Why are birth rates plummeting across the developing world? Why should we even care about low birth rates? Where can we find the most elastic baby? Jesús Fernández-Villaverde, Professor of Economics at the University of Pennsylvania, explains why Japan’s decline might be the best case scenario, the case against studying David Hume, and why the real fertility crisis isn’t in rich countries.
You can find Jesús on Twitter where he tweets about on economics, history, and demographics, and read about Korea’s fertility crisis in the new print edition of Works in Progress
If you want more from Works in Progress you can read the magazine here or listen to our episode with Alice Evans here. You can watch or listen on YouTube, Spotify, or Apple Podcasts.
Transcript:
Sam Bowman: Our guest today is Professor Jesús Fernández-Villaverde, who’s Professor of Economics at the University of Pennsylvania. Jesús is one of the most wide-ranging economists in the business today, but today we’re going to focus on the economics of fertility and falling birth rates. Jesús, I want to start by asking you, from an economics point of view, why should we care about declining birth rates, given that we don’t think that smaller countries are necessarily going to be poorer than richer countries? Why do we think that declining birth rates are a problem?
Jesús Fernández-Villaverde: Like everything in economics, low fertility is a complex phenomenon that has good things and it has bad things. I don’t want to give the impression that everything is bad; there are also some good aspects to it. But mainly, when you have fertility rates that are really very low – think about South Korea around 0.7, China slightly above 1, Spain or Italy around 1.2 – what you face is a big demographic cliff: a fast decline in population unless you have large flows of immigrants. That has consequences for total GDP growth.
There are many important aspects in society, such as social security payments or ability to service public debt that depend on the total size of GDP. It’s not as much that we want to have a large population per se, but that we have made commitments in the past in terms of social security benefits and in terms of public debt that depend on the total size of the population.
Sam Bowman: Imagine if we were a country without debt or a country without the kind of social services or social security networks that basically every country does have. We can talk about those, but I think that those problems are relatively intuitive. If we didn’t have those commitments, do you think that there would be a reason to worry?
Jesús Fernández-Villaverde: To some degree, yes. The first reason is what I call the basic accounting identity: that total output growth is equal to labor productivity growth plus labor growth, the amount of hours worked. If you are in a country like, let’s say, the United States around the year 2000, labor productivity growth is around two percent a year. That has been roughly constant for over a century. There are fluctuations from year to year, but on average it’s two percent. The growth of the labor force, of the hours worked, is around one percent, which means that you grow at around three percent a year.
However, if labor drops by around one percent a year, because you have very low fertility for a long time, even if productivity growth is still two percent, you are going to grow at most one percent a year. Is growth of one percent a year a problem? To some degree, it is not, but it requires that society adapts to it along many different dimensions. The second concern is that big population drops are not uniform across space.
Imagine that you’re in a country like Japan where you lose ten percent of the population. This doesn’t imply that every city and every town loses ten percent. What it means is that places like Tokyo still actually increase their population – this is a phenomenon called sponge cities. Other places lose 30 percent or 40 percent of their population. When you’re in a city or a town that loses 40 percent of its population, you need to close the local high school, you need to close the local college, you need to close the local hospital. You may need to close many of the local supermarkets. Those are costly decisions that have non-trivial consequences. I think that people sometimes do not fully appreciate that those types of changes are going to be quite disruptive in the lives of many people.
Pieter Garicano: The paradigmatic case that we think about used to be Japan, now it’s South Korea. With 0.7 total fertility rate, we should expect each to be roughly a third of the size of the one before. But despite this, if we look at macroeconomic indicators, South Korea is still doing relatively well. Its working age population has decreased by roughly two million in the last six years. But its output growth is still quite high. Its government debt is still quite cheap. The bond yields are lower now than they were in 2018 or 2019. Has the market just not appreciated what is happening?
Jesús Fernández-Villaverde: South Korea is doing well, but much worse than in the past. South Korea is a country that was clearly converging to the frontier, that was technologically dynamic, and used to grow five percent, six percent. I was just in South Korea in August, so I spent some time looking at their aggregate numbers. By now, a more regular rate of growth for them is between two percent and three percent. Remember, this very low fertility in South Korea started later than in Japan, which means that I’m really talking about the problems they are going to have in the 2030s, not the problems that they are going to have now.
Let me go back to the second point: are the markets under-appreciating what is happening in Asia? I actually changed my mind recently about that. I saw a very interesting presentation by Selahattin Imrohoroglu on Friday at UCLA, and he was talking about the very deep and aggressive reform of the social security payments that Japan did in 2004. Japan has been able, by introducing a sustainability index correction to social security payments, to stabilize their debt and to correct many of the imbalances that demographics are causing.
This goes to the point that East Asian societies, being very cohesive societies with a lot of consensus, may be able to handle these situations in ways that are much better than what other societies will be able to do. I have made the point in many of my presentations that, when people say, ‘well, Japan isn’t doing so badly’ that, in some cases, Japan is the best-case scenario. This is a country that has a lot of social consensus and a country that sacrifices a lot for the future. And yet, Japan has not been doing that great. Multiply the problems of Japan now by 10 by calling it Mexico. Good luck trying to get the consensus that the Japanese did with their social security reform in 2004. I think that’s what markets understand. Markets understand that Japan or South Korea, at the end of the day, are going to be able to more or less muddle through these problems. Will Spain, Italy, or Mexico be able to muddle through these problems? I’m somewhat less optimistic.
Sam Bowman: You have pointed out in your research that although Japanese GDP per capita has flat-lined for decades now, if you look at Japanese GDP per worker or per hour worked, they’ve actually done reasonably well. The point you’re making is that it isn’t actually that Japanese workers have stagnated in productivity terms. They may have grown less quickly than they’d like, but they haven’t flat-lined as much as the headline numbers would suggest. It’s that the composition of Japanese society has moved to being much more tilted towards old people who aren’t in work. This actually reconciles a phenomenon that I’m sure many people who visit Japan will experience, which is that it feels pretty rich even though it’s poorer than Britain, for example. Britain does not really feel like a rich, prosperous, successful country. I’m sure there are other reasons for both Japan feeling that way and for the UK feeling that way. But I do think that it’s quite an interesting reframing of Japan’s problem away from the idea that they basically just never recovered from the 1990s.
