PARTICIPANTS
Jesús Fernández-Villaverde, John Taylor, Annelise Anderson, Michael Boskin, Doug Branch, Pedro Carvalho, John Cochrane, Chris Dauer, Steve Davis, Sebastian Di Tella, David Fedor, Jared Franz, Bob Hall, Adele Hayutin, Gregory Hess, Laurie Hodrick, Robert Hodrick, Chad Jones, Ken Judd, Matthew Kahn, Pete Klenow, Evan Koenig, David Laidler, Oliver Landmann, John Lipsky, Lee Ohanian, Robert Oster, Radek Paluszynski, Elena Pastorino, Paul Peterson, Alvin Rabushka, Valerie Ramey, Richard Sousa, Tom Stephenson, Jack Tatom, George Tavlas, Yevgeniy Teryoshin, Chris Tonetti, Victor Valcarcel, Gustavo Ventura
ISSUES DISCUSSED
Jesús Fernández-Villaverde, the Howard Marks Presidential Professor of Economics at the University of Pennsylvania, discussed “The Wealth of Working Nations,” a paper with Gustavo Ventura (Arizona State University) and Wen Yao (Tsinghua University).
John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.
PAPER SUMMARY
Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per workingage adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.
To read the paper, click here
To read the slides, click here
WATCH THE SEMINAR
Topic: “The Wealth of Working Nations”
Start Time: January 31, 2024, 12:00 PM PT
>> John Taylor: Okay, we're very happy to have Jesus Fernandez Delagardi speak with us today. He's the Howard Marx presidential professor of economics at the University of Pennsylvania. PhD from Minnesota, was a national fellow here in 2014 2015 is what I have and an advisor to a regulation rule of law initiative, I would say.
One of my favorite papers published. It's called solution and estimation methods for DSGE models. Remember this? It's 186 pages long. Anyway, it's in the handbook of Macroeconomics. But today we're gonna hear about a paper called the wealth of Working nations, which is a lot of titles. Anna Gustavo is up on the screen somewhere, the author, but the other co author, Wen Yao, is not here, so take it away is this.
>> Anna Gustavo: Okay.
>> Jesús Fernández-Villaverde: Thanks a lot, thanks for having me. As John was mentioning, this is joint work with Gustavo at Arizona State and with Wenyau at Tsinghua. And because of the time difference, she cannot be here otherwise she will be happy. So the motivation for this paper is super easy, super simple, and in fact, you can get the point of this paper in 30 seconds.
Basically, as the population of advanced economies age, output growth per capita is becoming an increasingly misleading indicator for growth theory. We are not going to claim that output per capita growth is not useful. I have some slides about that later. I want to make just the point that one needs to be very careful when you use it.
And the reason for that is that changes in the working age population, in particular as the ratio with respect to total population have been so big over the last 20 years. That output growth per capita can hide important movements in output in per worker terms, in per working age adults.
I'm just sorry, one second. I'm going to put the time so I kind of keep an eye on the time. But before anyone asks, I'm going to define a working age adult as all the statistical agencies in the world do, which is an adult between 15 and 64 years old.
Some of you may think that you are outside that bound. I promise I will come back to that later, but just as a first pass. And the reason why we think the output per working age adult is a useful measure is because it's a measure of how much we can produce given the available amount of adults in the economy and the prevailing social norms.
And prevailing social norms. I mean the fact that in most societies we do not think that children below 14 should work and that in most societies you have some idea of retirement, where most people after 65 retire. Of course, there are two caveats that I want to be very obvious and very open about them right away.
First, yes, we are aware that some adults over 64 continue working. And as I mentioned, I promise I'm going to come back to that later on. And yes, we are aware that there are other possible measures. And the first comment I always get when I talk about this paper is why don't GDP per worker or per hour work again?
I promise I will come back to that. So yes, give me a few seconds to discuss those. Now, this matters, and this matters a lot. So if you ask the average economics journalist or even the average macroeconomist who is the poster child of bad economic performance over the last 30 years, chances are they are going to say Japan.
And the numbers they are going to tell you is that between 1990 and 2019, GDP in Japan grew at an annual rate of 0.93, while in the US it was at 2.49. And because of that, there is a small library of books and volumes and volumes of journals filled with papers on the economic struggles of Japan.
One book that was a big seller back in the day in 2014 was by Pesek, which I think was the Financial Times correspondent in Japan for a long time. And he popularized the term Japanization, which I guess was probably around before that. So few lessons are more timely or critical than those offered by Japan.
A once vibrant model for developing economies. And look at what it says later. That means exploring where Japan went wrong, how it sunk under the weight of Havre's and political atrophy. And miss opportunity after opportunity to scrap an insular model based on over-investment, export led growth, an excessive debt.
So that was quite an indictment. But what happens? Well, of course, people say, let me tell you my favorite policy recommendation. Okay, so this is just not mentioning that Japan is not doing very well. They say, well, maybe Japan should have done more aggressive fiscal or monetary policy.
Maybe Japan should have undertaken more structural reforms. And if anyone cares, the orient story of this paper is that a very prominent member of the economics profession, much more prominent than I am. Came to Penn and talked for 90 minutes in the seminar, in the macro seminar, about why everything that went wrong with Japan was the fault of the bank of Japan.
And I thought, that doesn't make a lot of sense. I tried to explain my displeasure, but I was brushed aside. So what I did was to go back and I look at output per working age in Japan. And when you do that since 1990 to today, it turns out to be the case that Japan has grown at 1.44% a year.
What is the difference between in the previous slide 0.93 and now 1.44. Well, basically that working age population in Japan has been falling at around half a percent a year, while the US has grown at a 156%. And 156 is a little bit more than 144, but it's not a big difference.
And why the US has been growing much faster? Well, because the US has brought in a lot of immigrants, just truly to begin with, since 1990. I came to the US in 1996. So since 1997, I guess that I got a job at the Minneapolis fed I count as part of the working force in the United States.
>> Participant 4: Good thing you came.
>> Jesús Fernández-Villaverde: Well, that's the counterfactual, you never know. But anyway, the point I'm trying to make is you look at Japan in working age population, you look at the US in working age population, it doesn't strike you like these two countries are doing much worse than each other?
In fact, I'm going to do a little bit of reverse engineering. So let me try to get this right, because sometimes people get confused. I'm going to stop at 2019 because it's where our data set ends and actually is good because it's before the start of COVID. So there is no contamination because of COVID.
And I'm going to say, let me go back in time until the year such that the US and Japan has grown the same amount. And that happens to be 1999. Now, because years come in integer units 1998, Japan has grown a little bit more since 1998. But basically the point is, between 1998 and 2019, the US and Japan have done exactly the same in terms of working.
And I think that once you see this and you think about it, maybe Japan is not doing so bad after all. Yeah?
>> Participant 1: Japan is still has a level effect in the US.
>> Jesús Fernández-Villaverde: Yes, that's-
>> Participant 1: Japan could do better.
