Few periods in American history were as prosperous as the two decades after World War II. But the roaring 1950s and 1960s are only obvious in hindsight. When the war ended in 1945, the common view among economists was that, stripped of war-time stimulus and brimming with debt, the economy would slip back into the Great Depression. In 1947, the Council of Economic Advisors warned President Truman of "a full-scale depression some time in next one to four years."
One never arrived, thank goodness. Why? Many reasons, but the post-war baby boom was a big -- and unforeseen -- boost to the economy. Americans went from having 2.6 million babies in 1940 to 4.3 million by 1957.
A baby boom does wonders for an economy. A bigger family requires a bigger house. A bigger car. A second car. More food, more clothes, more insurance, harder work to pay for it all, and so on. Decades later, those children enter the workforce and start businesses, creating a new boom. America enjoyed this in the 1990s.
It's different today. Now we face record-low birth rates and aging baby boomers lining up to bleed America's pensions dry. As hedge fund manager Stan Druckenmiller points out, by 2030 the average American will be older than the average Floridian is today. This is an economic disaster in the making, the experts tell us. "There is no precedent in human history for economic growth on declining human capital," writes Mark Steyn.
But what if it's all wrong?
What if we're about to have a new baby boom?
That's what The Economist asked recently. Citing a report from BCA Research, it discussed the prospects of a new baby boom. And I'll tell you, it's persuasive.
"Developed economies are about to experience a baby boom that will be bigger and longer-lasting than even the one that followed the Second World War," BCA wrote.
How can this be? And why is it so different from the common doom-and-gloom view of our demographics?
It's simple.
Later, not never
There are a few ways to measure births. One is completed fertility, or the number of babies already born to women of child-bearing age. America's completed fertility rate is 1.93, or below what is needed to keep the population from shrinking (ignoring immigration). Another is total fertility, or the number of babies a woman is likely to have over the course of her lifetime. America's is about 2.1. A third is cohort fertility, which looks at differences in fertility rates among women of different ages. This is what BCA is interested in.
The Economist explains why cohort fertility is important:
The difference ... relates to the long-term trend for women to have children later in life; in their thirties rather than their twenties. Two effects ensue. First, the fertility rate declines in the short term because today's twentysomethings are having fewer children in their twenties. That has a short-term effect on the total fertility rate. Secondly, females in previous generations who waited until their thirties tended to have one child, or none at all. Population forecasts tend to assume that future thirtysomethings will have the same problem. But medical improvements mean that women can have two or three children later in life. And the evidence suggests women want more children; BCA points to research that shows the average woman in the OECD has around half a child less than she would ideally desire.
Old norms we've extrapolated into the future should be questioned, too. In the past, the wealthier you became, the fewer kids you had. This has changed, writes The Economist. "The fertility rate of wives whose husbands are in the top decile of income is back to where it was a century ago."
The recession also pushed America's birth rate down, but this, BCA points out, is probably temporary. Just as World War II postponed childbearing into the 1950s, the Great Recession may push childbearing into the coming decade. According to a poll by Pew, 22% of American women age 18 to 34 delayed having a child in recent years because of the weak economy. This creates the pent-up demand. (Awkward, I'm sorry).
America may have also experienced low and falling births in recent decades because women of peak childbearing age declined by more than a million during the 1990s. But that dip bottomed in 2005, with the group now rising fast:
Source: Census Bureau.
The road ahead
Nothing is guaranteed. If the current population forecast is wrong, we also have to consider that BCA's outlook could be wrong, too.
But what if BCA is right, and the scary projections of America's aging population are wrong? What if we're on the cusp of a baby boom?
Two things happen to the economy.
One, pension funds become far less burdened than they now look. More babies mean more future workers paying into pension systems like Social Security and Medicare. The ratio of workers per beneficiary in Social Security was five in 1960, is currently about three, and is projected to fall to two by 2050. A new baby boom could push that ratio far higher than projected, drastically lowering what currently look like unfunded liabilities.
Two, our economy's growth potential brightens. There are two ways to grow an economy: increase productivity, and increase the number of people. America already has the first one down pat. A new baby boom would round out the equation .
This all may seem far-fetched. But it would have seemed far-fetched in the 1930s and 1940s, too. Big shifts aren't announced in advance. They happen slowly and will be denied by most until they're clearly under way. Keep an eye on this.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