Jesús Fernández-Villaverde: I fully agree with it. In fact, this research agenda of mine started precisely because of it. A very famous economist, which I’m not going to disclose his name, came to Penn to give a talk. It was one of those talks about how Japan has never recovered from the financial crisis of the early 1990s and ‘let me tell you some wonderful monetary policy I’m going to propose that is going to fix this problem’. I tend to be a skeptic of the idea that if you appoint someone very, very smart as a central banker, you are going to produce miracles. My view of the world is that usually a very good central banker avoids disasters, and that’s already enough to justify their wage. I raised my hand and I said, look, the burst of the bubble was like, what, 1992, 1993? We are in 2019. This was like 30 years ago. To put this in perspective, this will be like talking about the New Deal during Nixon’s time, that has the same amount of time that has passed by. This cannot be. We had what I think in England you guys call an honestly refreshing conversation for the next 10-15 minutes. I started thinking about what may have happened to Japan, and the idea that Japan may be suffering from these demographics issues came immediately to mind. I remember because I opened FRED, one of those databases that economists use. I had a computer with me in the seminar and instead of dividing GDP by total population, I divided GDP by population between 15 to 64, which is kind of a rough approximation of the total number of workers. I realized to my big surprise that suddenly Japan didn’t look worse than most other countries. It still does a little bit worse than the US, but it doesn’t really do worse than Germany or France or Italy. Then I figured that this was something that I needed to look at in more detail. It seems to me a sad indictment of much of the macroeconomics profession that we spend a lot of time thinking about a super complicated model to think about some explanation for some phenomenon, but we don’t spend a lot of time just looking at the basic facts. Even recently, another extremely distinguished economist mentioned that with better monetary policy, Japan today would be 70 percent richer, which is absolutely crazy. It would basically imply that productivity growth in Japan should have been around 4 percent a year for the last 30 years, which is nothing like anything that we have ever seen before in the data. That’s exactly what I think reconciles your point: that you go to Tokyo and it looks like a prosperous city and that the society works.
We may also want to remember that East Asian societies are different from Western societies in the sense that a lot of poverty is kind of hidden. One of the things that is salient about the United States and to some degree about the United Kingdom is that a lot of the worst areas in the country are in the big cities, while a lot of the poorest parts in East Asian societies are hidden away in very remote rural areas where tourists rarely go. When you look at it in that perspective, that changes things a little bit. But I will say that’s just a nuance to your statement. I think that, by and large, we have a very negative view of Japan that doesn’t correspond to reality because we were looking through the wrong lenses. The wrong lens is to think about total GDP and not a measure of GDP produced by our work.
Sam Bowman: As a side note, do you have a good reason why poverty in East Asian countries is not in cities the way it is in the West?
Jesús Fernández-Villaverde: I think that part of it is linked with ethnic homogeneity. I think that a lot of very dire poverty in, for instance, in the U.S. is linked with ethnic diversity. For instance, think about the ghettos in the northeast cities. Those were created by the migration of African Americans from the South to the North starting around the 1920s, and, of course, the enormous amount of discrimination that happened at that time. Those African-Americans moving from, let’s say, Mississippi to New York or from Mississippi to Philadelphia – there are actually a lot of people in Philadelphia who are originally in Mississippi – are concentrated in the cities for a number of reasons. While in California, in some continental European cities until recently, and in East Asia, you didn’t have a lot of these inflows of migrants from either other areas of the country or from outside the country, and poverty tended to be located in rural areas. That gives you a different view of society. If you go to a big city in China, you go to Shanghai, you go to Nanjing, you go to Beijing, and you are going to have a different feeling of how the average Chinese person is doing than if you go to a rural area in the middle of Yunnan. Rural areas in the middle of Yunnan still really feel like a poor country, while if you walk through Shanghai, you will think you are in a rich economy.
Sam Bowman: I’ve been to rural Yunnan and I agree with you, it’s very different to the coastal cities. In a way, what you’re saying is that South Korea and Japan, which we often think of as being the future that the Western world has in front of it, they’re actually not canaries in the coal mine because they probably can, or to some extent at least can, address the big worries that you have about social security commitments and debt overhangs. Whereas your supposition is that the Western world might not be as good as those countries will likely be. I’m curious if you have anything else to say about the cost of borrowing for a country like South Korea or for Japan. They’re still borrowing at rates that are pretty low, despite the fact that Japan has a very, very high debt burden, and they have, as we have talked about, far fewer workers to pay that back. What gives? Is that really just that they did excellent restructuring, or is there something else going on?
Jesús Fernández-Villaverde: There are two forces. The first one is that they have already undertaken that very deep and painful restructuring. Coming back to this paper I saw by Selahattin Imrohoroglu, what he actually does is project social security payments over the next 75 years. Japan is actually in a very good shape. It’s in a very good shape because they have already indexed their social security payments to the demographic conditions of the country. I think that markets understand that. The second issue is that the interest rates at which I can borrow as a country depend on two components. Component one is some sense of the international interest rate and the second one is kind of a country-specific premium. One important observation is that the real interest rates on the planet are very low. There is a lot of research about why this is the case. A lot of people have talked about the safe asset shortage. I have written a few papers making this point. Somehow the amount of places to invest in the planet with respect to the amount of savings in the planet are very small. So if the real interest rate is only 1, 1.5 percent at the world level, the fact that you are borrowing at 3 percent already implies a 1.5 percent implicit default premium, which is quite big.
In that sense, it may be slightly misleading to just say, ‘South Korea is borrowing at whatever rate they are borrowing right now, and saying this doesn’t imply any risk’. Yes, it may imply risk because it can be the case that, and I’m talking always in real terms, forgetting about inflation, of course, those get baked in the nominal rates, the real interest rate of the whole economy right now is very, very low. That may be very different in 20 years as the whole planet moves through this demographic transition. When the interest rates start going up, it may be the case that South Korea and Japan start to need to pay much higher interest on the debt.
Pieter Garicano: You had a recent slide deck where you identified that even relatively pessimistic projections for country populations are too high. We’re seeing an unprecedented decline in fertility rates, both in the developed world and also in the developing world. One critique you hear of this is that this could just be a shift in the timing of births, and that the completed cohort fertility rate—the actual amount of children that a single birth year will have across their lifetime—might still be unchanged. What’s happening is people are delaying having children. How do we know that’s not true?