>> Jesús Fernández-Villaverde: Exactly, and that's one of the things we are going to mention.
That the surprising thing is that in the model or, sorry, in the data, we are going to see that suddenly there is a much closer bunching of countries in terms of their per working age, population growth. Which suggests that all these countries are growing through some type of balanced growth path.
But there is no catching up at all.
>> Participant 1: Right.
>> Jesús Fernández-Villaverde: So to me, one of the most amazing things is basically since the early 1980s, mid 1980s. No catch up at all, no convergence at all among rich countries.
>> Participant 1: I presume we're gonna get to labor force participation and choice of hours worked, which is why Europe is 40% poorer.
>> Jesús Fernández-Villaverde: Exactly, so that's the very next slide. Okay, so again, when this paper circulated, that was the first question that I got. But, but, but, what about older people working, okay? And my answer is, look, I would love to have more dis-aggregated data of exactly how much older people are working, how much they are contributing to GDP, etc.
Unfortunately, the national income and protocols of most countries do not have a very good information on that. What I can tell you is the following. In 1990, 24.3% of adults in Japan 65 and older were working. In 2019, it was 25.3. So it has gone up a little bit, but very little.
Older people in Japan have always worked. Now, when you look at the US, that same rate has gone from 11.8% to 20.2%. So if I had access to some measure of disaggregated output produced by people of certain age, my guess, and again, this is a conjecture. I want to be very clear, is that the case in favor of Japan will be even stronger because the US has put another 10% of their older people to work.
Japan has only put 1% more, okay? And this is a case where if anyone has an idea of how we could look at the micro data and somehow reverse engineer at the composition, I would love to hear about it.
>> John Cochrane: This takes into account the number of people who are old.
Why not just do it for the US, Japan, you could do it for other countries, it might be harder, but 15 and older, you could show us that ratio.
>> Jesús Fernández-Villaverde: Yeah, I guess I could do that.
>> John Cochrane: I could do something like that. So there's the GDP per capita and the GDP per worker.
And the issue is the incentives to work for Carter. Once you get over 65, countries have all sorts of-
>> Jesús Fernández-Villaverde: Exactly, and that's-
>> John Cochrane: Different across countries.
>> Jesús Fernández-Villaverde: And that's, in fact, the very next slide. Okay, so participation rate in Spain for people over 65, 2%. And this, basically, I can give you the reason.
In Spain and in most other european countries, if you are working, you don't get your Social Security check. So it's just you are basically leaving money on the table by working. You take account of all the income taxes you are going to pay and you subtract the fact that you are not getting a Social Security check.
You actually lose money by working. So the amazing thing is that still 2% of people like to work. And that's exactly what John was saying. I have seen many, many papers that claim or that suggest to report GDP per worker or GDP per hour work. That will be a different measure, which is per adult or per working-age adult.
So, for instance, sadly, as Jonh was saying, I go to many conferences where they tell me, Jesus, you complain a lot that Spain is only 50% the level of income per capita than the US. But look how many vacations you take in Spain. Look how few hours you actually work in a particular year.
>> Participant 3: What about the informal economy in Spain? Is it-
>> Jesús Fernández-Villaverde: Actually, that's a little bit of a myth. So the informal economy of Spain is already 2020, 2% in the US is around 17 16%. So you are really only talking about like a 4, 5% difference.
>> Participant 3: And what about the informal economy as you get older?
Because that's what you're-
>> Jesús Fernández-Villaverde: Yeah, so I don't think that that will matter that much because I think that as you get older, most people are probably moving into home production. So my dad goes and takes my nephews to school and takes them back. That's not part of the measured GDP, anyway.
And I think that a lot of the informal economy is actually relatively young people who do not feel they need to get into any type of formal arrangements because they don't need to have much participation in the workforce data.
>> John Cochrane: I want to object to the idea that there's a right number and a wrong number.
>> Jesús Fernández-Villaverde: Yeah.
>> John Cochrane: There's a right number for each question. And if the question is the productivity of the workers, then you want output per hour. If the question is overall level of the economy and you're thinking about disincentives to work, then you've got-
>> Jesús Fernández-Villaverde: Exactly.
>> John Cochrane: Right, if the question is how many aircraft carriers can we afford to buy, then just GDP is-,
>> Jesús Fernández-Villaverde: Exactly, and that's that slide. Okay, so I'm coming back to that slide.
>> John Cochrane: I promise to stop giving you that slide.
>> Jesús Fernández-Villaverde: No, no, no, it's okay, it's okay. No, no, I love all those questions. Believe me, I have been thinking about this for ages myself. So I love all these questions.
And remember when I went back to the very first slide, I didn't say that it was a completely useless indicator. I only say it was an increasingly misleading indicator. I'm never going to be appointed the governor of the Bank of Japan, obviously, to begin with, because I don't speak a word of Japanese.
But if I were the governor of the Bank of Japan, and I go to the average conference in macro, and I have ten economies giving me grief because we haven't been doing it very well. I will say, look, given that my working age population evolution, what else could I have done?
I have done what I was supposed to do, maybe 1% up, 1% down. But this is not that. I have fundamentally missed anything. Now, why, I don't think, from my perspective, that if I want to think about the big picture of how well economies are doing, GDP per work is the most useful of indicators.
And again, I give you the point, it can be useful in some cases. There's a minor point. Data in hours is awful. So if you are trying to do something with hours, for the US, they more or less make sense. I can tell you, for European Union countries, they don't make any sense.
They are completely invented by some statistician in the national statistical office. The bigger point is that, sadly, as John was saying, the number of workers an hour's work are endogenous to labor market policies. They are endogenous to taxes. They are endogenous to a lot of things, okay? So Spaniards take six weeks of vacations on average.
Is this the same decision that they will make under different situations? Maybe, maybe not. I don't know. I will need a model to think about that. But there is something that you want to keep in mind, which is imagine that you have a restrictive labor regulation or very high taxes.
>> Participant 3: But there is immigration.
>> Jesús Fernández-Villaverde: I'm going to come back to that in a second. But remember, we are not counting citizens or nationals. We are counting people in the country, okay? And national statistical agencies have. A fair assessment of how many people are in the country regardless of their legal immigration status.
>> Participant 3: But immigration is sensitive to policy, It's indigenous.
>> Jesús Fernández-Villaverde: Yes, exactly, we are going to talk about that migration also as an indigenous decision, okay? But the point is that if you are gonna have some type of labor regulation that's gonna expel from the market, most likely those who are the least productive.
So by a pure composition effect, the average productivity is gonna look much higher. So the most cited person in my department is Frank Diebold. Frank Diebold has more citations than I do, so if tomorrow the dean fires me, the average citation count of pen economics goes up. Pen may look better on some rankings.
Now, it's a good idea from that I should be fired, maybe. But there is a composition effect you need to be aware of, okay? And taxes and labor market regulations have a huge effect on that. So just telling me, look, France is doing okay because they are just working fewer hours.
