Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / Why the US Birth Rate Matters for the Economy
Transcript
- Lucas: So the US birth rate hit a new record low in 2024 — 1.66 births per woman. That's below the 2.1 replacement level, and it's been below it for over a decade now. Luna: Right, I've seen that number. It's not as dramatic as South Korea's 0.72, but it's still a big shift for an economy that's always counted on population growth. Lucas: Exactly. And that's the angle I want to drill into today — not the scary headlines, but what 1.66 actually means for the economy. Not just in 2050, but in the next five to ten years. Luna: I think a lot of listeners hear 'falling birth rate' and immediately think 'Japan-style stagnation.' But the US is different — we have immigration, higher productivity, a younger demographic profile. Lucas: Yeah, and we're not trying to predict a collapse. But there are real economic consequences. Let's start with the most direct one: the labor force. Luna: If you don't have enough young people entering the workforce, eventually you run out of workers. That's the basic math. Lucas: Right. The US labor force grew about 0.5 percent per year over the last decade. That's already slower than the 1 percent-plus growth we saw in the 1990s. With a fertility rate of 1.66, that natural growth — from births alone — turns negative eventually. The only reason the US workforce is still growing is immigration. Luna: So immigration isn't just a cultural or political issue — it's an economic necessity. The US needs about 1 to 1.5 million net new immigrants per year just to keep the workforce stable. Lucas: That's the estimate from the Congressional Budget Office, yeah. Without that, the dependency ratio — the number of retirees per worker — would skyrocket. Social Security and Medicare are already under pressure. Luna: And that's the second big consequence. Fewer workers paying into the system, more retirees drawing benefits. The 2024 Social Security trustees report says the trust fund is projected to be depleted by 2035. Lower birth rates push that date closer. Lucas: Which is why you hear proposals to raise the retirement age or increase payroll taxes. But those are politically tough. The demographic math doesn't care about politics. Luna: Speaking of tough math — the housing market. Less population growth means less demand for new housing, right? But we're in a housing shortage now. How does that reconcile? Lucas: It's a timing mismatch. The shortage is now because the millennial cohort — the largest generation — is in their prime home-buying years. That demand will peak in the next five years or so. After that, with fewer children being born, long-term housing demand could soften. Especially in suburbs and rural areas. Luna: So you could see a bifurcated market — city centers staying strong because of knowledge workers and immigrants, but exurban sprawl losing value. Lucas: Exactly. And that ties into remote work. If you don't need to live near an office, you might move to a lower-cost area. But if you're a young family, you still need schools, childcare, community. Those amenities are harder to maintain in shrinking towns. Luna: I want to pause on that point about young families. The 1.66 number is an average. But the fertility rate for native-born women is even lower — around 1.5. The overall rate is boosted by higher fertility among immigrant women, which also tends to converge to the native-born average over time. Lucas: That's a key nuance. The decline is broad-based. Women are having fewer children later, and more women are choosing not to have children at all. The share of women aged 40 to 44 who've never had a child has doubled since the 1990s, to about 20 percent. Luna: And the reasons are well-known — cost of childcare, housing, student debt, economic uncertainty. But what's interesting is that even when the economy is strong, birth rates don't rebound much. It's a structural shift, not cyclical. Lucas: That's the part that worries economists. If it were just a recession effect, you'd see a bounce-back. But the US fertility rate has been below replacement since 2007, and it kept falling even through the long expansion of the 2010s. Luna: So what can policy do? The usual proposals — paid leave, child tax credits, subsidized childcare — have been tried in other countries with mixed results. Sweden's policies raised the fertility rate from 1.5 to about 1.9, but then it fell back to 1.5. Lucas: Right, which we covered in episode four. Pro-natalist policies can help at the margins, but they're expensive and don't reverse the trend. The US spends about 0.5 percent of GDP on family benefits; Sweden spends about 3.5 percent. And their fertility rate is still below replacement. Luna: So maybe the better approach isn't to try to boost birth rates, but to adapt to a lower-fertility future. That means higher productivity, more automation, and smarter immigration policy. Lucas: I think that's the most realistic path. The US has an advantage over Japan and Europe because our productivity growth has been stronger. We've averaged about 1.5 percent per year over the last decade, and with AI and automation, that could accelerate. Luna: But productivity gains don't automatically translate into higher GDP if the workforce is shrinking. You need both — more output per worker and enough workers. Lucas: Which brings us back to immigration. The US has a more flexible immigration system than most developed countries — not perfect, but we admit about a million green card holders per year. That's a huge demographic advantage. Luna: And immigrants tend to be younger, have higher labor force participation, and start businesses at higher rates. So they're not just filling jobs — they're creating them. Lucas: Let me give a concrete example. About 25 percent of US entrepreneurs are immigrants, even though immigrants make up about 14 percent of the population. That's a disproportionate contribution to innovation and job creation. Luna: So the story isn't all doom and gloom. But there are real challenges. One that doesn't get enough attention is the impact on local government finances. Fewer children means fewer students in schools, but the fixed costs of school buildings and administration don't shrink overnight. Lucas: Yeah, that's a great point. School districts are funded largely by local property taxes. If enrollment drops, you still have to pay for the building, the heating, the principal. So per-pupil costs go up, or you have to consolidate schools — which is politically painful. Luna: And that's happening now in places like rural Pennsylvania and upstate New York. School closures are a leading indicator of demographic decline. Lucas: But let's bring it back to the macro picture. The US economy in 2026 is still growing at around 2 percent. That's partly because of productivity, partly because of immigration, and partly because we're still working through the demographic momentum of the millennial generation. Luna: Momentum is a good word. The population is still growing, just more slowly. The Census Bureau projects that the US population will peak around 2080 at about 400 million, then start to decline. Lucas: So we have a couple of decades to adjust. But the decisions we make now — on immigration, on retirement age, on childcare support — will determine whether that adjustment is smooth or painful. Luna: I think a lot of this comes down to a basic question: can an economy grow without population growth? The answer historically is yes, but it requires innovation and productivity gains that are hard to sustain. Lucas: And that's the debate. Some economists say we need to embrace a steady-state economy with slower growth but higher quality of life. Others say that's defeatist and we need to find ways to keep fertility rates up. Luna: I don't think there's a right answer. But I do think understanding the numbers helps us have a more honest conversation. And honestly, if walking through the economy with us has made something click for you, that's the kind of thing that keeps this show ad-free. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to help if the show's been useful. We don't run ads, so that direct support is what keeps us going. And we appreciate it. Luna: Absolutely. So back to the demographics — let's talk about one more specific consequence: the impact on innovation. Fewer young people means fewer fresh ideas and fewer startups. Lucas: That's a hypothesis that's been studied. There's a paper by economist Benjamin Jones that shows the age of peak innovation is around 40, but the rate of innovation per capita does correlate with population growth. More people means more potential Einsteins. Luna: But we also have tools like AI that amplify the output of each individual. So maybe the relationship changes. Lucas: Maybe. But the data so far is mixed. What's clear is that the US has a window of opportunity to get the policy mix right. We're not Japan in the 1990s. We can learn from their mistakes. Luna: And one thing Japan did wrong was restrict immigration. They're only now opening up, and it's probably too late to reverse their decline. Lucas: Right. So the takeaway for the US is: don't slam the door on immigration, invest in productivity-enhancing technology, and maybe rethink how we support families so that those who want to have children can afford to. Luna: Sounds like a plan. And a good place to leave it for today. Lucas: Yeah. Next time, we'll look at one specific industry that's being reshaped by demographics — maybe healthcare or education. Thanks for listening.