A Retrospective Look at the Financial Crisis

Beyond demographics

Chief Economist Eugenio Alemán and Economist Giampiero Fuentes note that the global population is heading into a sustained decline for the first time in recorded history.

To read the full article, see the Investment Strategy Quarterly publication linked below.

The global population has surpassed 8 billion and according to the United Nations, it is projected to reach 9.7 billion in 2050.¹ However, the rate of population growth is slowing and is expected to continue to decline. Seems counterintuitive, no? Under the current demographic trajectory, the global population will likely follow a sustained decline for the first time in recorded history starting toward the end of the century.

Two factors are reinforcing this trend. Global life expectancy continues to increase and is expected to reach 77.2 years by 2050.² This is an almost five-year increase compared to today’s life expectancy, almost ten years higher compared to 1950, and more than thirty years higher compared to 1900. Second, the level of fertility at which a population replaces itself from one generation to the next, sometimes known as a country’s population replacement level or total fertility rate (TFR), has been declining steadily for decades. The current world’s TFR is ~2.3 but estimates suggest that the rate will fall below 2.1 around 2050. By 2100, 183 out of 195 countries will have fertility rates below population replacement levels.³

With improvements in public health, better living conditions, and overall environmental improvements, it is relatively easy to understand why human life expectancy has increased over the years. Additionally, the number of people living below the poverty line has declined over the last three decades from over 2 billion people to 700 million. Fewer people will go undernourished and without access to safe drinking water. These trends are expected to continue, improving the quality of life among developing economies while increasing longevity.

The west is getting old

Who’s going to fund programs like Social Security if the population is declining? Let’s look at the numbers: in the field of demography, a country’s population dynamic can be illustrated by the distribution of age group and gender. When the population is growing, this distribution is shaped as a pyramid, with more younger people at the bottom, and fewer older people at the top. The charts below illustrate what the United States population looked like in 1900, when the population was growing rapidly and how it looked in 2020.

Over time, the fertility rate in the U.S. declined, the median age increased from ~23 to ~39 years old, and the pyramid started to widen in the middle-aged groups. As this trend persists over time, fewer younger people will mean fewer people giving birth. The bottom line is that over time, with the combination of higher life expectancy and lower births, the U.S. population will likely continue to grow older, running into the risk of having an inverted population pyramid in the future.

The U.S.’s TFR has been in a narrow range of 1.7 to 2.1 births per woman since the 1970s, and it’s been below the replacement level for most of this period. However, during the same period, the U.S. population has increased by roughly 120 million, with approximately half of that surge attributed to net migration. In fact, if it wasn’t for immigration, the U.S. would have likely already joined (or be close to joining) the likes of Japan, Italy, Greece, and Portugal, in having a shrinking population.

An inverted population pyramid is not good news when it comes to demographics and economics. This is because the age dependency ratio, which measures the dependent population (between the ages of 0 and 14, and older than 65), divided by the population typically in the labor force (between the ages of 16 and 64), increases. Growth in the age dependency ratio means that fewer working people will be available to support more dependents. For example, in the United States in the 1950s over six people supported each dependent, while today there are fewer than four people for each dependent, meaning fewer working-age people carry a larger burden.

A smaller working-age population contributes to shortages of workers and lower production capacity, which ends up hurting economic growth. Similarly, fewer workers means a tighter labor market, which can ultimately lead to higher labor costs as well as upward pressure on prices, i.e., higher inflation. Fewer workers also means lower tax revenues, which could deal additional blows to the already difficult pension commitments of governments. This could put even more pressure on the ability of the U.S. government to support government programs, on fiscal deficits as well as debt levels over time. If these problems are not faced head-on, developed countries may be forced to issue more debt to support their respective aging populations over time, which combined with large issuance of debt to fight economic crises only adds to already large national debts long term.

In the United States, Social Security, Medicare, Medicaid, Children's Health Insurance Program (CHIP), and marketplace subsidies spending account for 10.7% of GDP, but according to Congressional Budget Office (CBO) projections, these expenses will account for 14.3% of GDP by 2050. 5 Furthermore, a declining working-age population will have a negative impact on tax revenues. While these projections are developed under current law, therefore assuming no changes in tax revenues and/or expenses, the increase in the aging population will continue to have an impact on the U.S. budget.

Enhancements in productivity and the evolution of artificial intelligence (AI) offer hopes of alleviating the situation, but the country will still need more people to meet the growing needs of an aging population. Thankfully, the U.S. is still considered by many as the land of opportunity, confirmed by the over 10 million nonimmigrant visa approvals and nearly 500,000 immigrant visa approvals issued in 2023.6 The large number of immigrants to the U.S. over the last few years has increased the supply of available workers, allowing the country to add a record number of jobs without putting excessive pressure on wages, and ultimately additional unwanted pressures on inflation. However, despite this large number of immigrants, the U.S. still has ~8 million job openings that are going unfilled as employers struggle to find workers.


1,2 https://www.un.org/en/global-issues/population

3  https://www.healthdata.org/news-events/newsroom/news-releases/lancet-world-population-likely-shrink-after-mid-century

4 https://www.worldbank.org/en/topic/poverty


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