Maybe, maybe not, it's a little bit more of a subtle point. You have a question?
>> Participant 3: No.
>> Jesús Fernández-Villaverde: Okay.
>> Participant 3: This is a really important point, right?
>> Jesús Fernández-Villaverde: Yeah.
>> Participant 3: We have some labor economists around the table. It sorta rings true anecdotally that low wage workers can work in the US and they kinda sit down in France and do nothing.
And French people keep telling us how great their productivity is.
>> Jesús Fernández-Villaverde: Look, my favorite example when people ask me this question was 1996. So I was telling you that I became a working age adult in the United States in 1996 when I moved to the United States.
>> Participant 4: We've moved in the European direction.
>> Jesús Fernández-Villaverde: Yeah, we are moving more and more, yeah.
>> Participant 4: Pushed out more of our least productive, least educated work.
>> Participant 3: Yeah.
>> Participant 4: Absolutely.
>> Jesús Fernández-Villaverde: But let me tell you this anecdote anyway. So I rent an apartment and I need some basic furniture, so I get a car and I drive to the mall of America.
I don't know if any one of you have lived in Minneapolis. And I buy some glasses and some dishes, and I get out of the parking lot and I see that I need to give my parking ticket to a person. And I was like, wow, I haven't seen this in 20 years in Spain.
Why, because Spain is a leading country in the terms of adoption of technology. No, it's just that, because of labor market regulations, since 1985, it made sense to install an automatic parking machine to pay your ticket. While in the US, it still was more profitable to have a teenager taking your ticket.
Okay, so all these decisions are endogenous, the way you organize. Another thing, good luck trying to go to a supermarket in Europe, even the most fancier, super expensive supermarket in Europe, no one is going to pack your groceries for you. In the US, at least at Whole Foods, they still do.
Well, that's just relative prices. Is this good or bad for society? I don't know. I need a model to think through it. But those are the optimal responses to relative prices.
>> Participant 5: It's a matter of questions. The statistics are most appropriate depends on the question.
>> Jesús Fernández-Villaverde: Yeah, exactly.
>> Participant 5: If you push this argument, if I look at the GDP level and growth of countries that are very stringent labor market regulations, where there is a correlation right there. If you push this argument through, GDP is not exogenous level of growth.
>> Jesús Fernández-Villaverde: Yes, exactly.
>> Participant 5: So I wouldn't take it as an argument for not focusing on GDP per work correlation.
>> Jesús Fernández-Villaverde: No, again, this is not an argument not to look at it. I'm just trying to say that looking at per working age adult is a very useful statistic to look at. Just let me put it in that way, okay? Now you're asking me a lot of questions, for instance, about policy implications, migration.
We don't have much to say about migration per se. As I was saying before, we are looking at people in the country regardless of their citizenship or legal status. So if someone comes from Mexico to the US, it goes down in Mexico, goes up in the US. And interestingly, in the data, there is no correlation, a very low correlation, between immigration and output growth per working adult, okay?
And again, this is not in favor or against immigration. It's just saying that countries that have a lot of immigrants in the data are not gonna do particularly well in our measure of per working adult, which again, I think is something that is interesting to know. And, coming back to the point, immigration is a decision.
I mean, the US changed dramatically since 1965 when immigration regulations were easy, okay? The US could change regulations again. And then, the same with fertility. Now I'm gonna come back to fertility a little bit later. Of course, fertility is to some extent endogenous. The only thing I want to mention now is that fertility has very, very long lags, okay?
So just think about it in this way, so fertility rate in the US in 2023 was 1.62. Imagine that we get some type of consensus that this is below too low and we decide to do something about it. Well, even if Congress passes legislation this morning, it will take nine months until something happens.
And after that new birth happens, it will take 15 years until that kid enters into the working age population, and it will probably take 22, 23 years until that kid gets out of college and gets a job. So fertility, anything that you wanna think about, fertility is super interesting and we can talk about it.
Just keep in mind it has 20, 25 years lags, okay? So if you are gonna ask me what if Japan had done something slightly different in fertility in 2000, my quick answer is it will have next to no impact in my data up to 2019.
>> Participant 6: Not to mention, even apart from the lags, China and a lot of other countries are figuring out that government policies aren't helping with fertility.
>> Jesús Fernández-Villaverde: Yeah, I have a few slides at the end. I put a lot of extra slides in case that people have questions. And yes, I have over there some assessment about how useful. So the empirical evidence I have in looking at it is that if you are super aggressive in terms of giving incentives to fertility, you can go like some European countries have been able to go from 1.4 to 1.8.
So you can get around 0.4 increases. You don't go back to 2.1, okay? Now I'm gonna try to argue later that even going from 1.4 to 1.8 has a huge impact in the long run. What is this gonna happen in China or South Korea? I'm gonna show you some numbers about South Korea later.
>> Participant 5: Metropolic levers in Italy and southern countries in Europe. As you know, there's a lot of discussions about financial incentives. But Italy and Spain are one of the countries that the lowest density, I mean, geographical distributions of Cape or K child care in general. And until you get to middle school, I mean, the spatial concentrations of schools in Italy is the same of Northern African countries.
Once you cut the kid out, what are you gonna do with it?
>> Jesús Fernández-Villaverde: No, I understand, and again, this is, I haven't prepared a lot of slides about the review of the literature. When we get to that, if you want, I can tell you a little bit what we believe we know and what we don't know, I'm just saying that.
To the best of my understanding, the best summary of the literature that I can give you is that being very aggressive in anything that we can put on the table to incentivize people to have more kids. This is gonna increase fertility rates. 0.40.5, which is non trivial, it's non trivial at all, but no, we are not going back to three.
We don't seem to have discovered any way to do that, maybe there is some secret lever that we don't know. Now, as I was mentioning before on the continuing usefulness of GDP and GDP per capita, so John actually used a great example. We are worried about how many aircraft carriers we can deploy against our friends in Beijing.
That depends, how big is your GDP, okay. A little bit less dramatic, sustainability of public debt, okay. The problem with public debt is that you want to think about it as terms of GDP, so if Japan population is going down, even if they are doing okay in per adult term, that's a real problem for public debt.
Also, GDP per capita, for instance, is still extremely useful, if you want to think about some measure of how much stuff we have per person in society, how many goodies we have to distribute among us. So we are not saying don't look at GDP per capita anymore I'm just saying, when you are thinking about how is the business cycle doing in the US, think more about in terms of per worker or per working age, adulthood.
And also, we don't have anything to say about issues like, it's a good idea to have larger and smaller population, it's not because Pete and Chad are here, but it's really one of the most beautiful papers I have seen in 2023. They have a fantastic paper on the importance of considering the total population, so all of those I fully agree with you guys I'm just, as John was saying, one question, one measurement okay.
So in the rest of the presentation, I'm going to do the following I'm going to first try to document that this holds for a lot of countries, so we are saying Japan. I want to convince you that this happens for everyone in the world, or at least for advanced economies, then I want to think about the data through the lenses of the neoclassical growth model.
