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How the West Was Won

January 7, 2013

I have often written about how demography determines economic viability. I want to return to that subject because of the recent burst of articles on how the Chinese economy is going to suffer because of its one-child policy that was put into effect in 1979. Had that policy not been put into effect, China’s population would have been 400 million more than it is today (1.35 billion).

The implications for China are immense. Because they have always favored males, they now have a formidable male/female imbalance which means that a substantial number of males do not have females available for marriage.

The economic effects of the one-child policy are two-fold: since the policy was put into effect, families that once had three or four kids now have one. That meant that there was more money per household to spend on consumer goods. In 1979, the per capita income in China was $200. Now it’s $6,000. That’s cool. But then what happens? Fast forward, 40 years to today.

China’s doing well economically, except for three things: first, they have a shrinking labor force so competition for labor is brutal; second, their cost of doing business has skyrocketed because of higher labor costs; third, the population is aging so the costs of senior care are ballooning; fourth, where previously four kids took care of their parents in old age, now one child has to do that and therefore the child may no longer have disposable income to acquire consumer goods. In other words, the one-child experiment made for great economic dissertations, but is a long-term disaster.

They are now changing the one-child policy, but it may be too late. Pointedly, the dependency ratio (relationship between the numbers of old to young) can be economically devastating.

Now, let’s turn to the United States. It, too, is aging. Our median age is 37.2 years, up from 35.2 just ten years ago. Obviously, much younger than Japan (44.6); Germany (43.7) and Italy (44.3), but aging nonetheless. On a math note, for a Nation to maintain continuing economic growth, there should be a fertility rate of 2.1 persons per adult female. In nations like Italy and Japan, it’s down to 1.4 not good. In the U.S. it is 1.9 – not perfect but O.K.

In the United States, all states are not equal. They may share the same constitution, but they certainly don’t share the same fertility rates. And that has enormous economic implications.

Looking at the 35 states with population over two million, California has the third lowest median age in the Nation at 35.2, well below the National average. Utah is No. 1, at 29.2 years, and Texas, No. 2 at 33.6 years.

When we look at the Nation as a whole, the Midwest and Northeast are getting older and the West/Southwest is staying young.

It is the Wild West that is setting the pace for youth. The eight largest states in the West have 25.7% of their population under 18 while the other states have an average of 23.4%. At the other end of the age scale, the big eight of the West/Southwest have an over 65 population of 11.4% compared to 13.7% in the other states. The ratio of young to old is even more vivid when you compare the big eight with the other states. In the big eight, the ratio of young to old is 2.25 compared to 1.71 in the other states.

Looking out to the future, the ratios are decidedly worsening for the other states as the 45-64 year olds start moving toward the over 65 column.

The importance of these ratios is monumental when you look at two factors: the number of people who will be the work force in the coming decades and the number of persons who are in the acquisitive stage of life. Supply and demand, a simple concept.

In the states with a youthful population, the supply of labor is ample, especially for jobs that require lesser skills. In the mid-west and northeast there is a crisis environment because employers looking for young persons who can read and write and do not have a police record are growing smaller by the year.

Further, the work force is getting older which means productivity is inevitably reduced and pay scales are at their highest levels (that’s just the way it is). Thus, firms in those aging states are not able to compete with the younger states. And a state’s cost of caring for the aged accelerates which drives up tax revenue needs, exactly opposite of that which happens (hello, Detroit).

On the demand side, as the population ages, its need for retail goods is substantially reduced. Yet, the demand for health and welfare increases, but that is not the same as demand for new housing, cars, household goods, clothing and entertainment. Starting at about age 50, people move away from their acquisitive stage of life and start to think about down-sizing and saving for retirement, and, increasingly more often, thinking about taking care and costs of aging parents.

In short, those states that young and fertile will win the economic battle in the United States and lead the competitive crusade against those Nations that are growing too old too fast.

California here we come.

This article was originally published by Xpera Group which is now part of The Vertex Companies, Inc.

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