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Peter Zeihan

Geopolitical Strategist

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How populations determine economic growth

Mar 21

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Peter Zeihan

Geopolitical Strategist

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Demographic momentum, roughly understood as a population’s ability to grow its economy over generations, is a key determinant for forecasting economic progress. For instance, the continent of Africa has mostly positive demographic momentum because the average age of the population is very young and can be expected to produce more and more wealth in the coming decades. Germany, in contrast, has poor momentum because it has experienced population loss and has a more elderly population on average.

Straight Arrow News contributor Peter Zeihan explains how demographic momentum works and then looks at the age demographics of Europe, Asia, Africa and beyond to imagine how different major economies might evolve in the decades ahead.

Below is an excerpt from Peter’s March 21 “Zeihan on Geopolitics” newsletter:

We tend to overlook the dynamics of demography and its economic impact, so let’s take a step back and break down demographics by generation and how that will dictate the future of our economies.

There are standard behaviors for each age group. You’re born as a ward, but are cheap to take care of. Then you start to become more productive and consume a lot. Then you age into a situation where you’re providing taxes. And then you revert back to your old ways and become a leech on the economy again. Fairly cyclical and predictable.

So in rapidly aging populations like Europe, Korea, Japan and parts of Africa, once you tip that scale towards people consuming more capital than they are producing…you can imagine how well that plays out. There are certain situations where population shifts could benefit an economy, but there’s no silver lining to deep population decline.

Hey everybody, Peter Zeihan here coming to you from snowy Colorado. Today we’re taking an entry from the Ask Peter column on overpopulation and underpopulation, specifically, the question is, Peter, you talk a lot about depopulation and the negative economic consequences of it. But if we are entering a world where there’s a lot of environmental concern and damage, doesn’t slimming down the population actually argue that we could be headed towards a better world? In addition, in general, isn’t this going to mean that there’s more resources available for everybody else, so wouldn’t that mean, we’re going to have a degree of economic growth that is qualitatively different than what came before? And you know, there’s some there’s something to that argument. But the problem is, that assumes that we lose 5, 10, 15, 20%, pick your number, across the world, equally, of every age group of every country in every ethnicity, that’s not what’s going to happen. So before I go into the nuts and bolts of it, let me kind of give you the overview.

 

As a rule, people under age 18 only consume things like education, a little bit of health care, they don’t contribute to the work in economy. People aged 18 to 45, these are the folks that are having kids and buying homes and going to school, it’s very heavy consumption, most of the stuff that you will consume in your lifetime, the greatest proportion of your consumption will happen while you’re raising your kids, which as a rule ends between 45 and 50.

 

From 45, to 50, out to 65, these are your mature workers, these are the people who are playing well, paying lots and lots of taxes, they’re saving for retirement, they’re generating the investment that drives the private sector. And then when you turn 65, you’re still consuming, but your consumption changes dramatically, to things like health care, and a little bit of leisure. But you’re still occupying your home. But your tax bill goes way down. And now you start drawing pensions and healthcare benefits that drive government commitment to you through the roof.

 

So you start out being a ward, but not being very expensive, you move into being very productive in a lot of consumption, you age into a situation where you’re providing taxes, and then eventually age to the point where you’re just this giant sucking sound.

 

Instead, in the advanced world, we’re not just dealing with the population, we’re dealing with very, very rapid aging. So the population structure for say, Europe, or Korea or Japan, in just 15 years is going to be a big bulk of people who have retired but not died. And then a very, very small number of working age adults and even fewer children. It’s a very different pattern, because old people, let me rephrase that, people of advanced age, consume goods, but also consume a huge amount of tax, tech, and healthcare. And so they are a net drain on the system instead of tax payers like they were in their 20s, 30s, 40s, 50s and early 60s. So the pressure on the system is massive.

 

A good thing, a good example I can give you how this imbalance really doesn’t work out is if you look at sub-Saharan Africa, especially Southern Africa, during the AIDS epidemic, you had an absolute gutting of the population structure of people roughly aged 18 to 45, leaving you with mature workers in societies where the mature workers weren’t all that skilled, and then no one to raise the kids. And so the block of people 18 to 45, those are the people who do most of the work, pay a lot of the taxes and absolutely raise the children for the next generation. And we lost their consumption at the same time. So a lot of these countries south of Congo, basically faced a 25-year period of economic just despair, as their population balance changed. The part of the world where we’re probably going to be seeing this happen most dramatically. Well, let me give you two.

 

The first one is East Asia. These are places that have seen absolutely massive increases in healthcare and longevity over the last 50 years. So for example, I believe the Koreans are now the longest-lived people in the world, which means that you’re gonna just have these massive, massive aged populations, sucking the government dry. While there’s no one down below to do the work much less are his children.

 

The other chunk is the Orthodox world. We’re a combination of the post-Cold War shocks and alcoholism and a poor diet, or hollowing out the working age population before we get to the point where we have a population collapse. And these are two very different economic models that really don’t go anywhere particularly positive. But there is a lot of nuance and difference between the two. In the case of East Asia, assuming for the moment that we don’t have an energy or trade breakdown. Big if you’re looking at a general degradation of the state’s ability to function. In the case of Central Europe, you’re instead looking at seen wedges of populations that are actually going to benefit quite a bit from this because if you lose everyone in their 30s, but you still have people in your 50s you still have a tax base, you still have the work and the economic inequality that will erupt in that sort of environment suggests a significant political challenge. So everyone has their own story, but it’s really hard to make the case that depopulation has a silver lining. In the environmental case, keep in mind that if people age they’re still consuming. You’ve just lost the younger generation that can pay the taxes and generate the investment that’s unnecessarily to maybe transition to something that isn’t based on oil and coal. So there’s really no upside here. There are just flavors of downsides.

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