I'm going to say, let me have a neoclassical growth model, and I'm going to feed exogenously population growth and see what happens. And, that will help us to understand a little bit better what is going on, then I'm going to talk a little bit about some extensions, and then I'm going to talk about China and India.
I will probably not have a lot of time, but depending on time and if anyone wants to stay around, I have some final thoughts on the demographic future of humanity by looking at numbers. Because, really, the demographic future of humanity has really changed dramatically over the last ten years.
What has happened with fertility has been quite amazing, and if you have, maybe I can give you some fun examples about how wrong you can get it when you forecast demographics. So maybe 20 years from now, people will be making fun of me about, you know, remember that be a Verde dude I mean, he got absolutely everything wrong.
So anyway, data, so we are going to look at the World Bank's World Development indicator database, I have written a few papers on growth and I did not have a good experience with the pen world tables. I was looking at them and for countries that I know a little bit better, the numbers just didn't make any sense.
I was looking in the literature and I discovered there is a nice paper by Pinkovskiy and Sala -i- Martin where he actually makes a similar point. We are going to look at these seven that the pill world table has a lot of creative accounting, so for instance, they do a lot of very aggressive transformations in terms of PPP adjustments.
And then you get numbers that do not make any sense, so for instance, they assume once you have done PPP adjustments, they claim that the Spain grew 15% in 2004. No, Spain did not grow 15% in 2004 it has been around for a while, but I think that is getting worse because they really try to make these things coverage more and more countries.
So when Chinese, we spend we have another paper, I have another paper with Wen and with Leo Henian where we are thinking about similar issues, but just focus on China. And we spend some time looking at the China number and the pen world table numbers just do not make a lot of sense.
>> John Cochrane: So the WDI, are you avoiding PPP adjustments and just looking at.
>> Jesús Fernández-Villaverde: Yes, because we are going to look at GDP in national constant price.
>> John Cochrane: That's the key.
>> Jesús Fernández-Villaverde: Yes, exactly. Yeah but they are going to have also the good thing about the world data, the World bank data, is that they have a lot of breakdown of information on population and things like that.
So I can put, I mean, I guess I could always get GDP from Penn World Table and population from the World bank, but then you're kind of mixing things and.
>> John Cochrane: But avoiding PPP is not a good thing, is it? It's a bad thing we'd like better PPP things, but ignoring PPP is apples and oranges, right?
>> Jesús Fernández-Villaverde: No, fair enough, yes.
>> John Cochrane: Are better adjustments.
>> Participant 7: If you want own country growth, you want it in local currency and the-
>> John Cochrane: But if you're comparing it to growth in the US, then it's.
>> Jesús Fernández-Villaverde: No, no, I understand, but I'm since I'm going to look at G7 plus Spain I don't think that the relative changes in PPP in this YP.
Now, if we were doing US with Zimbabwe, then yes, you are 100% sure, right, that this will not make a lot of sense. I don't think that these PPP adjustments are going to change my view of the world that much I have look at the PPP adjustments of the Penn World Table I just don't believe it.
I think that they introduce so much noise that this is the list of two bad choices.
>> Participant 4: And it's because they're trying to cover these countries that range over a factor of 50 in terms of levels of development.
>> If they were just trying to compare Spain in the US.
>> Jesús Fernández-Villaverde: They will probably do something. Yeah, but I am telling you, the day I gave up on the Penn World Tables is when they told me that we grew 14% in 2004. Now, we didn't not I mean, I will have noticed kay. It's not only me like the economist community in Spain will have noticed we were growing at a 14%.
>> Participant 3: Well, I don't want to.
>> Jesús Fernández-Villaverde: Yeah, so it's okay, go ahead.
>> Participant 3: We'll talk about this later.
>> Jesús Fernández-Villaverde: Okay anyway, so why G7n plus Spain? Well, I want to make the point that this matters for all rich economies. Spain is the next economy after the G7 in terms of science among the rich economies, and I know it well, so kind of gives me a kind of a reality check that the numbers I'm getting makes sense.
I don't know if anyone knows, but actually my very first job was to do a Spanish NEPA, so that's the only thing I know about everything else I don't know anything anyway. And as I was mentioning before, the population, the working age population is between 15 and 64 okay?
So these are the basic facts so let me show you from 1990 to 2019, we have done this with many different samples, many different beginnings and ends. But let me tell you why I think this 1990 to 2019 kind of makes sense. Because it's basically starting around 1990 that these big divergences in the evolution of the population, the working age population, over total population, start to be significant, okay?
Japan the big drop of fertility in Japan starts in the late 1960s, early 1970s, and it's by the early 1990s where this starts to be significant in the numbers. Why we stop in 2019? Because at the end of the data set, so you can see the first row, I know that people in Zoom cannot follow this, so just look at the first row, GDP.
You see Canada has been pretty well, France not so well, Germany not so well, Italy does terrible, by the way, before you say anything, Elena, no matter how you adjust it Italy is always awful.
>> Jesús Fernández-Villaverde: Okay, so Italy is orthogonal to adjustments.
>> Participant 8: How come Spain is so much better?
>> Jesús Fernández-Villaverde: We are more productive.
>> Jesús Fernández-Villaverde: Anyway, Japan 0.93, Spain 206, UK and the US. And then sometimes if you pick your standard textbook in macro, a lot of times the numbers are reported in per capita. And when you see numbers in per capita, they start to get a little bit closer together, okay?
So you start seeing, for instance, the US goes from 0.49 to 152, why? Because population has been growing a lot, 0.95. If during that time, kind of a rule of thumb. Now things have changed a little bit, but between 1990 to 2019, rule of thumb is that half of the growth in the US was people born in the US, the other half were immigrants like me.
But in Japan, you already see that the growth of the population was very, very small. So in terms of GDP per capita, they don't change that much. You go to only 0.84%. Now, the one, two, three, the fourth row is GDP per working age adult, and that's precisely the point that motivates this paper.
Now, what you see is a much smaller range of variation. The US is still doing very well, 156. But now it's actually doing a little bit worse than Germany, that is the best performer, 158, UK 152, Japan 144, I will say that roughly all these countries are doing pretty much the same, okay?
And yes, there is the point of levels, which I'm going to come back in just one second. And then you have Canada and France doing a little bit worse, and then Italy doing substantially worse. So let me show you in a graph. Hopefully there are not too many lines.
I tried to squeeze this as best as I could. Yesterday I was spending some time with Latex. But first row, first column, in that panel you see the GDP index normalized in 1990, and you see the big fan out. That comes from the first line of very big differences in growth in total GDP.
And at the top, you will have the US, of course, doing the best. The US, more than double is GDP, total GDP since 1990. At the bottom, you have Italy and Japan. But now you go down in the first column, you see the population index and you see two very, very big performers out there, Canada and the US.
