In the policy world, demographics is far beyond the time-horizons of politicians. Politics is played out in 2 years cycles, but demographic trends can take decades to play out. Today, America stands on the precipice of an unprecedented demographic event which has been termed “demographic winter.”
Demographic winter is mostly the result of plummeting birth rates and, to a lesser degree, the aging of the baby boom generation. The aging impact on America’s population has been offset by longer life-spans, but a baby never born has exponential ripple effects on the size of the future population. As a result of too few babies being born, many parts of America will experience a shrinking working-age population and eventually shrinking overall populations.
America is not alone. Countries like Japan, Russia, and many other in Europe are already facing shrinking populations. As we will discuss, this will create a drag on economic growth at a time when many social programs will experience tremendous increases in demand. Will future generations, fewer in number, acquiesce to the financial demands of older generations? Ready or not, we will find out.
For an excellent overview, check out this movie titled “Demographic Winter: The Decline of the Human Family” above.
As shown in Chart 1 below, between July 1, 2014 and July 1, 2015, the states with the highest rate of population growth, as a percent of population, were: North Dakota (2.3 percent), Colorado (1.9 percent), Nevada (1.9 percent), Florida (1.8 percent), and Texas (1.8 percent). The states with the slowest rate of population growth were: West Virginia (-0.3 percent), Illinois(-0.2 percent), Vermont (-0.1 percent), Connecticut (-0.1 percent), and Maine (-0.1 percent).
So, the place to start is to examine “net natural population” growth which is the number of births minus the number of deaths that take place in a given jurisdiction. In 2015, there were 1.4 million more births than deaths which sounds impressive. However, since 1991 the change in net natural population growth declined by -32 percent to 1.4 million from 2 million.
In stark contrast, America’s population over the same time-period increased by 27 percent to 321 million from 250 million. As such, net natural population growth is contributing less and less to the overall growth in America’s population. In fact, as a percent of population, net natural population growth has declined to 0.42 percent in 2014 from 0.79 percent in 1991—a decline of 46 percent!
Of course there is a large variation among the 50 states. There are currently two states, Maine and West Virginia, where there are more deaths than births which means net natural population growth is negative. States that have also seen large drop in the rate of natural population growth as a percent of population include New Hampshire (-85 percent), Vermont (-83 percent), Rhode Island (-75 percent), Pennsylvania (-74 percent), and Connecticut (-72 percent).
On the brighter side, North Dakota has seen an increase in their net natural population rate as a percent of population (22 percent) and Nebraska is nearly level (1 percent). Beyond these two states, net natural population growth has fallen though not nearly to the extremes cited above—South Dakota (-1 percent), Iowa (-13 percent), Utah (-21 percent), Kansas (-21 percent), and Minnesota (-25 percent).
As shown in Chart 2 below, between July 1, 2014 and July 1, 2015, the states with the greatest rate of net natural population change, as a percent of population, were: Utah (1.2 percent), Alaska (0.98 percent), Texas (0.78 percent), North Dakota (0.7 percent), and Idaho (0.66 percent). The states with the slowest rate of net natural population change, as a percent of population, were: West Virginia (-0.05 percent), Maine (-0.03 percent), Pennsylvania (0.1 percent), Vermont (0.11 percent), and Rhode Island (0.14 percent).
To better understand what is going on, let’s now look at the components of net natural population growth—births and deaths.
There has been a decline in the absolute numbers of births between 1991 and 2015 of 147,341 to 3.99 million births from 4.13 million—this is a -3.6 percent decline. Yet, as a percent of population, the drop is a steeper -24 percent to 1.24 percent in 2015 from 1.63 percent in 1991 because the decline in births is set against the backdrop of an overall increase in America’s population.
Only a single state—North Dakota—has escaped this dramatic fall in births as a percent of population with an increase of 3 percent to 1.48 percent in 2015 from 1.43 percent in 1991. This is likely due to boom in oil and gas hydraulic fracturing which has brought a younger and more fertile population to the state. Of course, with a small population of only 756,927 it doesn’t take many births to move the needle.
On the other hand, there are states with more dramatic drops in the number of births as a percent of the population including: New Hampshire (-38 percent), California (-36 percent), Vermont (-35 percent), Connecticut (-33 percent), and Rhode Island (-30 percent).
In stark contrast, there has been an increase in the absolute number of deaths in America between 1991 and 2015 of 486,127 to 2.6 million from 2.1 million per year—this is a 23 percent increase. However, the absolute increase in deaths has actually lagged behind the overall growth in population. As a percent of population, deaths have fallen by -3.4 percent to 0.82 percent in 2015 from 0.85 percent in 1991.
The states that have seen the greatest increase in deaths as a percent of the population include: Alaska (53 percent), Hawaii (35 percent), New Mexico (18 percent), Wyoming (16 percent), and Maine (10 percent). On the other hand, the states that have seen the great decrease in deaths as a percent of the population include: Nebraska (-15 percent), New York (-14 percent), South Dakota (-11 percent), New Jersey (-10 percent), and North Dakota (-9 percent).
Despite the aging of the Baby Boom generation, deaths are not (yet) to blame for America’s downshifting net natural population growth. For now, the increase in life-spans has forestalled a more dramatic rise in deaths as a percent of the population.
The blame for America’s reduced net natural population growth falls on the reduction in the number of births in both absolute terms and as a percent of the population. There are many factors that have brought this about such as contraception, abortion, delayed marriage, the decline in religion, and the rise of two-income households.
