How Population Trends Will Impact Growth, Inflation, Investing, and Well Being
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today's episode 395. It's titled, How Population Trends Will Impact Growth, Inflation, Investing, and Well-Being. This month, the United Nations released their World Population Prospects.

This revision for 2022 looks at a range of plausible outcomes at the global level, regionally, and nationally. Current world population in 2022 is about 8 billion individuals.

Based on the UN's latest projections, world population is expected to be 8.5 billion in 2030, 9.7 billion in 2050, and 10.4 billion in 2100. Importantly, world population is expected to peak in 2086 at 10.4 billion.

Consequently, those last 14 years, world population is expected to stagnate, to stop growing. Global population trends are determined by birth rates and life expectancy. At the national level, the other factor that impacts it is net migration. Are immigrants allowed into the country or are migrants leaving?

In 2019, global life expectancy reached 72.8 years. That is nine years greater life expectancy since 1990. But it actually shrank in 2021 from 72.8 years down to 71 years due to COVID.

The expectation, though, by the UN is that average longevity will reach 77.2 years by 2050. So about six years longer than it was in 2021. Life expectancy for women is higher than for men, about 5.4 years. Average female life expectancy is 73.8 years versus 68.4 for men.

Because women live longer, they make up more of the population of the older population, those over 65. Globally, women comprise about 56% of persons 65 years or older.

Life expectancy is higher in higher income, more developed countries. If we look at the least developed countries in the world, their average life expectancy is seven years behind the global average. And that's due to high levels of child mortality and maternal mortality. And in some countries, it's violence and conflict and diseases.

Global population then is increasing as we look over the next 60 years because life expectancy is increasing. Fewer individuals are dying. What is holding back population growth is birth rates. In 2021, the average fertility of the world's population was 2.3 births per woman over the woman's lifetime.

That has fallen from five births per woman in 1950. The UN expects fertility to decline to 2.1 births per woman. Fertility is decreasing. Women are having fewer children. Families are having fewer children because infant mortality and child mortality is decreasing. Families are choosing to have fewer children so that they can

invest more in the children that they have, and because it's costly to raise a child. With greater survival rates, families are just choosing to have fewer children.

With a lower birth rate, the population growth is shrieking. It is now under 1%. Back in the 1970s, the population was growing at more than 2% per year. As the population increases, it's a bigger number, and so that also impacts the growth rate.

More than half of the projected increase in global population is found within eight countries. The Democratic Republic of the Congo, Egypt, Ethiopia, India, Nigeria, Pakistan, the Philippines, and the United Republic of Tanzania.

different population growth rates will impact the most populated country in the world. Right now, China and India each have approximately 1.4 billion individuals. India's growth rate is higher. And so by 2050, India is expected to have 1.7 billion individuals, while China will have 1.3 billion.

China's population is shrinking. By 2100, India is expected to also see a lower population of 1.5 billion, but China will be at 800 million.

Much of the increase in global population through 2050 is driven by youths that are already around. The current population and just those children growing up and having more children, even if they only have two children per couple, will still see a population increase just because they're already here.

Some countries, though, will not grow at all. Japan, for example, 124 million individuals in 2022, expected to be down to 104 million in 2050 and 74 million in 2100.

The UN is projecting that the U.S., which has 338 million individuals this year, will grow to 375 million in 2050 and 394 million in 2100.

There are two major themes in looking at this data. The first is aging populations. As global population growth slows and peaks over the next 60 years, overall, and as longevity increases, populations are aging. And that plays into what's known as the dependency ratio.

How many working individuals are there for those that are not working? Either they're very young or they're very old. Those dependency ratios will be increasing around the world. The second impact, as we look at these trends, is that higher income countries with low birth fertility rates

will only be able to sustain their population by bringing in migrant workers. The UN writes, over the next few decades, migration will be the sole driver of population growth in high-income countries. By contrast, they said, for the foreseeable future, population increase in low-income and lower-middle-income countries will continue to be driven by an excess of births over deaths.

