Presentation to the Tenth Annual UNICEF-Georgetown International Development Conference (IDC).
I’m honored to address the 10th UNICEF-Georgetown International Development Conference (IDC). Since the theme of this year’s conference–”Educate, Empower, Enlighten”–begins with education, and international development is simply a broad view of human development, I’d like to discuss the interconnection between longevity, fertility, education, and income. I thought this might be useful background for anyone planning to work in this area.
I’ll draw on my book Redeeming Economics, which includes a country-by-country model of fertility that I developed and presented at successive World Congresses of Families: WCF IV in Warsaw, WCF V Amsterdam, last June’s Moscow Demographic Summit, this year’s WCF VI in Madrid and the Ulyanovsk International Demographic Summit.
In the process, I’d like to compare the likely birth rates if social benefits grow as predicted under the alternatives presented in this past Tuesday’s presidential election: President Barack Obama’s budget and as proposed by Congressman (and GOP vice presidential candidate) Paul Ryan. If we have time, I’ll conclude by discussing the reasons for the recent financial crisis and recession.
The cover of my book features Gustave Dore’s engraving, “Arrival of the Good Samaritan at the Inn” because the parable illustrates all the possible economic transactions we can have with our fellow man: the robbers beating a man and leaving him for dead illustrate crime; the priest and Levite who passed him by illustrate indifference; the innkeeper’s bargain with the Samaritan illustrates justice in exchange; and finally, the Samaritan’s devotion of time and money to restore the beaten man to life illustrates a gift. Crime, indifference, just exchange, and gift: this is the range of possible transactions.
In contrast, the premise of today’s neoclassical economic theory was expressed by Adam Smith in the Wealth of Nations with his assumption that “every individual . . . intends only his own gain.” “Neoscholastic” economics differs from neoclassical economics chiefly in retaining Augustine and Aristotle’s theory of gifts (and their opposite, crimes) as well as exchanges. This also makes the neoscholastic theory much more accurate.
For example, updating scholastic theory refutes the famous claim by economist Steven D. Levitt, featured in Freakonomics, that the U.S. Supreme Court’s legalization of abortion in 1973 caused the crime rate to fall 15-20 years later, by eliminating potential criminals.
In fact, there is a 90% current inverse relation between economic fatherhood and homicide. Legalizing abortion raised crime rates immediately and with a lag.
To go more deeply into the causes of economic development, I’d like to recall two highly significant features of family economics, which were first pointed out by Aristotle and St. Augustine.
Aristotle. Aristotle’s definition of man as a “rational” and “political animal” is well known. Indeed, these insights remain central to modern social science 23 centuries later, e.g. the World Values Survey. Yet the rest of Aristotle’s definition is curiously omitted: “man and wife…are [even] more inclined by nature to conjugal than political society.” This is why wealth takes two forms: people and property–or as University of Chicago economist Theodore W. Schultz called them, “human and nonhuman capital.” Both are “reproducible”; both may be tangible or intangible (e.g. our bodies vs. our education, a machine vs. a patent); both require maintenance to remain productive; and both depreciate in use. Labor compensation is the return on previous investment in people, while property compensation is the return on previous investment in property.
Yet there is an important difference: the rate of return on property is the same for everyone in a competitive market. But the rate of return on investment in people varies inversely with the age of the person. For example, the average economic rate of return on caring for a newborn is astronomical, because the rest of its lifetime returns depend on it. The real rate of return on college tuition at age 20 was about 16 percent recently in the U.S while the stock market’s long-term average is 6 to 7 percent. But after about age 40, the return on further education fell below the rate in the stock market, and after age 50 turned increasingly negative. This accounts for the pattern of lifetime earnings in the these two charts.
Labor compensation starts at zero during childhood, while we spend time learning valuable skills; but it rises rapidly between childhood and the mid-30s as we enter and gain experience in the labor market; then rises more slowly to peak at around age 50; and finally drops to zero. Property income also starts near zero early in life (for those with little inherited property), but becomes increasingly significant as the expected rate of return on investment in human capital falls below that on investment in property. And for those who acquire significant wealth from any source–whether inheritance, talent, luck, or hard work–the only practical way to save it is in the form of claims on property (stocks, bonds, etc.).