Basically, Canada and the US brought a lot of immigrants. They still had relatively high fertility. Then you have Spain. Spain fertility was terrible, but we decided that we like Argentinians, so we brought 2 or 3 million Argentinians and 2 or 3 million people from Peru, etc. So we grew a lot.
And then you have at the bottom countries like Japan that had very low fertility and had a very restrictive migration policy. So when you do it in that way, you see now top row, second column in that panel, GDP overpopulation gets much closer together than before. But the real interesting thing for me is when I look at the population over 15, from 15 to 64, which is the second row, second column.
And over there, you very clearly see what is happening with the US and you very clearly see what is happening with Japan. So Japan, remember what I was telling you before, they have 15% less people between 15 and 64 now, but in 1990 the US has 30% more.
By the way, you can see very clearly how the US is already leveling off, okay, as the fertility has been going down in the US. And then that gives you the top row, right panel where I pretty much see all the countries growing in parallel, small differences, except for the case of Italy, okay?
So of the G7 plus Spain, seven countries more or less do the same in terms of the working adults, and then Italy, which is the big outlier out here. Now, interesting, yeah.
>> Participant 5: There's also an interesting inflection in the top two panels, right, after the great recession.
>> Jesús Fernández-Villaverde: Yes, exactly.
So we are in one of the extensions that we are going to do. We are going to think about before and after the Great Recession, and we are going to investigate what happens if we are thinking about this, either as changing trends or a big drop in the level of judiciary.
>> Participant 5: That's a huge debate there, and your feelings, please?
>> Jesús Fernández-Villaverde: Well, I'm just trying to understand the data at a very fundamental level. I can show you that graph later on. But yes, basically, if you think, at this moment, to me at least, the best way to think about the US is we were growing at the balanced growth path.
In 2007, something happened and we have been growing at the same level, but with a 5% lower GDP. So 5% of GDP disappeared forever. And that's Milton Friedman, I guess, here at Hoover, I can remember him. He was right, that recession is you lose 5% forever, which in welfare terms is gigantic.
Yeah.
>> John Cochrane: If the kind of questions you're asking might be also fun, if possible, to do something like a skills weighted or education weighted population. In a sense, you're saying, well, we're gonna give you a break on the fact that most of your people just sit at home and that's labor market policy.
But you also might wanna take as a slower moving thing to facilitate catastrophes of education systems. I don't know if you can get it.
>> Jesús Fernández-Villaverde: Yeah, so I tried for something I did with Leo Henian a few years ago that we presented over here actually, at Hoover. We tried to have some measures of human capital.
So Robert Barrow and Lee have a very nice dataset. The problem of those datasets is that, for instance, they count how many hours of college, how many years of college do you have? So they are basically implicitly saying that a major in something that has the word studies on it, has the same value in terms of GDP that are major in economics.
>> Participant 9: Why not use Pisa?
>> Jesús Fernández-Villaverde: Okay, the problem with Pisa is that we will need to have a mapping between your scores in Pisa and how productive you are, and that I don't think anyone has it.
>> John Cochrane: I think you could.
>> Jesús Fernández-Villaverde: Okay, maybe I could do that, yeah.
>> Participant 9: It might or might not make it.
>> Jesús Fernández-Villaverde: Yeah.
>> Participant 9: Conceptually, it's another on the list of questions.
>> Jesús Fernández-Villaverde: Yes.
>> Participant 9: It's not exactly the same question, but it's a real.
>> Jesús Fernández-Villaverde: Yeah, so the point we were trying to make over there in that paper with Lee, is that the US has not been doing much better in education than 30 years ago.
But at least as measure as the percentage of population with a college degree, countries like Spain and Italy have dramatically increased the number of workers with a college degree over the last 30 years. So if you somehow control for that, then our economic performance is way worse.
>> Participant 10: Who knows what they learned in those colleges.
>> Jesús Fernández-Villaverde: That's the point I was trying to say.
>> John Cochrane: It's not changed that much, though.
>> Jesús Fernández-Villaverde: Yeah.
>> John Cochrane: I think you'd find it different if you worked with the piece of data.
>> Jesús Fernández-Villaverde: Yeah, okay, let me look at-
>> John Cochrane: Piece of data that's also like age, just raw things like high school or college.
>> Jesús Fernández-Villaverde: Yeah, I can try to do something like that.
>> Participant 9: People or immigrants who don't speak your language, that's a measure of certain skills you're working with.
>> Jesús Fernández-Villaverde: Now, I can tell you, for instance, that there is all these sets. I don't remember now every single piece, it's in some other survey, but they actually show that the average college graduate in Spain and in Italy have the same cognitive abilities that a high school graduate in Sweden has.
Which, having gone to a college in Spain I can tell you, is not a surprise. Anyway, I can tell you stories about college education in Europe for hours. Anyway, we do the same also starting in 1980, now, the point I'm only doing that, by the way, I cannot really go before 1980 because before 1980 I don't have comparable data.
The only point I want to do with this thing is that just, to convince you that we try many different combinations of start and ending. And of course, the big difference that you are going to see over there, is that, you are in some sense mixing two parts of the data.
1980 to 1990, where working age population was still growing everywhere, with after 1990, where this thing starts to matter.
>> John Cochrane: Is the bottom row, the beginning year or the end year?
>> Jesús Fernández-Villaverde: Is the average.
>> John Cochrane: Lot of your story though should be the change in that bottom row for-
>> Jesús Fernández-Villaverde: Exactly, so this, okay, oops, sorry, I wanted to do the, okay, okay, so this is Japan, and they started over there at 0.7, and they are going down, down. Sorry, John, I should have pointed in the other direction, it's going down, down to 0.56. So 70% of Japanese were between 15 and 64 in 1990, now, it's only 54% of them.
That's amazing, look, however, other countries, it has been much more of a stable thing, but it's starting to happen, okay? So later on, what I want to convince you, is that Japan, is just 10,15 years ahead of the rest of us, okay? And that's the point, that's why I think this paper is important, everything you think has happened to Japan is going to happen to the rest of us.
>> Participant 11: Is that good or bad?
>> Jesús Fernández-Villaverde: It's good for-
>> Participant 11: Value judgments.
>> Jesús Fernández-Villaverde: No, I mean, okay, actually, one of the reasons I went for dinner with Chad when he came to Penn to present his paper, and I told you that I have been thinking a lot about the philosophy.
And there is a branch of philosophy about the ethics of population size, because it's a non-trivial problem. How you evaluate walls where the endogenous choice of policy changes the number of people, okay? And so in that sense, if you want, when we finish, I'm more than happy to tell you about that, but let me not derail.
But I have spent a lot of time, believe me, reading about the philosophy of population.
>> Participant 11: You have a working age population.
>> Jesús Fernández-Villaverde: Yeah.
>> Participant 11: There's a difference between old people and children.
>> Jesús Fernández-Villaverde: Yes.
>> Participant 11: Children are good things, right?
>> Jesús Fernández-Villaverde: Yes, well, yes. Now they can make the statement, are you combining bad things and good things together?