Jesús Fernández-Villaverde: We need to be humble and we need to recognize that, as the old saying goes, until the fat lady sings, the opera is still going on. There is a chance that completed fertility may be quite different. Something we can do to try to gauge this possibility is to look at what has been the historical differences between completed fertility and measured TFR in countries that in the past have undertaken similar strong delays. These countries are like Scandinavian countries, where there were similar big delays in childbearing in the ‘70s and ‘80s with women getting into the labor force and with women becoming professionals. We can observe differences between TFR and completed fertility of around 0.3, 0.4. So when I say that a country like the United States has at this moment a fertility rate of 1.62, it may be the case that completed fertility goes as high as 1.9.
It’s very hard to see in the data any example where the difference between the two measures is bigger than 0.3, 0.4. The reason for that is purely biological. I can delay fertility a little bit, but this is facing in some moment the limits of fertility in life. We need to remember that fecundity – your ability to get pregnant – especially if you have never gotten pregnant before, drops very, very fast after 28. A lot of women who are thinking, ‘no, I’m trying to complete my PhD in chemical engineering, I’m going to have kids a little bit later’, are going to find that it’s going to be very difficult, even using IVF or any type of very aggressive medical procedures. The second thing is that we can already look at people looking at women in their early 30s. Completed fertility is not yet visiible, but the amount of children they will need to have when they are 35 to 40, the cohort as a whole, is so high that we have never seen that before. I don’t see a lot of 35-year-old women saying, I’m going to have four kids now. As I was saying before, this is a pure timing issue. That tells me that an upper bound scenario of differences between completed fertility and total fertility rate is probably between 0.3 and 0.4. In South Korea, we mentioned that the TFR is 0.7. This puts the best case scenario at 1.1. It’s not as catastrophic as 0.7, but it’s still extremely low.
Sam Bowman: We should say, for the sake of clarification, TFR isn’t a measure. We’re talking about two different statistical concepts. Completed fertility is actually how many children you have had by the time you reach, let’s say, 45, or the age at which it’s generally considered that it becomes very difficult to have children after. TFR is an estimate based on, in recent history, how many women at that age have had children. You can get these sort of whiplash effects and you can get this sort of undercounting.
Jesús Fernández-Villaverde: I was assuming perhaps a little bit more background in demography than is reasonable, but you’re absolutely right. In the country where I know fertility rates best, which is Spain, we have had fertility between 1.3 and 1.1 now for 25 years. There is no way our completed fertility is ever going to be above 1.5 for the next 50 years. There is just no space in the data. We are getting to the level when you are looking at women that are 40, they are at zero kids, and you are saying, well, but you still have four years. Theoretically, you can have four kids. But it starts to be a little bit tricky to deliver that. It’s like when you are in the football game, it’s minute 85 and you are losing one three and you say, oh, but I still have five minutes; I can still win this game. Maybe, but it’s becoming increasingly unlikely. In the case, for instance, of the United States, now we are at 1.62. I think the US is going to arrive at a completed fertility closer to 1.7, not to 1.6.
Pieter Garicano: In the conversation about fertility it’s common to speak about developed countries. You mentioned, for example, the case of the lady finishing a PhD in chemical engineering. I think the surprising shift over the last few years is the fact that collapse is relatively universal regardless of rate of development. US fertility is higher than that in Mexico and much of Latin America, which are much, much poorer.
How do we explain that the developing world is seeing, in some cases, a more accelerated decline in fertility than in rich countries? Our traditional model is that people delay childbirth because they get richer, and that there is a quantity-quality trade-off where you have fewer higher quality kids. What is going on? Why are Chad or India seeing this huge decline?
Jesús Fernández-Villaverde: When I’m giving talks to the general public, I always get someone who asks, ‘oh, you are just one of those economists who are very worried about the Western world. There are enough kids around in developing countries’. I say, no, actually, I’m not very worried about the US. The US is still at 1.6, maybe with a completed fertility of 1.7, plus a little bit of immigration. The US is not a big deal. The real problem is a country like Mexico. My favorite question when I ask people or give this talk is, especially when we are in campuses, I say go out to the middle of the campus, stop the first 10 people that look like a professor and ask them which country has a higher fertility rate, the US or Mexico. I will pay you a nice dinner if you find more than one that says Mexico. And yet, Mexico now has a lower fertility rate than the U.S. In fact, to put it even farther, because sometimes people ask, non-Hispanic whites in the U.S. have a higher fertility rate than Mexico’s. This is absolutely mind-blowing.
I’m actually working now on a paper where we try to make the point that demographic transitions in emerging economies are faster than in advanced economies. That is, the speed at which fertility is going to drop in an emerging economy today is going to be much faster than when it dropped in an advanced economy 20 years ago, 30 years ago, 50 years ago. And that the level at which it’s going to stabilize is actually going to be lower. There is going to be overshooting. There is a good chance—and again, it’s a chance, and I want to be very humble and recognize that in 50 years, I may be completely wrong—but there is a reasonable chance that in 50 years, the countries with the highest fertility in the world will be rich advanced economies like the United States.
Why is this happening? I think that part of it is that the type of new economy in which we are moving in, an economy that values a lot of skills, very abstract thinking, requires an enormous amount of investment by parents, especially in terms of time. Those investments are particularly costly for people living in emerging economies. And they are also particularly costly for relatively poor people or lower income people in rich advanced economies.
Let me tell you something that I don’t know if you are familiar with. Historically, if you look at the US or the United Kingdom for roughly the last 200 years, there is a negative slope between income and fertility. People living in a rural area in Yorkshire had on average more kids than people living in Kensington, London. Over the last 20 years, it has inverted for the first time. Now you see that richer, higher income people have more kids than poorer people. It’s very striking. You just walk through any major city in the Western World and you can tell. You see these very well-dressed families, they get out of the Range Rover and they have three kids. You see the poor mom walking in a not so good neighborhood in Philadelphia and she has one kid. It’s happening already, not only at international level, but within countries. Another possible explanation for that is that we are seeing family and household formation becoming more and more of a luxury good. A lot of the dissolution of traditional social norms related with marriage and long-run partnerships affect people with lower incomes much more, and that aggregates in poor countries into lower fertility rates.