Augustine. The large differences between total income and consumption in each phase of life reveal the other essential but neglected feature of family economics: the central role of gifts. “Human society is knit together by transactions of giving and receiving,” Augustine noted. But these outwardly similar transactions are of two essentially different kinds, he added: “sale or gift.”
Family members acquire their incomes mostly by selling services or products to those outside the family. But within the family transactions are mostly gifts, not exchanges. We all need to be fed, clothed, sheltered, and transported, whether or not we earn income. Our income therefore typically exceeds consumption during active parenthood and the “empty nest” (after the children have left home); while consumption exceeds income during childhood and old age. These differences reflect extensive gifts, not only from parents to dependent children, but also between husbands and wives, and later from adult children to aged parents.
To understand the economic and demographic dynamics, it helps to distinguish real GDP per capita from the “Capita”–that is, the number of “heads,” or population size. Perhaps the most striking fact is the stagnation of real GDP per capita in nearly all countries from Roman times until the Industrial Revolution. The main exception was a gradual rise in per capita income in Western Europe starting in the late Middle Ages. Then, between the start of the 19th and the end of the 20th century, nearly all countries joined in the progress.
What accounts for what has been called the “hockey stick” pattern in long-stagnating, then sharply rising modern incomes? In Redeeming Economics, I suggested that the single most important factor in the “hockey stick” pattern of real income per capita has been the similarly shaped pattern in longevity, due especially at first to improvements in public health.
But because parents seek live children, the decline in mortality has also meant that parents need to raise fewer children as the rate of survival has increased. Thus the rise in longevity has been mirrored by a fall in the total fertility rate. To see this effect, it is helpful to compared the total fertility rate (TFR: a hypothetical composite average of the experience of all women in a single year) with the Net Reproduction Rate (NRR: which takes mortality as well as fertility into account). An NRR of 1.00–corresponding to a mortality-adjusted TFR of 2.00–indicates that women are exactly reproducing themselves, while a higher or lower NRR indicates population growth or shrinkage, leaving aside immigration or emigration.
These last considerations bring us to the population. A retrospective view back to AD1 shows that during the period when per capita incomes were stagnating, population was also nearly constant or showed only a slight tendency to rise. But population took off during and after the “demographic transition.”
The retirement gap. Even with modern private capital markets, an inherent “retirement gap” arises from the fact that for anyone to retire, labor compensation must fall to zero, yet consumption ordinarily remains higher than the property income that could result from earlier saving of stocks and bonds. The “retirement problem” is how to fill this gap without either forgoing retirement, suffering a sharp fall in consumption during retirement, or lowering one’s total lifetime earnings and consumption (which would result if early in life one invested more in lower-yielding productive property and less in higher-yielding human capital).
Positive and negative impact of government retirement pensions. Without government social benefits, the retirement gap could be bridged only by a gift from someone (most often one’s adult children) whose own consumption is thereby reduced. Pay-as-you-go Social Security went a long way toward solving the retirement problem by providing an asset that private financial markets cannot. Starting a well-designed pay-as-you-go system therefore typically boosts the birth rate: for example, the American Baby Boom from the late 1940s to the mid-1960s coincided with the first generation covered by American pay-as-you-go Social Security retirement pensions. However, once benefits have closed the retirement gap, any further expansion must come at the expense of smaller investment in people or productive property. And this, as we will see, is the problem that the USA now faces.
“Neoscholastic” fertility model. What I call “neoscholastic” economics differs from neoclassical economics by recognizing gifts as well as exchanges. This also makes it much more accurate. Just four factors explain most variation in birth rates among the 50 countries for which sufficient data are available (comprising only about one-quarter of all countries, but two thirds of world population). The birth rate is strongly and about equally inversely proportional to per capita social benefits and per capita national saving (both adjusted for differences in purchasing power), which represent provision by current adults for their own well-being.
