Wednesday, April 9, 2008

Does Overpopulation Cause Declining Wages?

I had a little debate with the author of this blog (http://openwindowpublishingco.com/cgi/wp/), who posted a comment to my recent entry reviewing the book, Free Trade:

Here is how I understand your theory: overpopulation (and thereby immigration) eventually causes less per capita consumption due to the limits of land and space for consumables. In other words, as population increases, space decreases, and at some point, consumption must decrease, especially because overpopulation also causes less wage growth. The problem with any economic theory based on overpopulation is that the U.S. is one of the least densely populated places in the world. Also, the idea of physical space limiting consumption only applies to certain industries, such as autos and boats. It is far more likely that spending will increase as people buy smaller products, such as an iPhone or a laptop, which need to be replaced more often than larger products. In addition, more workers are necessary to pay the Medicare and Social Security liabilities we've built up, and some economists estimate 50 to 99 trillion dollar liabilities with respect to government entitlements/programs.

If your overpopulation/anti-immigration theory is correct, then people, especially younger ones, would be flocking to open spaces, such as Indiana and South Dakota, and states with smaller cities would have a higher GDP per capita. But a quick look at the following websites shows that CA (#11 and 10), Illinois (#14, 14) and NY (#5, 5) have relatively high per capita income:

http://www.top50states.com/average-job-salaries.html (2005)

http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_per_capita_%28nominal%29 (2006)

What you are really saying is that the fewer the people in a country, the more work there is for the existing residents, because competition is less; however, promoting population decline is a good idea only if you want to be a slow growth country. Part of growth means making way for the younger population and immigrants who can found companies, such as eBay (Iranian/French), Sun Microsystems (Indian), Google (Russian), Yahoo (Taiwan), and probably at least 30% of the start-ups in San Jose, CA:

http://blogs.zdnet.com/ITFacts/?p=12064

Immigrants who found companies in the U.S. create more jobs and also penalize the countries that couldn't keep them (referred to as the "brain drain"). So your argument is flawed, because it assumes population growth is automatically responsible for declining wealth and declining wages in all industries. Such an argument is simply not true--and if it were, NY and CA would not be at the high end of the per capita salary list. (You could counter with TX at #27 and #20, but that is still nowhere near the bottom of the list, as your argument would require.)

What is true is that certain industries, such as manufacturing, will see a drastic decline in wages, while employees in other industries, such as nursing, hotel ownership, marketing, advertising, and law, will experience a higher per capita wage increase. The primary issue is what should be done about the prospect of declining wages in industries that can easily outsource jobs or that require little training (e..g, McDonald's). I wish I knew the answer to that, but all I can come with are 1) job re-training programs; 2) better education, especially at the high school level; 3) longer periods of time unemployment insurance can be collected; 4) corporate acceptance of some due process prior to being terminated for cause, such as IBM's peer review panel, in exchange for an agreement that if the employee pursues litigation, s/he would be liable for the company's attorneys' fees [Update: up to a reasonable cap, such as 20% of total compensation at the time of his/her termination] if s/he loses in court and would be barred from receiving attorneys' fees; 5) elimination of all civil laws except for wage and contract laws relating to businesses with fewer than six non-family employees and/or gross revenue of less than 575,000 dollars per year (thereby encouraging entrepreneurs and small businesses); and 6) heavily subsidized health care benefits financed by higher taxes on gasoline, "sin taxes" (on cigarettes and alcohol), and also a sales tax that would go to the state (notice I said state, not federal) agencies administering the health care programs. Subsidized health care would create service jobs that could not be outsourced and which would also increase wealth across the board by decreasing all Americans' health care costs.

In addition, note that U.S. homeowners will also see a higher wealth effect as demand for homes increases because of population growth (after the market corrects the current bubble, which was good for most homeowners in the U.S. who already owned homes). Thus, while certain wages may decrease, net worth may actually increase due to higher demand for certain products.

Note: here is a counterargument to my post:

http://www.epi.org/content.cfm/bp196

This article says that because 70% of the American workforce is involved in "production/manufacturing" work, outsourcing will cause major displacement that presumably cannot be moderated by legislation or piecemeal benefit programs.

Also, on a separate note, Switzerland's prosperity may indicate that a slow growth economy can work in certain circumstances, assuming a liberal guest worker program (apparently, about 15 to 20% of the workforce in Switzerland are from other countries).

