One Finite Planet

One Finite Planet

the economic impact of population growth and immigration

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My suggestion in my future population posts is that population growth has a greater effect on economic indicators than on real wealth of citizens.  Here is an attempt to look at the economic impact of population growth, and what factors are real and identify any cases where indicators are positive beyond any real economic benefits.

Recession Protection.
The most referenced definition of a recession is two consecutive quarters of negative growth of GDP. Sine the test is GDP and not GDP per capita, clearly it is possible to meet the recession criteria in a time of growth of personal wealth increase given sufficient population decline.  Similarly, it is possible recession criteria under this definition through population growth, when otherwise the criteria would be met, through population growth alone.  That is, individual wealth could be in decline, but being offset by a larger number of individuals to ensure total wealth does not decline.

There are other criteria for recession, but most look economy wide so again are distorted by population change.  With a recession being measured over a two quarter period, the effects on an increasing population are relatively small so the recession protection delivered by population growth is marginal. Population growth will not mask a deep recession, only make the figures look marginally improved.  However if one country just technically qualifies for recession and another avoids recession,  it is worth examining population growth as the cause in place of economic factors.

Economic Population Growth = Total Population x Participation Rate.
Historic population figures do not always reflect the true picture in terms of economic population growth.  Only when society is structurally unchanged, does the total population change reflect the actual economic population change.  The factor that has changed with society is ‘participation rate’. This is the percentage of the population that can participate in the economy.  In the time of slavery, slaves were prevented from participating in most of the economy.  Many societies have had subsistence farming populations who have had a low participation rate.  Historically women had a lower participation than men in many societies.  Today in modern societies we see what we believe is maximum participation.  Babies still do not participate and children have restricted participation but almost all others participate in a modern economy.

As this participation has changed over time, economic population has effectively increased beyond total population, and in some cases very significantly beyond total population increase.  However we do not foresee further increases in economic participation in modern society so this effect in developed nations is generally only important for looking at historical data.

Stock Market Performance.
National stock markets are mostly dominated by national companies.  Local companies that do not serve an entire nation are extremely rare on the stock market, leaving international ventures and national ventures as the main entries.

Many of the national ventures are largely bound at national boundaries, and even exporting businesses often have a large component of national sales. So every company maintaining market share in an economy with a population growing at 2% should also grow at 2% every year, correct?  Actually most should grow more, as many businesses have a combination of fixed costs and unit costs, and only fixed costs increase with population, whereas all revenues increase.  So a 2% population annual increase can drive a 3% or 4% annual profit increase, with no increase in market share or increase in product price.  Combined with inflation, this process can deliver company value growth and share price growth.  Conversely the same business in a contracting population would naturally be a contracting business. The every increasing economies of scale are a real benefit,  but simply shipping more product in the ratio of population increase is of no benefit to society.

Looking at the US stock market, returns since 1900 are rated as an average of 9.4% and inflation at  3.4% over the same period.  This leaves a 6% yield above inflation. Population figures for the period state a 1.3% annual growth.  Ho much this is compounded by increased participation rates is complex to analyse, but there is clearly some compound effect.  In any event, since all products have some fixed costs which increase the impact of population growth this means between 25% and 50% of US stock market performance can be attributed to population growth over the period.

Real Estate Value Increases.
It stands to reason that the land component of real estate is a fixed commodity.  Yes countries such as the Netherlands have managed to add to their land mass, these are exceptions. Generally, each additional citizen means additional competition for the same total land area and thus according to the rules of supply and demand, and increase in the value of land.

Each nation has a basically fixed amount of real estate, but with population increase the total value of that real estate increases.  This creates an increase in national wealth as population increases.  Where the level of individual ownership of real estate is high it also creates an increase in average personal wealth.

Individual Industry Example: Banking.
When discussing economics, the banking industry is of specific interest.  Banks in most countries are national stocks and benefit as described above in ‘stock market performance’.  But banks are also involved in the real estate industry and also benefit protection of property values from ever increasing demand.  Many other factors including good governance, lack of corruption and a stable political system are all key to a strong banking system.  In short, a strong and stable banking industry is assisted by strong population growth.

Economic Boost from Immigration.
To be added.

What does all this mean for citizens?
Banking: Having strong and stable banks, has got to be a plus.  It could be argued that there is no logic to a drop in population putting the banking system at risk, but at this time and until we have change in the system, the suggestion is that there is a correlation between population growth and stable banking.  A benefit until the rules change.

Real Estate: While citizens on paper have increased wealth, they still own the same asset they would own if not for price pressure from increased population. So no real benefit to current owners and the younger general needing to compete in an ever more crowded market. Summary: A negative.

Stock Market: Those who hold stocks gain additional wealth paper wealth while holding the same stocks.  But with stocks representing national businesses, the stock available per citizen drops and the whole process reinforces the concentration of wealth, which is bad for social harmony.  Real business competition can suffer as businesses the thrive by simply benefiting from population growth hinder the development of true productive business.  Summary: A negative for the economy as well as the individuals.  

Recession Protection:  The economy as experienced by the individual is not improved by avoiding the declaration of a recession when times are bad.  The effect in the economic indicators is less relevant to detecting a recession than in general flattering the competitiveness of the economy.  There are arguments for why it is better to recognise relative performance accurately, and arguments as to why it may be better if others perceive the economy as better than it actually is.  Summary: Neutral. (but warranting further consideration)

Overall: Neutral.

Table of Contents


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