When these other factors are taken into account, a legacy of totalitarian government is also highly significant in reducing the birth rate, by about 0.6 children per couple.
Finally, the birth rate is strongly and positively related to the rate of weekly worship. This is because all gifts of scarce resources–whether rearing a child or devoting time to worship–require the same lowering of self and raising of others in our scale of preferences for persons. On average throughout the world in 2006 (adjusted for differences in mortality), a couple which never worshipped had an average of 1.19 children; but the average couple which worshipped at least once a week had 2.44 more–an average of 3.63 children. This was true with relatively little variation by religious denomination.
But regular worship is not only positively related to fertility in a roughly linear fashion. It is also inversely related to the incidence of abortion, which (like crime in general) rises exponentially as the rate of worship declines.
There are four main reasons, then, for “demographic winter,” in order of importance: First, low rates of religious observance, which are associated with low birth rates and high incidence of abortion; second, social benefits so high as to displace gifts within the family, particularly the gift of life; third, legacies of totalitarianism; and finally, finally, heavy reliance on so-called “consumption” taxes, which are effectively levied only on labor compensation and so penalize investment in “human capital.”
American demographic exceptionalism? The United States seemed for awhile to have avoided “demographic winter.” One respected demographer, Nicholas Eberstadt, even argued that “U.S. demographic exceptionalism is not only here today; it will be here tomorrow, as well.” The Social Security Trustees’ “Intermediate Assumptions” similarly assume “demographic exceptionalism” will continue.
However, my own research and analysis has contradicted this conclusion. First, as I showed in a paper published back in 2000, projected Social Security imbalances are entirely due to the reduction in population resulting from legal abortion.
Second, the Congressional Budget Office (CBO) now projects that the share of American national income absorbed by social benefits (mostly Social Security, Medicare, and Medicaid) will roughly double over the next 75 years. CBO also estimates that the expansion of these programs now proposed will worsen the problem considerably.
The latest data on fertility indicate that the U.S. birth rate had fallen to 1.89 children per couple in 2011.
The basic choice. The United States therefore faces a clear choice. It can have legal abortion or a balanced social insurance system, but not both. If the share of social benefits doubles while legal abortion continues, the empirical relationships I have outlined strongly suggest that the U.S. birth rate will decline steadily from the current 2.1 replacement rate to less than 1.7 (Column 1). That would closely approximate the “High-Cost” assumptions in the Social Security Trustees’ latest report (Column 5).
To avoid American “demographic winter,” rather than doubling, U.S. social benefits must not be permitted to increase at all as a share of national income. (For many European countries, achieving the same result would require a decline in the share of national income devoted to social benefits.) This would require two basic changes in fiscal policy.
Income tax reform. First, the cost of current consumption of public goods like defense and justice, which benefit all classes of taxpayers about equally, should be balanced with an income tax levied equally on labor and property income at the lowest possible rate.
Reform of social benefits. Second, “quasi-public goods” targeted more narrowly to workers or proprietors must be financed by current taxes on labor or property income respectively. This means each social benefit program must be balanced with current payroll taxes at a level calibrated to prevent the birth rate from falling below the replacement rate. Since the United States has fallen below the replacement rate, this means that rather than doubling, U.S. social benefits must not be permitted to increase at all as a share of national income. (For many European countries, achieving the same result would require a decline in the share of national income devoted to social benefits.)
The U.S. Social Security retirement system is easier to balance, because the program has an inherent link between benefits and prior contributions. Balancing the Medicare and Medicaid health insurance programs is much harder, because unlike Social Security, these programs never had such an automatic link, which would therefore need to be introduced.
Ending legal abortion. By far the easiest way for the United States to avoid a declining population and an unbalanced social insurance system is to end legal abortion. In that case, the U.S. birth rate would rise immediately to about 2.7 and instead of falling below 1.7, remain above the replacement rate through 2085 (Column 2). This would match or exceeding the Social Security Administration Trustees’ “Low-Cost” assumptions (Column 4).