More troubling, as Baby Boomers continue to age the number of deaths is only going to continue to rise. If the decline in births does not reverse itself, many states will soon face the prospect of declining overall population without an influx of domestic or international migrants.
As shown in Chart 3 below, between July 1, 2014 and July 1, 2015, the states with the best rate of net migration growth, as a percent of population, were: Florida(1.64 percent), North Dakota(1.55 percent), Nevada (1.28 percent), Colorado (1.24 percent), and South Carolina (1.07 percent). The states with the worst rate of net migration growth were: Alaska (-0.69 percent), Illinois (-0.53 percent), New Mexico (-0.47 percent), Mississippi (-0.32 percent), and Connecticut (-0.25 percent).
At the national level, there is only one form of migration and that is international migration. Between 1991 and 2015, there has been an influx of 24.9 million legal immigrants—an average of 997,063 per year. The states with the greatest number of immigrants in 2015 are: California (180,722), New York (134,160), Florida (129,525), Texas (101,558), and New Jersey (57,083). The states with the fewest number of immigrants in 2015 are: Wyoming (661), Montana (751), Vermont (914), West Virginia (1,345), and Maine (1,528).
While the absolute level of international looks large, it only averaged 0.34 percent of the population during this time-period. Of course, this varies by state. The states with the highest level of immigration as a percent of population in 2015 are: Hawaii (0.71 percent), New York (0.68 percent), Massachusetts (0.64 percent), Florida (0.64 percent), and New Jersey (0.64 percent). The states with the lowest level of immigration as a percent of population in 2015 are: Montana (0.07 percent), West Virginia (0.07 percent), Mississippi (0.09 percent), Wyoming (0.11 percent), and Maine (0.11 percent).
Net Domestic Migration measures the movement of people from one state to another. At the national level, these movements cancel each other out. However, for specific states domestic migration can significantly add or subtract population.
In 2015, the big winners of domestic migration include: Florida (202,510), Texas (170,103), Colorado (54,459), Arizona (45,934), and South Carolina (45,582). The big losers of domestic migration in 2015 include: New York (-157,992), Illinois (105,217), California (77,219), New Jersey (65,254), and Pennsylvania (41,607).
Also, it should be noted that some unknown amount of domestic migration is disguised international immigration. States like New York and California are major gateway destinations for international immigrants, but they don’t always stay for long. If they soon migrate to another state, they are classified as domestic migrants and not as international immigrants.
However, as a percent of population, the picture of net domestic migration changes somewhat. The states with the greatest domestic migration as percent of population in 2015 was: North Dakota (1.32 percent), Florida (1 percent), Colorado (1 percent), Nevada (0.97 percent), and South Carolina (0.93 percent). The states with the lowest domestic migration as a percent of population in 2015 was: Alaska (-1.04 percent), Illinois (-0.82 percent), New York (-0.8 percent), Connecticut (-0.77 percent), and New Jersey (-0.73 percent).
Economically, for business community, Demographic Winter will be akin to a slow-moving economic depression by moving from population growth to population decline. With a growing population, businesses can plan on new customers simply because there are more people. However, with a shrinking population, businesses not only lose the prospects of new customers, they must also face losing existing customers. If businesses are unable to find new markets, they will be faced with ongoing declines in revenue—or, put simply, an economic depression.
More specifically Arnott and Chaves find that:
[W]e show that the past 60 years—which we think of as “normal”— enjoyed a demographic tailwind which we can quantify. It was worth about 1% per year, meaning that, if we think of 3% growth as normal, it’s really 2% growth plus a demographic tailwind of 1%.
The coming decades—due to the rising support ratios from the aging boomers—will experience a demographic headwind of (very roughly—these will be wildly out-of-sample conditions) roughly the same 1%. So, if 3% growth was normal, 1% growth (again, very roughly) becomes normal. This is the reason behind my concerns regarding the legacy of monetary and fiscal experiments, and debt and deficits we leave our children.
So even without a fiscal calamity, Demographic Winter alone will have the economy at stall speed. A little economic hiccup will quickly send the economy into a recession or even depression. Uncle Sam has already run up an $18 trillion dollar tab, but adding insult to injury Demographic Winter will create another fiscal tsunami.
In addition to the overall negative economic impact, Demographic Winter will also have a negative fiscal impact on federal, state, and local governments. First, people over the age of 65 impose significantly more costs to government than younger age cohorts. Figure 2 shows that a typical person over the age of 65 costs government nearly three times as much for a person under the age of 18—even with educational costs factored in.
While these costs predominantly fall on the federal government (Social Security and Medicare), state governments should be prepared for a significant spike in Medicaid costs for those over the age of 65, especially driven by the cost of nursing homes.
Second, while expenses soar for those over the age of 65, the taxes paid by this age cohort drops by two-thirds as shown in Figure 3. The primary culprits for this drop are the payroll and income tax, which naturally decline as people retire from the labor force. As such, the primary fiscal concern for state policymakers moving forward is the eroding income tax base as the county continues to age.
Clearly Demographic Winter will be the major economic and fiscal issue for the next few decades. Reversing it will not an easy task. Of course, understanding why it is happening is the first step in fixing it. There is one variable that significantly correlates with the fertility rate—weekly religious attendance. Has America’s declining church attendance resulted in the declining fertility rate? If so, finding ways to increase church attendance does not sound like a simple solution. But find a solution we must.
Below is a recent interview I did on the subject of Demographic Winter and its impact on Maine (which is currently the oldest state in America as measured by median age).
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