This is the other half of the problem of lower birth rates offered by Rodney Johnson of Dent Research, an investment advisory service in Delray Beach, Florida.
The reason for fewer births around the globe, particularly since the global downturn, is obvious. It’s the same reason that families have fewer children when they move into urban areas.
It’s All About Money
There will most likely be an uptick in child birth in China. But the idea that easing the one-child policy will lead to a boom in births isn’t convincing. It’s no longer this policy holding families back. According to Credit Suisse economist Dong Tao: “The high cost of raising a child is probably China’s new birth control.” The country’s average income is roughly $5,000 per year. The cost of raising a child to age 18 is $75,000, or about $4,200 per year. That doesn’t include college.
In his book Korea: The Impossible Country, Daniel Tudor points out that raising a child there costs the equivalent of $230,000 U.S. (or about $12,700 per year). The average income is only $20,000 per year.
All of this should sound familiar.
Here in the States, the U.S. Dept. of Agriculture estimates it will cost just under $250,000 to raise a child born today to the age of 18 (not including college). As we’ve written before, the average cost of daycare for an infant is $927 per month. Median household income is only $54,000. Adding an expense of more than $1,000 per month when including food, health care, diapers, and clothing, is prohibitive to say the least!
Young Americans Still Want Kids
Even though young Americans are currently choosing to have fewer kids (if any at all), it’s not that they don’t want children.
According to a 2013 Gallop survey, the desire for children has barely changed over the last two decades. In 1990, only 4% of Americans said they didn’t want children. In 2013, the number was 5%.
With a desire for children and the casual attitude toward sex I mentioned earlier, it would seem like the U.S. should have another baby boom underway. But we don’t. Just like in China, South Korea, and a host of other countries, money is the issue.
Most Americans (65%) say they don’t have enough money to raise a child. Another 11% say the state of the economy or the dearth of jobs is why they’re not having children.
Given that families want children but believe they can’t afford them, and governments want these couples to have kids, the obvious answer is for governments to offer financial assistance. This is exactly what they do, but with limited success.
Even Free Money Isn’t Enough of an Incentive
In the U.S. we give tax credits for dependent children, child care and tuition. Russia offers a baby bonus of $9,000 for a second or higher-order child, while Australia offers $6,000 per child. In Germany, a woman can claim up to $35,000 in paid parental leave while caring for a newborn. France spends roughly 3% of its GDP on benefits for parents.
In Hungary, the government is so desperate for children that it now offers aid before couples have children. A family that pledges to have at least three children over 10 years can get a grant of 10 million forints (about $35,000) toward the purchase of a home. A typical house in Hungary costs around $100,000. In addition, couples pledging to have three kids can apply for a 10 million forint low-interest loan. That’s a great deal for something that hasn’t even happened.
With the global economy slowing down and the cost of current social programs ratcheting higher, it’s hard to see how any nation will significantly boost what it pays couples to have children. And yet, that appears to be the long-term solution to solving national budget woes and social funding shortfalls around the world.
Without significant growth driving up tax receipts to use for funding bigger social programs, nations would have to tap another source—taxpayers. These are the same taxpayers who are already dealing with stagnant wages and higher costs for health care and education, trying to fund their own retirement, and who are realizing that when Junior gets out of college their aging parents will need financial assistance.
In The U.S., It’s Not Just the Money
While a lack of financial security and a difficult economy are obvious headwinds to starting a family, the U.S. has an extra obstacle—changing immigration.
For many years, the main thrust of immigration to the States was from Latin America, and mostly Mexico. Since the Financial Crisis, the flow of immigrants north has slowed dramatically. Net migration from Mexico (counting those who return home) has fallen to zero.
And Hispanic migrants have been replaced by Asian migrants, who have a much lower birth rate.
Time Could Change Things
Without a change in social spending, immigration, or the economy, the best we can hope for is that the desire for children—which we know young Americans still have—overcomes the practical issue of cost.
We need for biological clocks to tick louder. Hopefully couples that didn’t have kids when they were in their 20s will rush to make up for it by having several when they’re older. This is called the “tempo effect,” and it’s already evident in the data. The dramatic drop off in births in the U.S. occurred almost entirely in the under-30 set.
Yet, the question remains whether or not enough couples in their 30s and even early 40s will have children so that we can gain ground in the fertility rate. In this respect, history is not on our side.
The last time the economy went through such a period was the Great Depression. Having children during the terrible economic times just added to family woes. Unfortunately, 22% of the women who entered child-bearing age during the 1930s never had kids, compared with the normal rate of around 10%. The tempo effect might not help us as much as we’d like.
The Most Likely (Depressing) Outcome
In the U.S., the correlation between births and median income is 0.76, which implies a very strong relationship. This makes sense. If people make more money, they feel more secure in having children.
What’s interesting is that childless couples don’t have the same immediate need to spend on essentials as those with kids, so they can choose to save. If they save instead of spend, they hold back the exact economic growth needed to generate more income for workers like themselves, making them less likely to have children. It becomes a vicious cycle.
Unfortunately the Fed, banking regulators, and the U.S. government have all worked to push out the recovery, just like their counterparts in Europe.
The best approach to the downturn would have been to flush out the weak companies and institutions early, re-price debt and assets at lower levels, and then allow the survivors to compete and grow. Wages might have dropped lower at first, but they would have resumed an upward trajectory, giving workers confidence to not only spend what they earn and take on credit, but to have kids.
Instead, both U.S. and European regulators allowed hobbled companies and banks to survive, which then spent years cutting costs and holding down wages to repair their balance sheets. The burden was laid on employees, who’ve now experienced more than half a decade of flat wages, or even falling wages, when we include inflation. It’s no wonder they aren’t optimistic about their financial futures!
What Won’t Work
It’s possible that Germany’s Angela Merkel was less than altruistic when allowing more than one million Middle Eastern refugees to reach her country last year. She could have been counting on the flow of mostly young people to stem Germany’s demographic decline. It’s highly unlikely that such a strategy will work.
The group that entered Germany last year was more than 70% men, and they don’t share a language or social mores with the domestic population. Germany would have to teach them the language and assimilate them socially before any such program could be called successful.
The French have tried for years with their Algerian population, which already shares the language, as have the Brits with their Pakistani migrants. So far, it hasn’t worked.
Interestingly, nations wishing to add some demographic heft through immigration policies and show mercy at the same time can look to Canada as an example. Our neighbor to the north does allow war refugees to migrate, but only women, children, and families.
At this point, falling birth rates will hold down economic growth, and populations will shift from young to old. Without more kids, a global economic rebound is not just around the corner, so traditional growth stocks and investment strategies won’t work.
In keeping with tepid consumer demand and modest growth, this environment is marked by falling interest rates and rising taxes, which is a recipe for a lower standard of living for those who don’t match their investment approach with the economic season.
That’s why it’s so important to review your investment holdings, and make sure they have the best chance to grow in the difficult years ahead.”