In this respect, America is not a demographic exception, either now or in the future. What will be true of the United States in the future is true already of the rest of the world. Weighting each country equally (e.g. Holland equals China) the most recent Total Fertility Rate for all 50 countries I studied is 1.88; without legal abortion it would be 2.34. Weighted by population, the TFR of all countries is now 2.16 (India is higher, China lower); without abortion the world TFR would be about 2.7.
What practical policies could improve the American birth rate, lower its unemployment rate, and render the real estate market less vulnerable to boom-bust cycles?
First, as already mentioned, simply practicing one’s faith and encouraging others to join us is the most powerful antidote to demographic winter. Between 2001 and 2006, the rate of weekly worship in the USA fell from 44% to 36%. The recent fall of the birth rate below the replacement rate in USA was close to what one would have predicted based on the fall in religious practice.
Second, like many other countries, the United States has decisively substituted “benefits for babies.” Public social expenditure in the USA, rose from 13.2% of GDP in 1980, to 13.5% in 1990, 14.5% in 2000, and 20.4% in 2010. As already mentioned, this figure is projected to double again in coming decades.
Third, the unemployment rate is determined by what in the 1920s and 1930s was called “Rueff’s Law.” Jacques Rueff was the French economist who first explained that unemployment is a function of the cost of labor as a share of total national income. I’ve shown that Rueff’s Law still holds: after adding social benefits and subtracting taxes, there is a near-perfect relationship between unemployment and cost of labor in the USA and Britain.
The source of any rise in unemployment is proportional to the share of national income devoted to benefits conditioned on being unemployed. This is apparent in the rise in U.S. unemployment that coincided with doubling of the previous term of unemployment benefits.
Finally, the housing crisis was part of a world-wide real-estate boom and bust caused by the dollar’s role as the world’s chief official reserve currency. Commensurate expansions and contractions of high-powered dollars–the World Dollar Base–preceded the gyrations not only of the oil price but also housing prices from 2000 to 2009.
Moreover, the entire decline in U.S. international competitiveness, for example, as measured by the U.S. investment position, is due to Federal borrowing from foreign monetary authorities. Apart from such official borrowing, the books of American residents have approximately balanced with the rest of the world.
Therefore, I repeat a proposal that Lewis E. Lehrman and I have made for more than 30 years: All countries seeking to end the boom-bust cycle should join in supporting a reform of the international monetary system, which would repay all outstanding dollar and other official reserve currencies and restore prompt settlement of payments in gold: a system that worked well for hundreds of years and can do so again.
To conclude, the bad news is that “demographic winter” results from poor policy choices, and the current administration and Congress of the United States appear intent on repeating the combination of legal abortion and high social benefits that was the recipe for “demographic winter” in developed Europe and Asia. The good news is that, precisely because it is a choice, there is nothing inevitable about the outcome. It is quite possible that the United States, having avoided demographic winter so far, will choose it now. But it is also possible for both the United States and most other nations now suffering “demographic winter” to choose a new demographic springtime.
John D. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center.
 John D. Mueller is the Lehrman Institute Fellow in Economics and director of the Economics and Ethics Program at the Ethics and Public Policy Center, president of LBMC LLC, and author of Redeeming Economics: Rediscovering the Missing Element (ISI Books, 2010).
 John D. Mueller, “A Family-Friendly Fiscal Policy to Weather Demographic Winter,” remarks to the Fourth World Congress of Families, Warsaw, Poland, 11 May 2007, http:/ /www.worldcongress.org/wcf4.spkrs/wcf4.mueller.htm, and http://www.eppc.org/publications/family-friendly-fiscal-policy-to-weather-demographic-winter/.
