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America's Demographic Winter

Demographics is Destiny!

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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, 2015 and July 1, 2016, the states with the highest rate of population growth, as a percent of population, were: Utah (2 percent), Nevada (1 percent), Idaho (1.8 percent), Florida (1.8 percent), and Washington (1.8 percent).


The states with the slowest rate of population growth were: West Virginia (-0.5 percent), Illinois(-0.3 percent), Vermont (-0.2 percent), Connecticut (-0.2 percent), and Wyoming (-0.2 percent).


Chart 1 Percent Change in Population by State 2015 to 2016.JPG


Net Natural Population Growth


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 2016, there were 1.2 million more births than deaths which sounds impressive. However, since 1991 the change in net natural population growth declined by -38 percent to 1.2 million from 2 million.


In stark contrast, America’s population over the same time-period increased by 28 percent to 323 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 0.38 percent in 2016 from 0.79 percent in 1991—a decline of 52 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 between 1991 and 2016, as a percent of population, include New Hampshire (-93 percent), Vermont (-88 percent), Pennsylvania (-85 percent), Rhode Island (-84 percent), and Florida(-78 percent).


On the brighter side, North Dakota has seen an increase in their net natural population rate as a percent of population (30 percent). Beyond that one state, however, net natural population growth has fallen though not nearly to the extremes cited above—Nebraska (-2 percent), South Dakota (-12 percent), Iowa (-21 percent), Utah (-24 percent), and Kansas (-28 percent).


As shown in Chart 2 below, the states with the highest level of net natural population change in 2016, as a percent of population, were: Utah (1.1 percent), Alaska (0.9 percent), Texas (0.8 percent), North Dakota (0.7 percent), and Idaho (0.6 percent).


The states with the slowest rate of net natural population change, as a percent of population, were: West Virginia (-0.1 percent), Maine (-0.1 percent), New Hampshire (0.1 percent), Pennsylvania (0.1 percent), and Vermont (0.1 percent).


Chart 2 Net Natural Population as a Percent of Population by State in 2016.JPG


To better understand what is going on, let’s now look at the components of net natural population growth—births and deaths.

 

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Births


There has been a decline in the absolute numbers of births between 1991 and 2016 of 155,520 to 3.98 million births from 4.13 million—this is a -3.8 percent decline. Yet, as a percent of population, the drop is a steeper -25 percent to 1.23 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 9 percent to 1.56 percent in 2016 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 757,952 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, between 1991 and 2016 including: New Hampshire (-40 percent), California (-36 percent), Vermont (-34 percent), Connecticut (-33 percent), and Rhode Island (-32 percent).


As shown in Chart 3, in 2016, the states with the highest birth rate, as a percent of population were: Utah (1.7 percent), North Dakota (1.6 percent), Alaska (1.5 percent), Texas (1.5 percent), and South Dakota (1.4 percent).


On the other hand, the states with the lowest birth rate, as a percent of population, were: New Hampshire (0.9 percent), Maine (0.9 percent), Vermont (1 percent), Connecticut (1 percent), and Rhode Island (1 percent).


Chart 3 Births as a Percent of Population by State in 2016.JPG


Deaths


In stark contrast, there has been an increase in the absolute number of deaths in America between 1991 and 2016 of 607,107 to 2.7 million from 2.1 million per year—this is a 28 percent increase. However, the absolute increase in deaths has grown in-line the overall growth in population. As a percent of population, deaths have grown by only 1 percent to 0.85 percent in 2016 from 0.85 percent in 1991.


The states that have seen the greatest increase in deaths, as a percent of the population, between 1991 and 2016 include: Alaska (60 percent), Hawaii (42 percent), New Mexico (23 percent), Wyoming (22 percent), and Maine (15 percent).


On the other hand, the states that have seen the great decrease in deaths, as a percent of the population, between 1991 and 2016 include: Nebraska (-12 percent), New York (-11 percent), South Dakota (-8 percent), New Jersey (-6 percent), and Illinois (-5 percent).


As shown in Chart 4, in 2016, the states with the highest death rate, as a percent of population were: West Virginia (1.2 percent), Alabama (1.1 percent), Pennsylvania (1 percent), Maine (1 percent), and Mississippi (1 percent).


On the other hand, the states with the lowest death rate, as a percent of population, were: Utah (0.5 percent), Alaska (0.6 percent), Colorado (0.7 percent), Texas (0.7 percent), and California (0.7 percent).


Chart 4 Deaths as a Percent of Population by State in 2016.JPG


Conclusion on Net Natural Population Growth


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.

 

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Net Migration


As shown in Chart 5 below, the states with the best net migration rate, as a percent of population, were: Florida(1.6 percent), Nevada (1.4 percent), Oregon (1.4 percent), Washington (1.3 percent), and Idaho (1.1 percent).


The states with the worst rate of net migration rate were: Wyoming (-0.7 percent), Illinois (-0.6 percent), North Dakota (-0.6 percent), Kansas (-0.4 percent), and New  York (-0.4 percent).


Chart 5 Net Migration as a Percent of Population by State in 2016.JPG


Net International Migration


At the national level, there is only one form of migration and that is international migration. Between 1991 and 2016, there has been an influx of 25.4 million legal immigrants—an average of 977,083 per year.


The states with the greatest number of immigrants in 2016 are: California (142,553), Florida (118,831), New York (118,478), Texas (91,839), and New Jersey (50,087). The states with the fewest number of immigrants in 2016 are: Wyoming (524), Montana (569), Vermont (955), West Virginia (1,076), and North Dakota (1,575).


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.


As shown in Chart 6, the states with the highest immigration rate, as a percent of population, in 2016 are: Massachusetts (0.6 percent), New York (0.6 percent), Florida (0.6 percent), New Jersey (0.6 percent), and Hawaii (0.5 percent).


The states with the lowest immigration rate, as a percent of population, in 2016 are: Montana (0.1 percent), West Virginia (0.1 percent), Mississippi (0.1 percent), Wyoming (0.1 percent), and Alabama (0.1 percent).


Chart 6 Domestic Migration as a Percent of Population by State in 2016.JPG


Net Domestic Migration


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 2016, the big winners of domestic migration include: Florida (207,155), Texas (125,703), Washington (67,571), Arizona (61,544), and North Carolina (59,584). The big losers of domestic migration in 2016 include: New York (-191,367), Illinois (-114,144), California (-109,023), New Jersey (-66,791), and Pennsylvania (-45,565).


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 shown in Chart 7, the domestic migration rate, as a percent of population, changes somewhat. The states with the greatest domestic migration rate, as percent of population, in 2016 was: Oregon (1.2 percent), Nevada (1.2 percent), Idaho (1 percent), Florida (0.1 percent), and South Carolina (0.9 percent).


The states with the lowest domestic migration rate, as a percent of population, in 2016 was: New York (-1 percent), Illinois (-0.9 percent), Connecticut (-0.8 percent), North Dakota (-0.8 percent), and New Jersey (-0.7 percent).


Chart 7 International Migration as a Percent of Population by State in 2016.JPG


 

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The Economic Costs of Demographic Winter


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.


The Fiscal Costs of Demographic Winter


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.


Figure 2 Government Benefits by Program and Age.jpg


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.


Figrue 3 Government Tax Collections by Program and Age.jpg

Conclusion


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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