>> John Cochrane: Old people are bad things.
>> Participant 11: Yeah.
>> Jesús Fernández-Villaverde: But remember, I'm only looking at 15 to 64, because the point I'm trying to make is, imagine, let me try to see if I can make this point. Imagine I'm the president of a country, I'm El presidente, and I'm trying to figure it out, how much we can produce in this country.
And I'm going to constrain myself of, I'm not going to get, people less than 15 to work, because I'm not such a nasty guy. And I'm not really going to get all people to work either, that's the idea of social norms. And I want to have a measure of, given how many people I have between 15 and 64, how well I'm doing.
That's what I'm looking at, so I'm not projecting into the future, yes.
>> Participant 7: So it matters if it's, if they're in the younger part of the distribution.
>> Jesús Fernández-Villaverde: Yes, no, no, no, exactly, but this matters with respect to the future, I fully agree with that. And I'm going to come back to that in just one slide, okay?
So, I'm not claiming that any of those statements is not important, I'm just trying to, call people's attention, to how important this is. And then you can say, look, maybe I can move over here, maybe we can. If I convince the profession that this is important, this will motivate us to write much more sophisticated models.
Maybe I can have a model, with OLG structure, maybe I can have a model with endogenous growth, endogenous fertility, endogenous migration, all that. This is just to say, hey, this is such a first order problem, that the fact that we are not paying more attention to that is highly quality.
>> Participant 10: And get simpler models, because you found that we're all the same in one important thing and.
>> Jesús Fernández-Villaverde: Yes.
>> Participant 10: We're different from each other and how many hours we choose to work. You've simplified it, not complicated, but if you want to start speculating about the future you need to add Africa.
Cuz the place, we're all on the same demographic path except, sub–Saharan Africa which is on a total.
>> Jesús Fernández-Villaverde: I actually disagree with that, so I have a few slides, you may need to leave. So if you forgive me, if I jump ahead for a second and I do a nonlinear presentation, I have another paper, just send it out to the journal two weeks ago.
So, if you are the referee, fantastic paper Is called, we actually have data on the demographic transitions of 182 countries. And we document in that paper that every country in the world, including every single country in Africa, has already started the demographic transition.
>> Participant 10: They just have the existing vaults, it's gonna be.
>> Jesús Fernández-Villaverde: No, no, I understand, no, no, but the point we make over there, is that the demographic transitions are getting faster and faster, but at an amazing speed, okay? So, the metropolitan area of Nairobi, is already below replacement rate. Africa, they are going to have a lot of countries below replacement rate, in ten years.
Now, you are absolutely right, there is something in demographics this is called momentum, which is it's going to take 2030 years to be felt, okay? But what I'm telling you about what is happening with Italy and Spain, this is going to be the future of Africa as well in 2016.
And by the way, Brazil, is going to start losing population around the year 2030, so what is happening today with Japan, is Brazil of 2030. That's amazing, and that's something, you may know it, but I don't really think even. I'm talking with a lot of my Brazilian co-authors, they don't seem to be fully aware of that.
>> Participant 11: Are you gonna explain or get to the causes of population decline in your discussion?
>> Jesús Fernández-Villaverde: At the end, I have some slides on the demographic future of the-
>> Participant 11: Are you gonna get into the difference? I'm sorry, are you gonna get to the education of women as being a causal factor?
>> That's where I wanted to get to.
>> Jesús Fernández-Villaverde: So part of the answer is yes, it seems to matter. But what is really amazing are two observations. First is the enormous collapse of fertility since around 2014.
>> Participant 11: Yeah, but that's what I'm getting at. Is that the cause of the enormous cause of infertility?
>> Jesús Fernández-Villaverde: I don't think it is.
>> Participant 11: Or is it the dominant cause?
>> Jesús Fernández-Villaverde: I think that changes in education of women explain why we went from 4 children to 1.7. I don't think they explain why over the last ten years we have gone from 1.7 to 1.
>> Participant 11: Well, Korea's at 0.7.
>> Jesús Fernández-Villaverde: 0.7, the US is at 1.62.
>> Participant 11: Well, I understand, but Korea wasn't at 0.7 40 years ago.
>> Jesús Fernández-Villaverde: Exactly, and that's-
>> Participant 11: And now women are all educated.
>> Participant 3: Lots of things changed.
>> Jesús Fernández-Villaverde: Yes, over the last, no, no, but that's the point.
>> Participant 3: Cross-sectionally, well-educated women in the 1950s had lots of kids.
>> Jesús Fernández-Villaverde: Yes, but that's the interesting thing. So, for the first time in the US, there's a very nice paper by Matthias Doepke about this. For the first time in the US over the last five years or so, the relation between education, income, and fertility Has started to be upward sloping.
And this is very simple. You go to the suburbs, to the rich suburbs, you still see a lot of families with two or three kids. You go to the inner cities, they have one kid. For the first time since we have data in the US, starting in 2021, African American fertility, woman fertility is below white fertility, and they are lower educated.
That is changing, and it's changing in a very dramatic way. And that's what I don't think that education is really helping you to understand what is happening in the last six years.
>> Participant 3: Education is also endogenous.
>> Jesús Fernández-Villaverde: No, no, I understand. I'm just saying I really don't understand what is happening with fertility.
Sorry, if you brought me here and my answer is, I don't know, but what is happening with fertility over the last ten years-
>> Participant 11: There's huge literature on that, not in economics.
>> Jesús Fernández-Villaverde: Okay.
>> Participant 11: It's outside of economics, and that's why you're not paying attention to it.
>> Participant 3: All of it, and Jesus authoritatively is telling you they don't know either.
>> Jesús Fernández-Villaverde: So I'm member of the population studies.
>> Jesús Fernández-Villaverde: No, I don't hear. No, but I just wanted to mention, I'm a member of the population study center at Penn, which I think is one of the top demographic groups in the US. And I go to all their seminars on Monday.
And the director is a big buddy of mine because he's Argentinian, so we can go for drinks. And I have asked him many times, Emilio, what is going on? The guy tells me, I don't know. He's the super duper professor of demographics. So that, at least to me, is a first pass that this doesn't seem to be.
I don't think I'm missing the big paper in the Europe Population studies were kind of clarified.
>> Participant 10: Jesus-
>> John Taylor: Yeah.
>> Participant 10: You should watch the time and tell us to shut up when-
>> Jesús Fernández-Villaverde: Okay, don't worry, I like to talk. Anyway, so what I'm going to do today is I'm going to have kind of a minimalistic growth model.
And I know how to go very complicated, and I have gone very complicated in a lot of other papers. But as Jon was trying to say before, I just want to convince you that even the simplest possible neoclassical growth model gets a lot of things right. So what I'm going to have over there?
So I'm going to have an economy that is populated with an infinitely live representative household of variance size, and I'm going to take that as given, okay? So, Nt is going to be exogenously given. The preferences, very simple, discounted utility, no shocks over here, everything is perfect. Foresight and the functional form I have over there is log over city over Nt, which is per capita consumption.