 John D. Mueller, “How Do Nations Choose ‘Demographic Winter’? Is America Doing So?” Remarks at the Fifth World Congress of Families Panel on “Family and Demography,” Amsterdam,, Netherlands, 11 August 2009, http://www.worldcongress.org/wcf5.spkrs/wcf5.mueller.htm and http://www.eppc.org/publications/how-do-nations-choose-a%C2%80%C2%9Cdemographic-wintera%C2%80%C2%9D-is-america-doing-so/
 John D. Mueller, “Babies and Dollars: Babies and Dollars: Implications for USA, Russia, and the World,” available at http://demographia.ru/eng/articles/index.html?idR=80&idArt=1946 and http://www.eppc.org/publications/babies-and-dollars-implications-for-usa-russia-and-the-world/. I’d like to thank Mary Claire Reim for her assistance in gathering the data necessary to update the model.
 Smith, A. (1966 , Smith, Wealth of Nations, IV.ii.9, accessed on 19 September 2009 from http://www.econlib.org/library/Smith/smWN13.html#IV.2.9.
 John J. Donohue III and Steven D. Levitt, “The Impact of Legalized Abortion on Crime,” Quarterly Journal of Economics, vol. CXVI, issue 2 (May 2001): 379-420
Levitt and Stephen J. Dubner, Freakonomics: a rogue economist explores the hidden side of everything, New York: William Morrow, 2005.
 Aristotle, Rhetoric, I, 1 (1355b), http://www.public.iastate.edu/~honeyl/Rhetoric/rhet1-1.html
 Aristotle, The Politics, I, 2 (1253a2), tr. B. Jowett, http://classics.mit.edu/Aristotle/politics.1.one.html.
 Aristotle, Nicomachean Ethics, VIII, 12, http://classics.mit.edu/Aristotle/nicomachaen.8.viii.html. I quote the more felicitous translation in Thomas Aquinas, Commentary on Aristotle’s Nicomachean Ethics, tr. C.I. Litzinger, Dumb Ox Books, Notre Dame, IN, 1964, 520.
 Aristotle, The Politics, I, 3-4, op. cit., http://classics.mit.edu/Aristotle/politics.1.one.html. .
 Theodore W. Schultz, “Investment in Human Capital,” American Economic Review, (March 1961), 1-17.
 Bloendal, S., S. Fickel, N. Girouard, and A. Wagner, “Investment in Human Capital Through Post-Compulsory Education and Training,” Organization for Economic Cooperation and Development (Paris, 2001): 10.
 To Simplician-On Various Questions,” Book 1, question 2 article 16 in Augustine: Earlier Writings, selected and translated with introductions by John H.S. Burleigh, Westminster Press, Philadelphia, 1953, 398.
 Augustine, On Free Will, in Augustine: Earlier Writings, edited by John H.S. Burleigh, The Westminster Press, Philadelphia, 1953, 131.
 John D. Mueller, Redeeming Economics, 34, 111, 219.
 Author’s calculations based on Michael Haines, “Fertility and Mortality in the United States,” EH.Net Encyclopedia, edited by Robert Whaples (January 22, 2005), available at http://eh.net/encyclopedia/article/haines.demography. TFRs and NRRs derived by author from U.S. population estimates by age and sex, available at http://www.census.gov/popest/data/historical/index.html
 John D. Mueller, “How Does Fiscal Policy Affect the American Worker?” Notre Dame Journal of Law, Ethics and Public Policy Vol. 20 No. 2 (Spring 2006), 563-619; available at http://www.eppc.org/publications/how-does-fiscal-policy-affect-the-american-worker/
 Weekly worship data: World Values Survey, http://www.wvsevsdb.com/wvs/WVSAnalizeStudy.jsp. It should be noted that some surveys of religious practice are biased upward compared with actual counts of church attendance or time diary studies, while others are not. The World Values Survey and the American National Election Studies (ANES: a semiannual American time series since 1948), appear to be relatively unbiased indicators and largely agree; American National Election Studies, http://www.electionstudies.org/nesguide/gd-index.htm#1. ee also Philip S. Brenner, “Exceptional Behavior or Exceptional Identity? Overreporting of Church Attendance in the U.S., Public Opinion Quarterly,” Vol. 75, No. 1, Spring 2011, pp. 19-41; Stanley Presser and Linda Stinson, “Data Collection Mode and Social Desirability Bias in Self-Reported Religious Attendance,” American Sociological Review, Vol. 63, No. 1 (Feb., 1998), pp. 137-145; C. Kirk Hadaway et al., “What the Polls Don’t Show: A Closer Look at U.S. Church Attendance,” American Sociological Review, Vol. 58 No. 6 (Nov. 1993), 741-752.