But think about that in the U.S., Europe, Japan. They will need workers, particularly as the dependency ratio gets higher. I did a brief look online just to see how different countries are dealing with this. There was a news article in Luxembourg where they launched a new website, the country to attract workers, particularly in the IT space. Julian Evans, director of recruitment at

at KR Recruitment said, it is now astronomically expensive to live in Luxembourg. Everyone finds out what the costing of renting or living is, and you get people saying, no way, they're not going to want to work in the country. But they're competing. They're trying to get IT workers. The German government is planning to simplify the process for recruiting foreign workers, particularly in the hospitality space.

Much of the airline woes at airports has been due to not having enough workers, and countries want to invite those workers to work in their country.

I saw a news item about in Italy, individuals can purchase a home in some towns for only one euro if they agree to restore it or renovate it. In countries with shrinking population, there's too much housing and the towns are shrinking as individuals move to the cities. Consequently, these towns are

are also competing for citizens, for the tax base to support the infrastructure of the city. There will be competition for workers, for residents as population growth slows, stagnates, or even shrinks. Now let's go back and consider this aging population situation. Is that deflationary with falling prices or inflationary?

My initial thought was it's probably deflationary because if the aging population is combined with less people, then that potentially is deflationary. But if we just isolate aging population on its own, there are some studies that suggest that is inflationary. It can lead to a rise in prices.

Here's what Charles Goodhart and Manoj Pradhan wrote in their 2020 book, The Great Demographic Reversal. Put simply, improvement in the dependency ratio are deflationary since workers produce more than they consume while dependents consume but do not produce. The sharp worsening in the dependency ratio around the world means that dependents who consume but do not produce will outweigh the deflationary workers.

If there's less working age population, fewer workers per retiree or the young, then potentially the workers aren't producing enough for the individuals who aren't working. That could lead to capacity constraints, which will push up prices and inflation. There could be greater demand for fewer goods. One study that the Great Demographic Reversal book referred to was by Mikhail Khrushchev.

Druselius and Elad Takats.

They looked at 22 different advanced economies. Data set was from 1870 to 2016. And they write, we find a link between a population's age structure and inflation. A larger share of young and old in the population is associated with higher inflation. Conversely, a larger share of working age people is associated with lower inflation. They gave an example in the U.S. where there was a high share of dependents

high dependency ratio in the 1950s and 1970s, and that contributed to higher inflation during that period. Whereas from the 1970s to 2000s, when there were more workers, the dependency ratio fell, there was lower inflation.

Interestingly, though, what they found was that for the oldest cohort, if there were more individuals over 80, that actually wasn't inflationary. That was more deflationary, maybe because those over 80 just didn't consume as much as the non-working population between ages, let's say, 60 and 80.

Why is it, though, an aging population could lead to inflation? Well, the one reason we pointed out, capacity constraints. If workers just aren't producing enough goods that older individuals are consuming, then that could lead to inflation. There could be labor shortages, and that could lead to greater bargaining power by workers pushing up real wages.

particularly if there's more unionization. I saw one report in The Economist where, this is based on Bureau of Labor Statistics data, that the share of American workers that belong to unions continues to fall. It was 10.3% last year compared to 10.8% in 2019. Back in 1983, it was 20% of American workers were unionized.

And the all-time high was in 1954 at 35%.

Most union workers are government employees. About 40% of government employees are represented by unions, whereas the private sector workers, it's only 6%. The only category that saw an increase in union representation in the past year were 18 to 24-year-olds. And where there's been a lot of news reports about certain workers at Apple stores or Amazon workers who tend to be younger, there have been successful union drives.

Perhaps that expansion in unions and bargaining power for wages will increase as populations age, and that potentially is inflationary. The deflationary aspect of it, though, is productivity improvements, more technology, the ability to produce more with fewer workers. Certainly, that could impact the inflation versus deflation outcome.

