Bryant: The Shrinking Pie

The oncoming threats of population decline and falling economic productivity demand a rethinking of our economic policy.

by Will Bryant | 2/14/23 4:05am

Both right- and left-wing economics envision a world where economic growth is the norm, and contraction or stagnation are aberrations. Though there is disagreement on the particulars, politicians and policymakers across the political spectrum agree that the American economy will continue to grow overall. Unfortunately, the relatively assured growth in the U.S. of the past century may be coming to an end. As the American population ages and exits the workforce in greater numbers, they will place greater strain on the social safety net, weighing down economic productivity. I argue that this oncoming demographic shift will force a dramatic change in our national economic thinking — and both the right and the left are woefully unprepared for a low-growth future.

In the U.S., at least, the discourse on national economics often returns to the “growing pie” metaphor to explain both right- and left-wing economic disagreements. First articulated in defense of Reaganomics in the 1980s, this model imagines the American national economic product as an ever-expanding pie. As economic growth continues and gross domestic product increases, the pie grows. It does not matter who gets which slice of pie, as long as it is growing. Therefore, according to the right, the government should not play a role in the redistribution of wealth. If the state rearranges the size of the slices, then those who receive the bigger ones will lose their incentive to grow the pie, making everyone worse off.

Since the 1980s, the left has countered with their own interpretation of the pie model. Motivated by a sense of justice, left-leaning economics is willing to sacrifice some pie growth, in return for a more equitable distribution of the pie slices. Through taxes, welfare and other programs, the government intervenes in markets and causes some amount of inefficiency — deadweight loss — in exchange for a more just distribution of wealth. 

Regardless of your political preference, the basic assumption of the pie model is that the pie is always growing. Unfortunately, this may no longer be the case in the relatively near future. A raft of demographic evidence suggests that population decline in the developed world will place the economy — both in the U.S. and worldwide — under serious threat.

A common approach to predicting population growth and decline is the Demographic Transition Model, which consists of five stages. As a country develops economically and becomes more productive, it moves through the stages of the model. Stage 1 describes the least developed nations, which have a high birth rate and a high death rate. Stages 2 and 3 consist of the transition from developing to developed nation, where death rate and birth rate fall, one after the other. Stage 4 describes a developed steady-state, in which a wealthy country with robust healthcare infrastructure has a low death rate and a low birth rate, resulting in a large and stable total population. This stage of the model arguably characterizes much of the developed world today. However, the model also predicts an ominous Stage 5, in which the birth rate actually falls below the death rate. In this scenario, the total population of the country begins to fall, and, crucially, the national median age rises. 

It remains to be seen whether Stage 5 is a guaranteed reality for all nations at Stage 4. The U.S., for example, seems to have essentially maintained a replacement rate of two children per woman for many decades. Other societies, however, are aging – causing economic trouble across the developed world. Japan’s troubles amid a plummeting birth rate have been well-documented. China, too, is currently facing the consequences of its one-child policy, implemented in the 1970s. Despite pro-natalist policies in recent decades, the country is seeing a rapidly aging population. In the West, aging populations are also causing economic trouble. France, for example, recently raised its legal age of retirement from 62 to 64 amid concerns that the country’s pension fund would become insolvent. In the United States, the trust fund that makes Social Security payments is projected to exhaust itself in 2037.  No longer are these predictions a concern of the distant future. 2037 is 15 short years away — and the adults currently in middle age will likely be the first to lose their Social Security benefits. 

In all of these developed countries, the threat of insolvency looms large, because their working-age population is quickly losing ground to a growing number of retirees. The robust social safety net that supports the elderly relies on the economic productivity of those younger than them. Put simply, there are not enough young people right now. Given the fiscal constraints of safety net programs and intense political reliance on perpetual economic growth, developed countries will soon be facing a shrinking pie.

What does this shrinking pie mean for the political visions of the economy? On both sides of the aisle, it demands a radical rethinking. As this demographic shift runs its course over the next half-century, the party who is best prepared to respond to a rapidly changing economic position will win the day.

Both parties need to consider how their economic model functions in a shrinking-pie scenario. The conservatives need to ask themselves: is perpetual growth even possible? Are we facing demographic constraints that will prevent us from growing the pie at all? If growth is no longer possible, then, should we consider splitting the pie more equitably? The conservative economic mindset encourages growth at all costs, but as a result, it does not have a contingency plan when times get tough. Under population decline, even the most free-market policies may not be able to save the economy from austerity. Conservatives need to consider how they will respond when growth is no longer possible, and economic hardship demands a just response. 

On the left, the shrinking pie challenges the assumption that it is still possible to sacrifice growth in exchange for equity. If the U.S. is facing a future of demographic transition and economic austerity, then it stands to reason that we should take every opportunity to grow what we can, as opposed to sacrificing what little growth may be available. As a declining workforce puts strain on the economy, it may no longer make sense to sacrifice growth in exchange for redistribution. In our current economy, we have enough surplus economic product to redistribute wealth — but as growth slows, this may no longer be possible without forcing greater austerity on everyone. 

No matter your political preference, the threat of the shrinking pie must force a dramatic rearranging of economic visions. American economic policy needs to escape its obsession with growth in order to effectively confront the challenge of population decline.