Finally, and this is more speculative, is that there is a little bit of dualism in social norms. In a lot of developing economies, you are going to have a lot of women that have aspirations to the lives and the social norms of women in advanced economies that they have seen through social media. They look at how women live in London, how women live in Paris, and they say, I want the same type of life. Their potential male partners are still stuck in very traditional gender roles that do not fit very well. I think we are seeing more and more evidence that this is a real problem. You have ladies in Mexico that want to have the life of someone in an advanced economy and men who still want to live in a very patriarchal household. The outcome is that those marriages are not being formed and the children are not being born.
Sam Bowman: How much is that attributable to cultural effects like social media versus those women just having more economic bargaining power because they can work now? Especially in East Asia there’s been a huge transition of women into the labor markets and a huge increase in female reservation ability to not get into marriages that might change their lives in a very dramatic way.
Jesús Fernández-Villaverde: I think that both mechanisms are important. I have changed my mind a little bit over the last five years or so, and now I’m a little bit more inclined towards social norms, which I know puts my PhD in economics in danger and may lead my tenure to be revoked. The reason is because I’m looking at fertility rates in the Muslim world. There is a drop of fertility all across the Middle East and North Africa that is quite amazing.
Pieter Garicano: Do you mind quantifying how steep this has been?
Jesús Fernández-Villaverde: Egypt used to be around 3.9, 3.8, and I apologize because I’m quoting from my head, but it was in that order of magnitude. In 2025, they are going to end up around 2.3. And at the speed at which they are going, the TFR in Egypt is dropping at around 0.1, 0.2 a year. That may tell you that Egypt may be below replacement rate by 2027 or 2028.To put this in perspective, the United Nations in their World Population Prospects 2022, was not forecasting that TFR in Egypt was going to be at 2.1 – below the replacement rate – until the year 2100. So we are talking about a tremendous, incredible change. Let me give you some more examples: Morocco is already below replacement rate. Tunisia is already below replacement rate. Those are countries where women are still not joining the labor force and where they don’t have a lot of independence. You could argue that if in Morocco or Egypt it was also the case that women had access to the labor force, instead of being at 2.3, it may be the case that Egypt was already at 1.8 or 1.7. So that mechanism may actually matter as well. I’m not dismissing it in any way. But the drop in fertility in the Muslim world is quite amazing
.
Let me give you one last example. I’m going to try to be careful because, given the current events, this one is always a little bit tricky. It’s the comparison between the fertility of Muslim and Jewish women within Israel. First of all, the data I’m going to use is the data as reported by the Israeli National Institute of Statistics, which is Israel, the frontiers of 1948, plus Jerusalem, plus Jewish citizens in the West Bank. This does not include Gaza and this does not include most of the West Bank. In 2021, for the first time, the fertility of Jewish women passed the fertility of Muslim women. It used to be the case that the fertility of Muslim women was much, much higher. That was the cause for a lot of anxiety within Israel about whether or not Israel could be a country that in the long run would have a Jewish majority. But the fertility rate of Muslim women has been dropping very fast, while the fertility of Jewish women has stayed roughly constant.
Israel is very interesting because they also report the intensity of the religiosity of the mother. This is not just due to very conservative unorthodox Jews. Even secular Jews have a high fertility. Since 2021, the fertility of Muslim women is below the fertility of Jewish women. Since then, for the first time since the creation of the State of Israel in 1948, the percentage of children born from Jewish women is higher than the percentage of Jews in the population. That tells me there is probably a very strong social norm change within the Muslim population in Israel that is probably accounting for a lot of what is happening.
Pieter Garicano: You have a paper titled ‘An Economic Model for the Rise of Premarital Sex’. The model you describe there is that people’s behavior is determined by the expectations set for them by their peers. In turn, those peers set their preferences based on what technology sets as optimal for them personally. The existence of birth control means that premarital sex doesn’t have the same kind of externalities for people around you that it did previously. And so expectations change. Is there a similar technology-driven story we could tell for what is happening now?
Jesús Fernández-Villaverde: I always joke that every economist is a right-wing Marxist. Karl Marx has this view of the world where technology determines everything. He calls it the forces of production, but fine, that’s just technology in modern terms. He says, ‘look, you have a technology and that technology percolates into some social structures’. As an economist, I tend to fundamentally agree with that view, that technology is the ultimate decider of social structures. Having said that, the problem, and that’s what I was trying to do in this paper that you mentioned with Jeremy Greenwood and Nezih Guner, is that the way in which technology transforms itself into social norms may be very complex and it may take several generations. So maybe what is happening is that we have modern contraception technology and it takes three to four generations to work its consequences through the population. The first generation is already socialized in a situation where contraception is not available, but now suddenly it’s available and that kind of conflicts. It may take two or three generations to work that through.
Maybe what we are seeing right now is the consequences of the invention of the pill in the 1960s, except that it takes 80 years to have its consequences. If I may make a small aside, I have been very critical of a lot of modern empirical economics. The reason why I have been critical is because they tend to look at very short-run effects. People say, ‘The National Health Service introduces free contraception technology; let us look at the consequences across the next five years and write the paper and get it published in American Economic Review’. My argument is that this is not very interesting or very relevant. The women who are using free contraception have been socialized in a very different environment. What we really want to know is what is going to happen in 80 years, when you have two generations that have passed by and they don’t have any memory of past socialization. That was the point we were trying to make in the paper. To really look at the consequences of big, deep changes in technology, sometimes you need to wait 80 to 90 years. Maybe what we are seeing right now with a big collapse in fertility in 2025 is the consequences of the social revolutions of the 1960s, of the sex revolution, of the change in the equality of men and women. It just takes 60 years to work through the system.
Sam Bowman: Janet Yellen’s argument is that once abortion becomes available or normal, or whatever kind of status it roughly has in most Western countries, it means that a pregnancy stops becoming the trigger for couples to get together. Previously, you would get a lot of shotgun marriages. Obviously, the contraceptive pill reduces the number of pregnancies, but abortion also reduces the number of pregnancies that have to lead to that kind of coupling. One of the things Alice Evans emphasizes is that it isn’t really that couples are failing to have enough children; it’s that you aren’t getting that many couples, or you aren’t getting as many couples in the first place. It’s the extensive rather than the intensive margin, as you have put it, Jesús.