1 comment:

5sbauthor said...

K_Yew, thanks for the opportunity to continue the discussion and explain my theory further.

First of all, regarding the decline in per capita consumption that occurs when population density rises beyond an optimum level, I'd like to make a couple of points.

1. You said "...the idea of physical space limiting consumption only applies to certain industries, such as autos and boats. It is far more likely that spending will increase as people buy smaller products, such as an iPhone or a laptop, which need to be replaced more often than larger products." Actually, per capita consumption data from around the world indicates that almost every category of product is affected. Japan is a good example because it is one of the wealthiest nations on earth (thus, their per capita consumption is not low due to poverty) and because they are ten times more densely populated than the U.S. Let's begin with dwelling space. The average dwelling in Japan is less than a third of the average American dwelling. Thus, their per capita consumption of every product used to manufacture housing - lumber, drywall, concrete, nails, wiring, plumbing, electrical fixtures, flooring materials, roofing materials, windows, doors, etc., etc. is dramatically reduced. Their per capita consumption of vehicles is about 25% less than in America, and the vehicles are much smaller, affecting not only per capita vehicle consumption but also the consumption of steel, plastics, glass, rubber, etc. Their per capita consumption of lawn and garden equipment is about half that in America. Their per capita consumption of golf equipment is one third that of America's. Their per capita consumption of pleasure boats is almost non-existant. Their per capita consumption of household appliances is half that of America's. Even though this sounds counter-intuitive, their per capita consumption of personal computers and phones of all types is also less than in America. Why? It goes back to the premium on space to store products. Because they are crowded into tiny dwellings, they are forced to share these items. There's not enough room to store multiples. And consider the per capita consumption of infrastructure: for example, their per capita "consumption" of roads is only 40% of that in the U.S. This pattern holds true not only in Japan, but throughout the entire world.

2. When I spoke of falling per capita consumption as a result of rising population density, I think that you missed the qualifier I included: "beyond an optimum population density." Until that point is reached, a growing population is in the best interest of both the common good and business (corporations). For the common good, we needed more workers to man our factories, producing the goods needed for a high standard of living. This population growth translated into sales volume growth for corporations. Both were happy. But, once an optimum population density is breached, their interests diverge. It is in the best interest of the common good to stabilize the population, avoiding an erosion of our quality of life through high unemployment and poverty. However, it is still in the interest of corporations to fuel population growth because, even though per capita consumption goes into decline, total consumption still increases. We now find ourselves in the position of having corporations and economists influencing public policy in a direction that is not in the best interest of the common good.

Returning to the example of Japan and their per capita consumption of housing: even though their per capita consumption is less than a third of that in the U.S., because their population density is ten times higher, their total consumption of materials used in the manufacture of housing is three times higher than it would be if their population density was the same as that in the U.S. Therefore, it is in the interest of the average Japanese citizen to shrink their population, affording them the luxury of living in larger homes and also increasing the percentage of the population employed in the manufacture of housing and materials used in the construction of housing. But, at the same time, it is in the best interest of corporations (and economists, if they are focused only on the macroeconomy) to support never-ending population growth to drive total sales volume higher.

3. Regarding the U.S., have we breached the optimum population density? It's a very difficult question to answer, but I think the following evidence indicates that we have:
a. There are some categories of products for which our per capita consumption is already lower than less densely populated nations: infrastructure, lawn and garden equipment, golf equipment, pleasure boats, household appliances, and others.
b. We hear lots of talk about our dependence on foreign sources of energy. What few people realize is that we are dependent on foreign sources for every category of natural resources. We have a trade deficit in every category of natural resources - even food.
c. The U.S. is more densely populated than it first appears. We have vast areas of mountain and desert that are incapable of supporting any significant population. So, while the U.S. as a whole has a density of only 83 people per square mile, most of the northeast is as densely populated as India. Everything east of the Mississippi has a density of 181 per square mile. California has a density of 230 per square mile. It is only the state of Alaska and the western mountains and deserts that keep our overall density low.

Well, this is getting quite long, so I'll end for now. K_Yew, I truly appreciate the opportunity to engage in a respectful discussion of this issue. I admit that it's going to be difficult to fully understand my theory without reading the book. Since you have a blog with some following, I'd be happy to send you a free copy if you'll just E-mail me your shipping address.

Pete Murphy
Author, Five Short Blasts