Economics of population growth

Mark Crosby over at Core Economics has a post on population economics that created stress for me.  Stress because it argues an intellectual position I (and many others) have being trying to combat for many years.  

Mark uses the Solow-Swan neoclassical growth model – a representative agent model – to suggest that claim that reduced population growth will increase living standards.  This claim is, in fact,  probably correct but you can’t get it from a neoclassical growth model and attempts to do so lead to the policy error of trying to address population size as a primary concern rather than what people can do once they join a population. Such a model effectively assumes a communist state where new people share equally in the extra output and assets generated by their existence as a birth-right without paying anything. This this isn’t the way competitive markets operate at all.

Having extra people in a neoclassical world without market imperfections increases the gains-from-trade to the original residents sanctioning the increase. The original people have increased opportunities to trade because the new people (whether migrants or the progeny of original residents) exist and therefore offer more potential trades. Admitting more people is like removing a prohibitive tariff on international trade – more potential trades can occur – so that Pareto welfare gains must inevitably result.  This is first-year economics though generations of thinkers in the area of population economics have manufactured theories which obscure this.

The ‘common property’ error says that new people gain access to a society’s assets without paying anything – in particular they share equally in the returns to the pre-existing capital stock. In fact extra people (migrants or your children) must either buy assets (housing, cars, equities, business premises) from pre-existing people on terms that are acceptible to the original owners or (luckily in the case of progeny) have them assigned as voluntary bequests. On all these bases there are gains to the original people since no-one twists their arms to do such deals.  Provided the new people are happy living – so the newborn don’t wish to suicide and migrants don’t want to go home – then the newcomers are better-off as well.  We are all happily better off (on average) when there are more of us provided markets work! Bliss!

Of course the neoclassical model itself is totally wrong and misapplied in this situation. But there is a real and substantive case against population growth has nought to do with the main factor Mark identifies, namely spreading the capital stock more thinly over a bigger population.  It has to do with distortions in markets which mean extra people don’t necessarily add to welfare – subsidised education and health schemes, the existence of unpaid-for public goods and environmental externalities such as congestion and population-induced pollution, adverse selection of high risk migrants with poor health or with terrorist inclinations are all enough to mean extra people do not necessarily imply average gains to all. Its these distortions – not numbers of people or growth rates in numbers of people –  that should be a policy focus in addressing population size issues.

In addition equity issues arise weven if there are gains-from-trade vas a consequence of population increase. Having extra people – who have no capital resources – switches the functional distribution of income against labour.  Wage earners can lose out even if there are average gains to all overall. This is an important issue in Australia where workers are identified as the long-suffering children of Jesus and capitalists are seen as cigar-smoking narks who fleece the masses of their hard-earned savings.

All these concerns (externalities, equity) can be addressed by pricing the externalities and taxing the capital gains asset owners (e,g. house price gains) derive – a broad conclusion myself (and many others) have been arguing for 20 years or more. Another way of putting this is to say: the better we price the environment and get rid of pure public good inefficiencies the more we can enjoy the gains-from-trade advantages of a larger population. Ditto if we are prepared to remedy equity concerns with redistributive taxes.

The communist inspired myths of the neoclassical growth model parable tell us zero about how competitive economies respond to population growth.  The problem is that an externality has crept into this model – namely that assets are common property and not individually owned.  That’s at best an exaggeration and at worst a myth. This externality is an artifact of ‘representative agent’ modelling – but there are real externalities and equuity concerns which are not at all artifacts.

Generally my view is that we should be wary of unbridled population growth because of the externality, public good and equity concerns I raise.  I used to argue strongly for removing these distortions but, while that’s true, there are long-run political constraints on doing this.  These constraints are real and hence we should be cautious about moving towardsw a much larger population on the basis of competitive equilibrium arguments.  In addition, I think there is an optimal degree of solitude in society – too many people can be hell because the flood of messages overides the gains-from-trade.  An interesting question is whether the birth rate and demands for immigration are elastic enough with respect to the efficiency-promoting policies I mention so that a long-run population emerges which prevents the Australian population from reaching 5 billion even without anti-natalist policies or immigration quotas. For example, if we do levy congestion taxes in our cities and price all other analogous externalities will the birth rate drop and will fewer migrants wish to come here. My guess is that with enough people the externalities and income redistribution effects will become so severe that population will converge towards a replacement level not too far north of where we are now. But that is a hand-waving guess that I’ll leave to a new generation of population thinkers to resolve. (942)