The Real Cause of the Recession

An economist at the Vatican has suggested that the underlying cause of the current recession is not loose credit or real estate. It is infertility. The real estate bubble of the last few years was simply masking a deeper longterm problem which is now revealed.

To call economics an inexact science is to give it far too much credit. But what Signor Gotti Tedeschi of the Institute for the Works of Religion says has, to my mind, the ring of truth. People are our most valuable resource; they produce all other resources. No nation has ever prospered as its population declined. Witness Japan: in a dead stall economically for almost two decades, due to its rapidly falling birthrate and aging population. Welcome to our future. Japan is just two decades ahead of the world curve in this regard.

Buying a home, and then possibly also a vacation or retirement home, were the two biggest, and last big, expenditures all those baby boomers were going to make. Note that the recent bubble was biggest in retirement destinations: Arizona, Florida, Nevada, the coast of Spain.

That's been done. Now the boomer demographic is barrelling into retirement. They are going to start selling their main homes and downsizing. There are fewer coming in the next few generations. It will be a buyer's market, for real estate, for the foreseeable future. And for everything else--retirees spend less. Of course, they also produce nothing.

And remember this: while all economics may be voodoo science, demographic projections are rather reliable, at last for a few decades into the future. Numbers are numbers, and it takes twenty years to make a human generation.

So the real estate market is not going to pick itself up and resume its onward march anytime soon. And that, according to the Economist and others, was just about all the action in the US and European economies for the last good number of years.Without it, we would probably have been in recession all along. Now we will also have a huge surge in government pension and health costs, coupled with a huge drop in productive capacity, and in consumer buying power, throughout the developed world.

Hard to see how an economy can go through all that without grave economic consequences.

The rising tax burden to pay for entitlements will in turn suppress economic activity; Ibn Khaldun, the great Arab historiographer, posited that all polities eventually collapse through overtaxation. We're about to test his theory; the more so since most governments have responded to the current recession by going heavily into debt.

So, okay, the entire developed world is heading for a long, perhaps permanent, Japan-like recession. What about the developing world? Certainly, the dropoff in consumer spending in the developed world will hurt them. But their own conumers; might they pick up the slack?

It doesn't look all that promising, actually. For the past four decades, most of the Third World has been busy trying to get their fertility rates down. They accordingly face more or less the same crisis. First, forget China replacing the US as the world's dominant power—it has a bigger demographic crisis facing it than anyone, about to hit in just a few years' time. Not only did they stop making children--of the children they still made, a disproportionate number were boys, meaning they will never be able to find a wife and have children of their own. It's going to be like hitting the wall, even if China's political problems do not hogtie it well before this point. Russia? In worse shape demographically than anyone else in Europe. Of the members of the big leagues, India is rather better placed than anyone, though its fertility rate too is lower than it should be and declining. Indonesia looks relatively sound. Some nations of SubSaharan Africa are growing faster than anyone--Nigeria, Ethiopia--but they have yet to demonstrate that they have the other requisites for development: stable government, decent education, lack of curruption, and so forth. Among the already-developed nations, the US is doing better than anyone at keeping fertility levels up.

Some nations, including Canada, have thought that the solution to this demographic problem was to open up the borders to increased immigration. The assimilation problems this causes are now, however, beginning to cause severe strains, and the public is turning against the idea throughout Europe. In any case, it doesn't work: it turns out that recent immigrants very quickly age themselves, and their fertility patterns quickly match those of the native-born. And, if the problem is worldwide, we are only offshoring it, not solving it.

So, how do we solve it? How can we get the engine running again, if only for our children's children, or our children's children's children? Nobody seems to know, because nobody seems to know, or professes to know, what's causing it. Nobody seems able to explain why fertility rates are dropping so quickly. Because so many women are in the workforce? Then why are Japan and Italy leading the pack? Because of growing wealth? Then why is the US somewhat resisting the trend? Because of religious beliefs? Then why is Iran flagging? Because of urbanization? Then why didn't it happen immediately postwar, when everyone poured into the suburbs? Instead, we had the baby boom.

As it happens, I have a suggestion, which seems to me to account fully for the data. The drop in fertility is proportional to the ready availability of abortion, reliable contraceptives, a social safety net, and old age pensions. Abortion and contraceptives, obviously, allow women to choose to have fewer children. Turns out, given the choice, that most do not want ten or even five. Good solid old age pensions mean less need to have children as an insurance policy against incapacity in old age. A strong social safety net from government means less need to rely on family for one's security in tough times, hence less need to have a large family.

This explains the anomaly of the USA, still at replacement level in defiance of the trend. The USA is simply less "socialized" than Europe or Japan. Communist and ex-Communist nations like Russia, Cuba, and China suffer from having a very strong social safety net, and stand out in terms of population decline.

The cure, then, might be a bitter one: roll back the social safety net. Go back to banning not only abortion, but contraceptives as well--as was the case essentially everywhere until around the 1960s. It seems just conceivable that our grandparents were right after all.

One other possibility also occurs to me. It may be just baby-boomer wishful thinking, but one hears more and more about the possibility of new life-extending medical technologies coming in the near future. A friend of mine who is in the field says something dramatic will probably be available within ten years. If so, the sudden jump in lifespans in the developed world might save us; at least long enough to make the necessary changes to our systems. Notably, this too, to be a solution, would require ending all talk of pensioned retirement at 60 or 65.

If this comes, it will only boost the current American economic dominance. The sudden jump in life expectancy would probably be felt here first, and would add to the already relatively healthy fertility rate. The US has another advantage, that is not always appreciated: while European immigration comes mostly from Muslim lands, and involves a radical change of culture, America is built for immigration, and its immigrant supply comes mostly from Latin America--on the whole, a similar culture.

I think this is enough to make it probable that China will never surpass the USA economically. If the baton passes, as it eventually must, it will take a while.

And it will more likely be to India.