This general point that this is a technologically driven phenomenon implies that it is tractable. Now, many of the policies that that might imply are not acceptable for liberal reasons or for other reasons. Maybe the trade-offs are too high. But it is, I think, a good starting point to kind of say, ‘this isn’t completely outside the realm of change’, even though personally I am very pro contraceptive pill and very pro available abortion. Getting on to what we can actually do about this, if we can do anything. It’s first interesting to know, can we do anything? Is this completely amorphous cultural trend that it’s really difficult to get our heads around, or are there much more material factors at play here?
Jesús Fernández-Villaverde: Let me start with the beginning about the extensive versus the intensive margin. Yes, I’m a big believer that this is very, very important. The idea is that the forces that may induce you to have at least one child may be different from the forces that induce you to have three instead of two. This whole area of research says that whether or not I have at least one child may depend on whether or not I have a partner, while whether I have two children or three children may depend on how expensive my local school is. If my local school is relatively cheap, I have a third child. If my local school is relatively expensive, I have two children, or my housing. While the zero versus one or more may be more about, can I find a partner? What do I want to do with my life? Do I want to be a chemical engineer versus who knows what? The type of policies that we may want to address may be quite different. What Alice Evans and myself have argued is that a lot of what is happening right now is that more women are deciding to stay at zero. Coming back to this example we were using before, this is about a woman who moves on to do a PhD in chemical engineering and finds a great job for British Petroleum as a chemical engineer, and is doing great in her professional career, and decides she never wants to get married, or even if she gets some type of partnership, she’s never going to have any children. This is different from what we were saying before, which is whether I have two children versus three.
It may also be the case – and I think that in the United States, at least when I walk through the streets, I can see it quite often – is the fact that there is a non-trivial amount of men who are undateable. I want to say this in a very specific way, because every time I say this, I always get one or two misunderstandings. For a number of reasons, the educational system in many countries has failed a non-trivial percentage of the population. That non-trivial percentage of the population has an over-representation of men and of boys,
We have introduced a lot of changes in our educational system. Some of them are good, but some of them are not so good. I think that men have suffered more from those bad consequences than girls, for a number of reasons that we can discuss in another moment. You basically have now 20-25 percent of boys at the very bottom of the distribution that spend their days smoking dope and playing video games. This is not very good marriage material. And women who are not high in the distribution themselves in terms of qualities as partners, they say, well, between marrying a lousy husband or staying at home single, I’d rather stay at home single. As you were mentioning before, this is something you can do in modern life, because being a single woman, especially in an advanced economy, is perfectly fine.
If we want to think about how to increase that percentage of women being married, and having children – by married here, I don’t mean just legal marriage; it can be some type of long-term cohabitation – maybe what we want to think about is the supply of potential partners and about policies to increase the supply of potential partners. Or coming back to the example of developing economies, maybe it’s not that these 25 percent are at home smoking dope and playing video games, it’s that they still have a very patriarchal understanding of a relationship, and maybe we need to convince them to move towards a more egalitarian understanding of relationships. In that sense, I think that Alice is absolutely right. But there was also a second aspect of the question: if this is related to issues like technology, can we have technological solutions to it? I’m a little bit skeptical. The reason I’m a little bit skeptical is that the history of the 20th century should make us cautious about the idea that we can be social engineers, moving one gauge in the dial and getting things. Things that we know work relatively well in many countries, like better and cheaper housing, better and easier education, capping part of the educational arms race, which plays a big role in East Asia, will probably put us to a much more reasonable level of fertility without having to do any kind of crazy policies
Sam Bowman: One thing I like about this podcast and about our listeners is that they are, I think, unoffendable. Whereas on another podcast, I would be very careful and worried about terms like ‘the supply of partners’ ‘and ‘undateable men’. I know that Works in Progress readers and listeners do not care and are absolutely interested in the core concepts.
Jesús Fernández-Villaverde: Let me give you an example. I talk with some young people and they tell me how easy it is to get dates now in New York. They say, if you are a single male and you are 28 and you do not have any major physical defect, you can have as many dates as you want. Basically, time is the constraint. And you look at the percentage of single women in New York. It’s very clear why this is happening. As I was saying, if you have taken out 25 percent of ‘the competition’ who are at home playing video games, then this is a fantastic market. When I try to explain this to the undergrads, I need to be careful in case some people don’t like it.
Although, to be honest, things have improved a lot over the last two years. I have found that over the last two years, undergrads are much more willing to use this language again and be less offended. They are not looking for reasons to be offended anymore.
Sam Bowman: On this point about social engineering, I think it’s obviously a good point. To give one example, you’ve alluded to what some people call the ‘fuckboy’ problem, which is men who string women along and who kind of use them for sex by dangling the prospect of a long-term partnership. Some women are perfectly happy with short-term partnerships, and that’s great. But many, I think, relative to men, are looking for more durable relationships. Right now, there’s a huge asymmetry. Something I had thought was, well, maybe we could create social stigma for men who do this. Maybe we should make this a really big thing where if you kind of get involved in some way, in a casual way with women, then there’s a big social expectation that you settle down with them.
Our colleague, Ben Southwood, who’s very bright, pointed out that this could easily have the backward effect of just deterring men from having relationships with women at all, including short-term casual ones that lead maybe by accident or unexpectedly lead to long-term ones. Men do have alternatives, although they’re pretty unpleasant, like pornography or AI girlfriends, although I’m a little skeptical about that. As you say, it is very difficult to think of a clean intervention, even putting aside concerns about individual liberty, which are very important. Even if we pretended that that didn’t matter, it’s very difficult to be confident that any kind of intervention doesn’t have unintended consequences. Except the kind of no-regrets policies where we should do this anyway because we think these things have good outcomes. If they bring, let’s say, coupling or fertility benefits as well, that might be kind of just an extra bonus.
A really obvious example, one that I’ve written about a lot, is housing. Clearly, I think both empirically and anecdotally, limited housing supply, especially in wealthy areas, means that people have fewer children and delay having children and overall have fewer kids than they would like to. One of the reasons that I think that’s a very attractive area to focus on is that it probably won’t solve the problem, but if it does nothing, it will still be a good thing to do. What other areas are there like that where the risk of unintended consequences is lower?