Before we continue, let me pause and share some words from this week's sponsors. Another area that could lead to higher inflation as populations increase is the strain on the world's ecology, natural resources. I read a paper in an interview with Herman Daly, who is an emeritus professor at the University of Maryland. He's a former senior economist in the Environment Department of the World Bank.

He describes the world we live in as a full world where potentially maximizing or maxing out our natural resources, where he writes that natural resource flows are now the scarce factor compared to labor and capital. He writes, what ultimately limits the production of cut timber? Is it the number of chainsaws, sawmills, and lumberjacks, or the remaining forest?

and the growth rate of new trees. What limits the crops from irrigated agriculture? The number of pipes, sprinklers, and pumps? Or the stock of water in aquifers, their recharge rates, and the flow of surface water in rivers. As the population increases by another 2 billion individuals over the next 60 to 70 years, will that lead to even more constraints on natural resources?

Daly argues that the global economy needs to transition to

what he describes as a steady state economy. Steady state economics was first developed or most developed by John Stuart Mill back in the late 19th century. In a stationary economy, the population and the amount of investment doesn't grow anymore, even though well-being could continue to improve.

Birth rates would equal death rates. Production would equal what is consumed. And this steady state economy could lead to an increase in well-being. Daly points out there's a difference between development and growth. He writes, when something grows, it gets bigger physically by accretion or assimilation of material. When something develops, it gets better in a qualitative sense. It doesn't have to get bigger.

He gives examples of computers. Computers can do more today than they ever have, even though they're not getting bigger. In fact, with laptops and tablets or phones, the actual material needed is getting smaller.

So it is possible to increase our well-being without necessarily getting more stuff or growing, producing, and grabbing more natural resources. One of the other flaws that Daly points out in the economy and how we measure the economy, which is typically measured by gross domestic product, GDP, the monetary value of what is produced, that only measures one side of the equation. GDP measures growth.

It doesn't measure the cost of that growth. If you subtract for the deaths and injuries caused by automobile accidents, chemical pollution, wildfires, and many other costs induced by excessive growth, it's not clear that well-being or a standard of living is improving.

We've been at our cabin here in Idaho overlooking the Tetons for two months now. Been a glorious, beautiful two months. But it's late July. Wildfires are starting. Some in California. There's a big wildfire near the Salmon River in Idaho. We're starting to get more smoke. The clarity, the clear air, the blue skies are less now than it was three weeks ago.

That doesn't improve our well-being. We'll be going back to Tucson here in a few weeks. It hasn't been the worst, but there's a cost, environmental cost, from climate change. Climate change that has been impacted by growth, human development. We need to look at both sides of the equation, the benefits as well as the cost.

When we think about what would the world be like without growth? Daly gives the example of an economy that needs to grow, and if it doesn't grow, that's the disaster. We call that contraction. It's a recession. But a steady state economy, if it doesn't grow, that's not a disaster because that's what it's designed for. Compares the steady state economy to a helicopter. It can just stay in place like a hummingbird. It's a different design than an airplane that needs to grow.

We will need to transition to a steady state economy because the population in the world is going to stop growing within 60 years.

Another thing that could push to more of a steady state economy is pollution, climate change. As countries with lower income, families with lower income, because they're just trying to survive, they're not focused on reducing the amount of pollution. But once they get to a certain level of income,

particular higher incomes, there ends up being in countries more of a focus on the environment. This is called the environmental Kuznets curve. It's like an upside down U. The amount of pollution goes up as countries develop, but then at some level of income per person, pollution goes up.

damage to the environment. Now, this is somewhat controversial. They're still working it out, but intuitively it makes sense. As our income goes up, we don't want to live somewhere that's polluted with polluted water, smoky and polluted skies. And as the world gets richer, hopefully there'll be a natural desire to reduce global warming and other negative environmental impacts.

