots; it wasn’t clear whether “grandfathering” the measure made it better or worse in the eyes of the populace.)

You can increase taxes, but at a time of deep recession to do this to the level needed would destroy the economy completely.

The best solution, of course, is economic growth: to increase productivity, so as to maximize the tax base. Easier said than done, though, in many cases.

Demography has several effects on this process.

First and most obviously, in the countries we’re speaking of, falling population is due not to rising death rates but falling birth rates, usually in conjunction with increasing life expectancy. A shrinking population is thus also an ageing population, which means that there are more welfare recipients and fewer taxpayers, making it even more difficult to service debt.

Beyond that, however, an aspect the Atlantic focuses on is the difficulty in achieving a growing economy with a shrinking workforce – and with the population both shrinking and ageing, the labour market faces a double whammy. And the same is true of neighbouring countries (except for the more successful economies in northern Europe, who are not likely to be exporting workers to Spain or Greece), limiting the scope for outsourcing labour force growth.

A similar point might be made about markets: the high-earning, high-spending age-groups are also shrinking faster than the overall populations.

Now that the focus has shifted from America to Europe, with everyone holding their breath to see what happens in Greece, and how many of its neighbours follow suit, we may need to revisit our idea of what the GFC was – and is – really about.