We have played with different formulations of the utility function. Doesn't really seem to matter much for what I want to tell you today, okay? I want to be very careful. Output standard cop Douglas production function. You have labor augmented technology. You have a law of motion for capital with depreciation factor rate delta resource constraint for the economy.
And then total population, which is just the factor of the population growth period by period, okay? Now, this is an economy that has growth both in population or changes in the size of population and in terms of productivity. So I need to write everything, I need to rescale, and I need to normalize the variables.
Nothing very deep over there, except what I want to show you is over there. You are going to have a lowercase lt, and that lt is going to be the ratio between the number of people between 15 to 64 and the total population. And I'm taking a labor supply as exogenous over here, okay?
And again, I understand you could do labor supply endogenous, but just to make things as very simple as possible. Now, the very good thing about this model is that everything is characterized by a standard Euler equation. And this is exactly the same Euler equation that in the neoclassical, in the textbook neoclassical growth model, except that you have this lt over here, okay?
So think about the first case. Case 1, lt+1 is a constant. If this is a constant, this basically means that population 1,564 over total population is a constant. Some economy that is in some type of steady state in terms of population, well, it's exactly the same model that the neoclassical growth model, except that in front of the production function, I have a constant.
And if you want to think about the dynamics of the model, it means that any type of shock, like a shock to productivity, a shock to the discount factor, etc, will have exactly the same dynamics that in the neoclassical growth model. Now, in the case 2, lt+1 is going to change, and that's what we are going to fit into the model when we compute it.
And this is equivalent to a technological shock, okay? So, lt+1 changing is exactly the same that if we become more productive or less productive. So, if you know how the real business cycle model works, you know how a model where the ratio of population working over total population behaves, okay?
Exactly the same dynamics, I can just take exactly the same code. So what I'm going to do is I'm going to calibrate the model and I'm going to do the following. I'm going to pick a few parameters that are going to be constant for the eight economies. I always click the wrong button, yeah.
>> Participant 10: In the standard real business cycle model, it's a transitory technology shock, which is important to generating. This is like permanent shock.
>> Jesús Fernández-Villaverde: Well, so you can think about this in two ways. One, it will be permanent. In fact, if you read the original two papers by Kim Plusser and Revello in the Bureau of Monetary Economics, where they kind of work through the whole thing, in the second, they have two papers.
In the first paper is transitory, in the second one, they work out the dynamics with permanent. So this will be the RBC with a permanent shock. But also lt+1, you could imagine having a lot of persistence, but then kind of reverting back or happening something. In that sense, is that what we argue, is that the model inherits the same persistence that you are feeding it into the population, okay?
>> Participant 5: Can I ask you, sorry, but I'm thinking about Corb. I'm thinking about ashamed of Restrepo. I'm thinking about the debate on the labor share. Is it obvious that Newman 80 is labor augmenting?
>> Jesús Fernández-Villaverde: Again, the point I was trying to do over here, as I was mentioning before in the presentation of the model, was not.
Let me go and build a very state of the art worlds and whistles model. This was a very Minnesota exercise. Let me take the neoclassical growth model and see what happens.
>> Participant 5: But you could have an 8 times l and a times k.
>> Jesús Fernández-Villaverde: No, that's fair enough.
I'm happy to do it. I'm happy to do, I just want to know what happens. In some sense, this paper was for myself, for Gustavo I guess. We just wanted to figure it out what happens, okay? It's nothing deeper than that. Anyway, thankfully, I'm not in a situation anymore where I need to be absolutely sure I publish every paper.
So if I cannot publish, good. I mean, Gustavo may have a different view. Now, so we are going to take three parameters and we are going to make them equal for all countries. And then I'm going to have a different g for every country. I'm going to have an exercise later when I use the same gif for all countries, and I will try to convince you why doing it in that way is useful.
Anyway, so this is what you get. So the blue line is the model. Now, you think that that blue line is a constant, but it's actually not. It changes because we are feeding the l over n. It's just that from year to year, the differences are not that big that you can really see a big change.
But if I had the zoom over here, and I could zoom it. You will see that that blue line has a little bit of a bearing slope over time, yes.
>> Participant 4: In 2008, I know it's the working equilibrium, not the employee.
>> Jesús Fernández-Villaverde: Exactly, and by the way, what I'm doing it is I'm normalizing the model and the data to one in 1990, which is just assuming there is a constant in the production function that makes them equal.
And to me, the really interesting thing about this graph. Yes, I know, I always hit the problem one, that the model seems to do quite well job. Now, yes, this is the 2007, I told you before we are going to come back to that. But it seems that a very simple neoclassical growth model that takes into account the time barrier.
Look, for instance, this is the case of Spain, because in Spain we had such a gigantic immigration, actually, as the percentage of the population, we have way more immigrants at the US. You can see now that this is not a constant slope. For a lot of these countries, you seem to do pretty well.
>> John Cochrane: Pretty well, I mean, you change the growth rate.
>> Jesús Fernández-Villaverde: Yes, and I'm coming back to that.
>> Participant 3: Trends, isn't that?
>> Jesús Fernández-Villaverde: No, okay. Very good, come back to that in a second, so. Yeah.
>> Participant 12: When you back out the g, the sole residual, you're using employment. The actual employment.
>> Jesús Fernández-Villaverde: Yes.
>> Participant 12: So that's the success exactly.
>> Jesús Fernández-Villaverde: Well, because I'm not doing-
>> Participant 12: Matter that much.
>> Jesús Fernández-Villaverde: Yeah, no, that's fair enough. We need to do something about that. Yeah, we need to think a little bit.
>> Jesús Fernández-Villaverde: Yeah, no, no, I know, I know.
>> No-
>> Participant 11: I considering counting.
>> Participant 12: Fine
>> Participant 5: Yeah.
>> Participant 11: How much was just the g and how much was the change in the fractions?
>> Jesús Fernández-Villaverde: Yes, I can do that, but.
>> Participant 11: It actually looks better than I said.
>> Participant 5: Exactly.
>> Participant 11: That the g really isn't making.
>> Jesús Fernández-Villaverde: So maybe this helps you.
What I'm going to do now is I'm going to take the g from the US. And I'm going to assume the US has a system that more or less works. So you can think about the g in the US as a first order approximation to the growth of the world technological frontier, which I think a lot of people in growth theory do.
And this is what you see. So for the US, it's exactly the same that before. What you start to see is that some countries don't do so well. Canada, Canada seems to be missing a lot. So if I were Canadian, I will not be very happy. Germany is still doing okay.
France seems to be missing a little bit. Italy really, really does a terrible job. Japan, Japan is still doing pretty well. That's the point we are trying to make. Once you think about this working age thing. It really, really seems to be the fact that the way you want to think about Japan really changes.
Now, some of you were already asking. What happens if you change trends? So we did this in two ways. One is we changed the trend in 2007. And again, we could think about a more sophisticated model.