Jesús Fernández-Villaverde: In my slides, housing is number one. There is quite an amazing paper that I always cite. In Brazil, they have public housing. Don’t think about the public housing in some of the shady areas of London. This is actually decent public housing.You apply for a lottery, because there are many more people who want public housing than public housing units available. What the authors show is that people who win the lottery – and that kind of takes care of the selection bias because everyone applies – and get early access to public housing have 0.5 children more on average. It’s a gigantic effect. As you say, even if you win the lottery and you decide you are not going to have children, what is the cost of it? I’m actually giving you housing, which is something that as a society we should aspire everyone has, right? I’m a big defender of the idea that we need plenty of new houses in the world. There is a point related to it because this was a little bit of a discussion I have had in the context of Spain. A lot of people tell you to look at the stock of housing in proportion to population. It’s actually not at historical lows in Spain. But remember that the average household is much smaller. When we were small kids, it was my mom, my dad, all four brothers of us, and we actually had a living aide living with us. There were seven people living in the house. Now it’s my dad living alone and it’s the same house. He hasn’t moved. If you measure effective units of housing, we need many more effective units of housing.
Sam Bowman: There’s an economist in Vancouver, Jens von Bergmann, who has tried to estimate this doubling up effect. This is people either living with their parents as adults or people flat-sharing or house-sharing, perhaps not with strangers, but definitely not with romantic partners or people they would actually choose to live with. He estimated how many more homes you would need in each of Canada’s major cities to not have anybody doubling up. It’s absolutely gigantic. The lowest city in his set is Quebec City, which has, I think, about 12 percent extra units. But once you get up to Toronto and Vancouver, you’re talking about 40 percent of extra units. And this, unlike most estimates of housing demand, which tend to look at the desire to migrate into the city from the rest of the country, just looks at people who are already in those cities. I’m keen to get that work done for the U.S..
Jesús Fernández-Villaverde: Canada is pretty big. Anyone who has flown over Canada, there is more than enough space over there to build houses. I was flying over Texas the other day. When Texas brag about Texas being big, they are right. I was just looking out the window. I was like, oh my God, this is a gigantic state. The idea that there is any type of land constraint is just absolutely crazy. Even in Philadelphia, there are so many beautiful areas to build, and they are completely abandoned because there’s a railroad area that is no longer used. All manufacturing places that are no longer used, areas with very low density that could be increased. You can easily double the stock of housing in Philadelphia if you wanted to. And the city would actually look much better. It would be a more livable city. In that sense, I fully agree that housing should be dial number one. As you say, it’s a no-regret policy. We are going to be better off no matter what, even if this doesn’t lead to even a single more birth. A second idea I’m becoming more keen on – and maybe this is even controversial for your own listeners – I think we are over-educating a lot of people right now. The internal rate of return of a degree in the humanities is probably negative. Now, Pieter knows me a little bit better. He knows that I love philosophy and I love history. And if your goal in life is to dwell on Kant and Hegel and Martin Heidegger, sure, of course, you want to do that.
Sam Bowman: Well, if your goal in life is to dwell on Hegel and Heidegger, maybe not. Maybe Hume.
Jesús Fernández-Villaverde: Okay, fine, John Locke and David Hume. I’m going to pander to the British in the audience. But the point I’m trying to make is that I don’t think that the average person getting a degree in these fields is doing it because they really have a passion for David Hume. It’s not that they are against philosophy. They may find it mildly interesting, but in some sense, they have been moved into college or even graduate school as the path of least resistance. By over-educating a lot of people, we are delaying family formation and we are actually putting them into lower income paths than they would have otherwise been. In fact, I think, if you look at a lot of the unrest that happened in US campuses between 2020 and 2023, most of the leaders of those unrest were precisely from those fields that have very bleak job market opportunities. We don’t really need that many people going to graduate school. We don’t really need that many people doing masters, in particular in fields in humanities and social sciences.
If we could think a little bit about how to push these people more into professional or trades, I think that will be better for the economy. There is a big shortage of a lot of specialist workers in many, many fields of the economy, and it will be better for family formation. That, to me, will be another example of a no-regret policy. Let me come back to a policy recommendation I gave to the Korean government, when all of them looked at me and probably thought ‘why are we paying him a consulting fee?’ One of the real problems that they have is that if you don’t make it into what they call the SKY universities – which I think is Seoul National, Korea National University, and Yonsei University – your life is not going to be great. That creates this enormous pressure, this competitive educational race that is limiting fertility in a very radical way. Even forgetting about fertility, I don’t think it’s good to have such high status gains so early in life. Because a lot of people bloom later in life. This may depend a lot on your social background. It kind of makes the system too much of an all-boys club. Something that I proposed was to have, like now, a national entry exam to college, but to set up a minimum threshold – say 8 out of 10. What we do is we agree that if you score 8 in that exam, it means you have the IQ necessary and the background necessary to succeed at Seoul National. Then, among everyone who has scored 8 or higher, we are going to run a lottery. What is the point about that? Well, first of all, you only want to get to 8. You don’t want to encourage overstudying. At the end of the day, does it really matter that you are 9.1 versus 9.2? No, it doesn’t really matter. It’s pure randomness. It’s pure noise.
We stop this insane level of competition. The reason why this is good for society is because there is a kid who got 9.9 and should have gone to Seoul National no matter what, because he’s a super genius. He gets unlucky in the lottery. He will go to the next university. The next university is going to probably not be that much worse, and that will create a much more open set of options. You will have more of a gradient of quality of universities than this cliff, that either you made it into Oxbridge like Pieter, or you don’t make it at all. And I think that’s good for society in any case.
Sam Bowman: Korea is an interesting story when it comes to fertility rates. What’s less well known is that the Korean government for a long time actually deterred people from having children and pioneered anti-natalist policies. If listeners or viewers would like to learn more about this, there’s a brilliant article in the new print edition of Works in Progress about this. It’s partly about the history of Korea’s anti-natalist policies and also a surprisingly optimistic view of the attempts that the Korean government has made to raise birth rates. If people want to get that and everything else that’s in the new print edition of Works in Progress, they can get it for $100 a year for six issues at worksinprogress.co/print.