So when we can consider the long-term population trends, the population growth is slowing globally. It will continue to grow for the next 60 years. We're at 8 billion now, expected to peak around 2086 at 10.4 billion. Many countries, higher income countries, will see their populations shrink and will need to offset that to reintegrate.

reduce the dependency ratio by bringing in more workers. There will be competition for workers. There's so many debates in many countries about immigration, not wanting immigration, but if you don't have enough workers and that's driving up inflation, that can change the motivation to bring in workers, to compete with workers, and potentially that could drive up wages and benefits if the worker pool is not large enough. We'll need to see

how technology and productivity improves, how that can minimize the number of workers needed, as well as the demand for things, for goods and services, how that demand shifts can impact the demand for workers and goods and services.

There is the potential inflation or deflationary impact of aging population, depending on the productivity improvements, wages, unionizations, and the supply of natural resources. How many inputs end up being needed to produce what the population wants.

Ultimately, the global economy will need to transition to a steady state because the population isn't growing and there are natural constraints with natural resources. How then could that impact investments? When we think about the value of a stock, its intrinsic value, what it's worth is the present value of its future dividends and the expectations that those dividends will grow over time.

Certainly will be the case for some stocks, but if you buy an index fund, if you own the entire world, thousands of companies and population growth is slowing or stagnating, at what point does that start impacting the valuation of stocks?

Now, that doesn't mean the stocks go to zero, but just like the value of a bond isn't zero. But if something is just not growing, we just get a steady state of income or, let's say, a steady interest amount or a steady dividend. We can live on that, but it's not a growth stock or a growth economy, and that potentially could impact the

the value of investments based on what is the embedded growth rate in that. And if it's not growing at all, then that potentially means that the stock doesn't appreciate or the investment. It just is worth what is worth based on the income yield, which means investors would have to save more because expected returns for investments would be lower.

One of the points that I forgot to mention in the studies on population and inflation in the book I mentioned by Charles Goodhart and Manoj Pradhan is both suggested that real interest rates, the

Neutral real rate of interest, what at the base level investors demand to lend money would increase because there would be less savings as populations age, as retirees live off their savings and draw those savings down. And that savings relative to the demand for that savings for investments to invest in new projects would

that there would be more demand versus the supply of savings, and that could push up real rates of interest. That contradicts what central banks believe, that the neutral real rate of interest has fallen because of slower population growth and just an excess of savings.

Now, a higher real rate of interest doesn't equate to higher inflation. It just means interest rates could be higher, which more of our returns potentially with a steady state economy, aging population, more will come from income versus capital appreciation just because across the economy, there wouldn't be the capital appreciation, the growth as much as we've had in the past. We don't know, but it's an interesting concept.

A steady state economy, which we will eventually transition to.

potentially in the lifetimes of many of us, is one focused on well-being, where we look at the benefits relative to the costs, not just the dollar amount of what is produced. We can implement that personally. It's certainly something that Lapril and I tried to focus on. Instead of spending hours and days thinking about what's the next purchase,

just being satisfied with what we have. These were themes outlined by a book I've mentioned numerous times in the past by E.F. Schumacher, Small is Beautiful. He says that wisdom is permanent, and the opposite of wisdom is the cultivation and expansions of needs. That cultivation and expansion, wanting and needing more, is the antithesis of wisdom, he writes.

and the antithesis of freedom and peace. Why? Every increase of needs tends to increase one's dependence on outside forces over which one cannot have control and therefore increases existential fear. The more things we want, the more time we need to earn the money to buy it. It restricts our freedom. It can stress us out.

By reducing what we need or want, that's how we reduce those tensions and increases our freedom. That's why he says our aim should be to maximize our well-being with the minimum of consumption to increase our freedom and our existential fear. Ultimately, the global economy will have to move that way also.

due to constraints in natural resources and just the population isn't increasing. Well, there isn't more people to buy more things. We've reached a steady state. We'll see if that is inflationary. It certainly is going to change the investment environment over the next 30 to 60 years. Fascinating concept. We'll see how it evolves. That's episode 395. Thanks for listening.

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