 As Augustine noted, a crime is the opposite of a gift: the taking from other persons their own goods. As with “legal” abortion, the objective facts remain the same whether or not the crime is recognized as such by human law.
 Nicholas Eberstadt, “Born in the USA,” The American Interest, Summer 2007, available at http://www.aei.org/publications/filter.all,pubID.25988/pub_detail.asp. See also “America the Fertile,” Washington Post, May 6, 2007, page B7, available at http://www.washingtonpost.com/wp-dyn/content/article/2007/05/04/AR2007050401891.html.
 John D. Mueller, “How Abortion Has Weakened Social Security,” Family Policy, March-April 2000, available at http://www.eppc.org/publications/how-abortion-has-weakened-social-security/.
 Congressional Budget Office, “A 125-Year Picture of the Federal Government’s Share of the Economy, 1950-2075,” July 3, 2002, available at http://www.cbo.gov/showdoc.cfm?index=3521; updated in “The Long-Term Budget Outlook,” June 2009, available at http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf
 James C. Capretta, “The Demographics of Social Security: Why Entitlement Reform Needs a Fertility Boost,” The Family in America, Vol. 25 No. 1, Winter 2011, May 31, 2011, http://www.familyinamerica.org/index.php?doc_id=29&cat_id=13 and http://www.eppc.org/publications/the-demographics-of-social-security/
 Brady E. Hamilton, Ph.D.; Joyce A. Martin, M.P.H.; and Stephanie J. Ventura, M.A, “Births: Preliminary Data for 2011,” National Vital Statistics Reports, Volume 61, number 5, October 3, 2012, U.S. Department of Health and Human Services, Division of Vital Statistics, Washington, D.C.
 John D. Mueller, The LBMC Plan for Tax Reform, Memo to the National Commission on Economic Growth and Tax Reform, September 26, 1995. For an updated discussion, see John D. Mueller, “Taxes, Social Security & the Politics of Reform,” The Weekly Standard, November 29, 2004, 24-29; available at http://www.eppc.org/publications/taxes-social-security-and-the-politics-of-reform/.
 Since about 1990, the retirement system has collected about 25 percent more from workers in payroll taxes than necessary to pay current retirement benefits. This means that American workers have been subsidizing general government operations that ought to have been paid for with an income tax on both labor and property income. But due to legal abortion this is expected to reverse as the declining ratio of workers to retirees causes future benefits to exceed payroll taxes by a similar proportion. The simplest way to balance U.S. Social Security is therefore to cut retirement payroll taxes immediately by about 25 percent (3 percentage points), returning the trust fund surplus to American working families to invest either in raising and educating their children or in stocks and bonds, depending on their family situation. Prospective deficits would be removed by a phased matching reduction in promised benefits. New episodes of imbalance would then be prevented by automatically adjusting the benefits in inverse proportion to the birth rate and longevity. See James C. Capretta, “Building Automatic Solvency into Social Security: Insights from Sweden and Germany,” The Brookings Institution, 1 March 2006, available at http://www.eppc.org/publications/building-automatic-solvency-into-u-s-social-security/
 World Values Survey, 2001 and 2005-07, op. cit.
 Adema, W., P. Fron and M. Ladaique (2011), “Is the European Welfare State Really More Expensive?: Indicators on Social Spending, 1980-2012; OECD Social, Employment and Migration Working Papers, No. 124, OECD Publishing. http://dx.doi.org/10.1787/5kg2d2d4pbf0-en; Table A.I.1.3: Public social expenditures as % GDP, 1980 – 2012, estimated for 2008 to 2012, p. 41.