Pieter Garicano: It seems to me that in South Korea, it’s clear this behavior is quite rational on the part of the parents and the students. The college wage premium in Korea is extremely large, especially if you go into these four top universities, and they’re stuck in this destructive state for their total welfare but for each individual optimal zero-sum arms race. However, that doesn’t seem to be true for the kind of students who are pursuing a humanities degree at a lower-ranked Anglo-Saxon university or European university, where clearly it’s not in the individual’s material interest to pursue this. You might say that in Europe there’s subsidies and hence distortions. But there aren’t any subsidies, at least not very large ones, for private universities in the United States. If we’re good liberals, why shouldn’t we let them just do this if they so desire? And, how can this kind of inefficiency, if it’s so personally prosperity-destroying, persist?
Jesús Fernández-Villaverde: Let me start with the beginning of your question. Even in the U.S., when you go to universities, you are actually getting a huge subsidy. If you go to Ohio State or you go to Texas Austin, these are public universities. You are paying tuition, but a lot of it is also paid by the state. It may be the case that most of the people you know in life, Pieter, went to Chicago or went to Columbia, but they’re actually very rare. I don’t remember the exact numbers, but once I did the computation of the likelihood of the ten closest people to you in life, five or more having a degree from an Ivy+. It is infinitesimal if there was perfect random mixing in society. And I look at my own case, and of the 10 closest people to my life, I had like six who satisfied this condition. We tend to forget that a little bit.
There is an implicit subsidy going to a public school in the U.S.. But even if you go to a private school like Penn. The way to think about Penn’s budgets – and this kind of also puts in perspective some of the current financial difficulties – is that one third of Penn’s budget comes from tuition, one third comes from endowment, and one third comes from federal grants. Those federal grants implicitly are paying for part of the undergraduate and graduate education. So if you go and decide to do a PhD in philosophy at Penn to write that breakthrough dissertation on Martin Heidegger, you are probably going to have package aid from Penn, which basically means your stipend and tuition, and that’s implicitly paid by the federal government.
Second, I’m a strong believer in people making good rational decisions when they go and buy bananas. What do I mean by that? You go to the supermarket the first day and you buy a banana and you don’t like it. You think it’s a bad banana or too expensive of a banana. Tomorrow, when you go to the supermarket again, you buy an apple or you buy an orange. You go to another supermarket that has the best bananas.However, in life, there are decisions like going to college, going to graduate school that you do only once in your life. There is a lot of uncertainty about the parameters involved in making that decision. And that you are going to make that decision in part influenced by objective facts and information, but in part, yes, by social norms or trends or facts.
This is not based on abstract thinking. If I had a time machine and I could find myself at 17 years old, would I tell Jesús—this will be like in 1990—to do the undergraduate degree that he did? No. I think I picked the wrong undergraduate degree, and I think I was a relatively highly rational agent that looked at this thing carefully. Or even in graduate school, did I always make the right decisions in graduate school, even with ex-ante information that was available for me? The answer is probably no as well. I can perfectly see a lot of students not making the right decision, and it doesn’t cost me a lot of effort or contradiction within my standard framework of a maximizing utility economist. I think that most high school students are not very aware of these internal rates of return, for instance. This year, at the beginning of the semester, someone has actually calculated the internal rate of returns for different majors at Penn. Actually, just for fun, I had one lecture going over those internal rates of returns with my undergrads, and I asked them, and I would say most of them were completely clueless. And we are talking about seniors majoring in economics at Penn.
Sam Bowman: This is also a very no-regrets policy, to just make students or young people aware of the rates of return from various degrees. I can’t imagine any possible argument against giving information. It doesn’t cost anything or it costs almost nothing. I can hardly imagine it being a costly thing for people to know true facts in this case anyway. I’m curious to ask about baby subsidies. My take is that one of the really big problems that all pronatalist policies like that have is that they really struggle to target babies that wouldn’t have been born versus babies that will be born anyway. So if you imagine a really successful policy that increases birth rates by 10 percent, you’re still spending above 90 percent of that money on babies that are being born already. Given that the goal here is to raise birth rates, you’re wasting a gigantic share of that. That means in practice that most of these policies, if they would work, are still just unaffordable. Not necessarily because the money that we spend on the babies that wouldn’t have been born isn’t worth it. It probably is worth it. It’s that we’re spending so much on all these other babies that would be born anyway that it just becomes unaffordable. And so the actual amounts spent are tiny and unsurprisingly don’t end up really observably changing behavior that much.
What I am really interested in is whether there are ways to target babies that wouldn’t be born in a better way. For example, if we know that couples that do have children average at two children each, rounding to the nearest whole number, then maybe giving a subsidy for the third child that’s born. Or for example, if we know that people who have children earlier tend to have more children, then maybe we try to subsidize children being born under a certain age. I can think of pretty easy political ways of making that possible. You need to get a bigger car if you have three children. If you’re under 25 and you have kids, you need to have certain support that over 25s don’t need because you’ve got less money, whatever it might be. That’s something I think about a lot. Do you think there is any mileage in this idea of just paying people to have kids?
Jesús Fernández-Villaverde: First of all, the idea that by giving 5,000 pounds to every child you are going to make much of a material impact is crazy. I think that a lot of the facile criticism of pronatalist policies is based on this type of evidence. As you say, 90 percent of people or 80 percent of people who are going to make this decision are probably not affected by this type of subsidy. In economics, we will call this inframarginal, which means you are not pushing the person over the margin. It’s a waste of money.
I agree with you that an important margin is two to three. This is true in the US. I suspect it’s probably true in other countries, but I have not looked at the data myself – I want the listeners to have that caveat in mind. In the US, a lot of the change in fertility over the last 40 years has been the reduction of families from three to two. You used to have many more families at three than now you have, and most of these, we have seen them moving to two. That is a little bit of a nuance or a qualification of the discussion we had before between zero and one. We have more people that used to be at one or two at zero. We have more people at three going to two. I fully agree with you that pushing people from two to three will make a big difference.
