Why a Falling Birth Rate Is a Big Problem

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It sounds like one of those stories you can safely ignore: The U.S. birth rate has hit a record low, led by a big drop in the portion of immigrant women having babies.

[Photos: Kennedy Center Honors Led Zeppelin, Hoffman, Letterman]

This development doesn't directly affect anybody, since it's one of those long-term societal trends that occurs in small increments and doesn't change the unemployment rate, the price of gas, the direction of the stock market or any of the big economic forces that make our lives better or worse today. And since the trend is strongest among immigrants, it sounds like maybe this is something happening in a shadowy part of the economy that doesn't matter all that much.

But it does matter, and if the trend persists, it could mean lower living standards for most Americans in the future.

It may seem intuitively obvious that a slower-growing or declining population is good for the economy, especially when you think about starving children in poor parts of the world where there's not enough food for everybody. In places where resources are severely limited--and economic policies are dysfunctional--it may be true that a growing population is a bad thing.

But that's usually because such economies are static, and instead of creating wealth they typically just divide up what's already there. That's not the situation in America, which has a dynamic economy that creates wealth and more than enough resources for all of its citizens.

[See: What Keeps People Out of the Middle Class]

On the contrary, one of the great strengths of the U.S. economy, especially compared to Europe and Japan, is a relatively high birth rate, which keep the population young, on average, and population growth robust. "Everybody comes into world with one mouth and two hands," says economist Donald Boudreaux of George Mason University. "It's generally true that most people produce more than they consume."

A growing population is good for the economy when rising productivity continually reduces the amount of resources required to produce a given amount of output. Even now, with the U.S. economy in a rut and too many people out of work, productivity is rising, which means a larger population would generate more wealth per person than a smaller one. Boudreaux points out that Manhattan, one of the mostly densely populated places in America, is also one of the wealthiest, whereas rural states like Mississippi are sparsely populated, and much poorer.

The sizeable drop in the U.S. birth rate, reported recently by the Pew Research Center, has probably occurred because of the struggling economy. Though Pew didn't investigate the reasons behind the decline, birth rates tend to rise and fall based on how optimistic or pessimistic people feel. The U.S. birth rate peaked in 1957 (hence the "baby boom" generation), when the economy was booming and the unemployment rate was about 4.5 percent. It sagged in the 1970s, when inflation and other problems battered U.S. workers. The birth rate stabilized in the 1980s and stayed more or less level, until starting to dip again in 2008.

[Also: How Much Will the Fiscal Cliff Will Cost You?]

Since then, younger Americans have been waiting longer to get married, often because of economic difficulties. Married couples may be waiting longer to have kids, or having fewer kids, for the same reason. While the trends are more pronounced among immigrants, they're occurring throughout the U.S. population.

These types of demographic trends get the attention of economists when big changes might raise or lower the economy's capacity to grow--which could be happening now. Fewer marriages and fewer children lower the rate of household formation, which means people spend less on everything from appliances to clothing. "Fertility rates have plunged, and that will have an impact on future consumer spending," says Nigel Gault, chief U.S. economists at forecasting firm IHS Global Insight.

That trend could reverse itself if the economy picks up for good and Americans become convinced that happier days lie ahead. But for now, a dearth of babies and a limp economy may be reinforcing each other. A few more babies would be good for business.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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