I don’t think that 5,000 extra pounds will make a big difference pushing people to go from two to three. But things like if you get to the third kid, college tuition is free for all three kids will make a huge difference. If you go from two to three, parental leaves are going to be convex in the number of children you have, things like that. I would need to sit down and think exactly about what can be done in every particular country. By the way, I think this is one of those situations where the one-size-fits-all approach that economists always have may not be the best approach. The type of policies that you may want to do in Finland may be different than the type of policies that you may want to do in Poland or in Portugal. But pushing people to two to three, I think, will make a big difference.
And, since you have given me the green light that our listeners are not going to be offended, we want to be sure that the best people have kids. The ‘best people having kids’ doesn’t imply they are the best people because they are the most handsome or the ones we like the most. But, conditional on someone having three kids, it is probably much better that we have a highly educated, successful professional woman having a third kid than having a poor single mom without any education having a third kid. This sounds bad, but I think it makes sense. And thinking about subsidies that are a little bit biased towards these outcomes, I think will also make a difference. What I really want is my neighbor who is a very successful lawyer who has done very well in life and who is going to be a great mom to think about having the third kid. How can we help her to push her over the line of that decision? I think that that will be good for society as a whole. As you say, it’s probably going to be one of those no-regret policies that even if it doesn’t make much of a difference, we are not really losing much anyway.
Sam Bowman: One doesn’t have to prefer higher skilled parents to have children. Just wanting a neutral system could lead someone to still not want subsidies, which relatively have a much stronger incentive effect, if they work at all, on people on lower incomes, which is distortionary.
Jesús Fernández-Villaverde: That’s a good way to put it.
Sam Bowman: Which is one reason. I am unconvinced that childcare subsidies do a great job – but maybe they do. If they do, then you want to do it via tax deductibility by making the reward scale with how much you earn so that it’s sort of an equal share of your income, wherever you are on the income distribution. You don’t need to take a position on who you want to have kids. In not taking a position on who you want to have kids, you end up needing it to be neutral and doing it via tax deductibility. I think that’s quite important, and actually has led me to think that childcare subsidies as we do them are pretty bad and a pretty distortionary way of trying to support parents compared to tax deductibility of childcare fees.
Jesús Fernández-Villaverde: That’s a much better way to put it. I think that your formulation reflects my underlying thinking much better than the way I put it. I fully agree with you on that point. And, to emphasize this once more, I think this also needs to be done by keeping an eye on the complete tax system of each country. Tax systems are very complicated, and they have a lot of subsidies and hidden situations. What I would recommend in the United States may be very different from what I would recommend in the United Kingdom, just because of this very complex structure of the whole tax system.
Pieter Garicano: Given the importance of this issue, I’d like to come back to a question we were discussing at the start but never finished, which is how do we get a better understanding of why this is happening. You mentioned that economics as a field has some structural reasons for why it’s not dealing very well with this. But it also seems to me that finding the answer could be relatively capital intensive, perhaps because it requires a lot of surveying across many different countries. What’s an experiment we could design – if we had unlimited funds – that you think would be the best way to try to gain as much information as possible on the reasons for why we’re seeing decline in birth rates and perhaps also the pathways through which we could incentivize people to make slightly different choices?
Jesús Fernández-Villaverde: Let me answer that in two steps. The first one is I would like to have much better data. Much, much better data. This is not even about asking people why they are not having children, because who knows how people answer questions. But if you actually look at the data, you will be quite surprised that except in a few countries, our understanding of who is having children and their demographic characteristics is quite limited. We are in the situation where we are making important policy decisions blind with just wild guesses. So having a much more detailed demographic information about who is not having children would be a very fundamental point.
I’m extremely critical of the World Population Prospects of the United Nations. I think it’s a little bit of a scandal how bad that data is. When I wrote something for a British magazine, there was some organization in London that fact-checked my statements. It’s actually still online. And they basically say, ‘oh, we fact checked you against the United Nations and your numbers are wrong’. I said, ‘well, okay, fine, maybe it’s the other way around’.
With respect to the type of things we can ask people, you will need to talk about that with people who have been thinking a lot about how to design good surveys like Yuri Gorodnichenko at Berkeley or maybe Stefanie Stantcheva at Harvard. These people have been thinking a lot about how to design good surveys and how to elicit truthful answers. So maybe they will answer better.
But, going back to the point before, are they aware of probabilities? As I was saying before, if you are going to major in philosophy, what do you think your career path is going to be? Are they getting this right? Maybe they do want to spend the next 40 years of their life reading David Hume, and they are fully aware that they are going to be poor.But maybe what we realize is that a lot of people are not.
And that will tell us that maybe giving them a piece of paper with information before they go to college will be important. Coming back to the no-regret policies, imagine that we can agree on a five-page summary of professional outcomes based on college majors. Before letting you enroll into college, you need to sign that you have actually read this thing. That would be useful.Asking them about, are you aware of how quickly fecundity decreases after 28? Are you aware of the advantages and disadvantages of having kids? So that would be what I would do.
I’m a little bit more skeptical about designing experiments. First of all, I’m on the side of economists who think that experiments are a little bit less informative than what the consensus of the profession now thinks. I think that a lot of that has to do precisely with the timing issues that we brought up at the beginning of this conversation. Even if we design an experiment, since we will need to wait until completed fertility, it may take us 20 to 30 years, and that may not be the best way to make decisions in real time. Now, if this is only about the scholastic satisfaction of understanding what is going on, then we can wait 30 years, but probably by 30 years from now, we will know anyway. So in that sense, I think that a combination of the pure raw effort of getting data right and asking well-designed good survey questions.
I’m quite concerned that one of the main problems that the economics profession right now suffers is that we do not value enough data construction. If your goal in life is to become, you know, super duper endowed chair of economics at Penn, super duper endowed chair of economics at London School of Economics, you are going to write a fancy model, or you are going to write fancy empirical work. But if you actually spend 15 years of your life putting together a super useful data set, you are not going to end up being the super duper endowed professor at a top university. I think that’s wrong.
Sam Bowman: Professor Jesús Fernández-Villaverde, thank you very much for joining us. If listeners want more, I recommend your Twitter account. It’s very good. You tweet very interesting insights. The other day you did an interesting one on Twitter, inspired by Dan Wang and Joel Mokyr, who is one of my heroes and one of the Works in Progress’ leading intellectual lights, which tried to draw out a potential synthesis of their ideas, which I thought was really interesting and people should check out. Thank you very much for joining us.