>> Participant 13: I would look at Japan, I'm confused by the magnitude. So it's going from one in 1980 to 1.04 in 2016.
>> Jesús Fernández-Villaverde: Because this is incomparable working age.
>> Participant 13: But only 4% increase in income for working age.
>> Jesús Fernández-Villaverde: Yeah, you're right. Not quite sure what I think, we maybe.
>> Participant 13: Maybe it's the logs.
>> Participant 11: Yeah, it's the logs.
>> Jesús Fernández-Villaverde: It's the logs, okay. Yeah, yeah, but we should clarify that actually.
Gustavo, write that down.
>> Jesús Fernández-Villaverde: Anyway, so as I was saying before, we are going to do an exercise where we change the trend. And this is table just to show you that the trends really seem to be very different after 2008, that before 2007. And this is what happens.
So we changed the trend a little bit for the US, but we still seem to be missing things. And for the case of Italy, now Italy, the trend is so full. So, they still do pretty bad. But the other example that we do is the idea of Milton Friedman permanent drop.
And this is the dynamics of the model where you have a permanent drop.
>> Participant 5: And what were you doing the previous, this is permanent?
>> Jesús Fernández-Villaverde: Changing the trend. In the first exercise, it's changing the trend. Here is you just go down like five.
>> Jesús Fernández-Villaverde: Yeah.
>> Participant 5: Yeah.
>> Jesús Fernández-Villaverde: You change the intercept, we lose 5% of TFP because we just lose it, okay?
And what is really interesting to me at least, is that for the US, it seems to do really, really well. I have a very simple model of the US economy that does this. It seems I'm capturing a bunch of things. Anyway, so China and India, go back to the previous slide.
>> Participant 3: Do you have a quick hypothesis about why Italy is not functioning? I do, the whole country is dysfunctional. I mean, I've been there off and on for the last 10, 15 years. Every year it's worse. More strikes, more problems, no toilets. Not gonna clean up garbage everywhere.
I mean, it's just a completely dysfunctional country, and it's gotten worse. Now, I mean, does that fit your sort of understanding?
>> Jesús Fernández-Villaverde: Yes.
>> Participant 3: That's a personal observation.
>> Jesús Fernández-Villaverde: No, I think it does. I have a paper between Vincenzo Quadrini and and also in Italy that just came out in review of economic dynamics.
And that's basically the point we are trying to make, is that TFP is not growing in any way that you measure it, which goes to that point. It's just they are becoming growingly dysfunctional. Now, the only thing that worries me is that the present of Italy is the future of the US.
But that's something.
>> Participant 3: We can talk about that later.
>> Participant 5: I mean, following up on Arvin's point. I don't know if it is true of the country, too. But there is a spatial segregation-
>> Jesús Fernández-Villaverde: No.
>> Participant 5: In countries like Italy, where the north and the south are, by all accounts, different economies.
Is it true of other countries, too?
>> Jesús Fernández-Villaverde: Okay, no. So what we document in the review of economic dynamics paper, we actually look at the big picture of Italy since the unification. The really amazing thing is that there were many countries in Europe that had as big regional differences as Italy in 1870.
And they have shrink their differences while Italy has not been able to shrink those differences at all.
>> Participant 5: Because in a way, who cares about Italy. But the US, too, I mean, there's a growth is an especially constant.
>> Jesús Fernández-Villaverde: Yes, but the missing thing about Italy is that regional differences are growing more and more, which may be happening in the US as well.
>> Participant 13: What is the interpretation of these figures? I back out the g from, or then I put it by hand.
>> Jesús Fernández-Villaverde: Yeah.
>> Participant 13: The g from just solar residual law as the actual employment.
>> Jesús Fernández-Villaverde: Yes.
>> Participant 13: And the model is, I'm feeding that in. But then also feeding.
>> Jesús Fernández-Villaverde: But I lead capital.
>> Participant 13: Working age population instead of employment.
>> Jesús Fernández-Villaverde: Yes, and capitalist endogenous.
>> Participant 14: The model line is what should have happened.
>> Jesús Fernández-Villaverde: Exactly.
>> Participant 14: And the red line.
>> Participant 13: That is section.
>> Jesús Fernández-Villaverde: Sorry, sorry, sorry.
>> Participant 13: There's two-
>> Jesús Fernández-Villaverde: Yes.
>> Participant 13: There's two things to take away.
One is the relationship between employment and working population. That's to do a lot. Neoclassical.
>> Jesús Fernández-Villaverde: Growth model dynamics.
>> Jesús Fernández-Villaverde: Exactly.
>> Participant 13: Sorry, you feed in the g.
>> Jesús Fernández-Villaverde: Yeah, sorry, I should have made that a little bit clearer. Let me very quickly talk about China and India, and then I'm running out of time.
But we can have some time for some questions, so I can show you a couple of fun numbers. So, China and India, the interesting thing over here is that China, GDP, 9.6. GDP per capita, 8.6, GDP per working adult, 8.18. So it doesn't really change our view about China that much.
Why? Because the change in the working age population ratio in China between 1981 to 2019 was not that adulthood dramatic. Now, India, had a growing population, and a younger population on average, which meant that they go from 6.8 to 3.79. And what I think this highlights, is how much more India, has been underperforming, with respect to what China has been able to accomplish.
And to me that's also very striking. Now, look at the population, over total population in the case of China, it peak over there and it's falling. And it's falling at a tremendous speed, which tells you that China, is going to really have this l in China is going to really matter dramatically.
And that's why I have this other paper, with Li and with when, on the neoclassical growth of China. Where we basically are saying, any way you want to forecast what is going to happen in China over the next 50 years, you need to take account of this. And it's already baking, okay?
Because even if Chinese start to follow the party orders and have babies like crazy tonight, nothing is going to happen for 25 years. The future of China is already baking. Okay, so, if you want I can answer more questions. And if not, I can, I was thinking about.
>> Participant 3: Can I just make one comment? Today, by the way, is National Hug and Economist Day. And I'm not sure that all of you know that.
>> Jesús Fernández-Villaverde: Okay.
>> Participant 3: Yeah, today, January 31, is National Hug and Economist Day.
>> Participant 10: I need to warn you, Stanford's HR and sexual harassment policies.
>> Jesús Fernández-Villaverde: Probably makes this so.
>> Participant 3: It is, it's true, it's such a day, look it up. National Hugging Economist Day. So you can go out and hug each other today.
>> Participant 4: Written consent first.
>> Participant 3: Well, that's a Stanford.
>> Jesús Fernández-Villaverde: But let me give you. I did the HR training for University of California five weeks ago.
I don't know what you guys do here in Stanford, but it cannot be worse than that one.
>> Participant 5: I've done both, Stanford's better.
>> Jesús Fernández-Villaverde: Yeah, no, no, yeah, the UC was realistic. Anyway, so let me tell you a couple of things, okay? And as I was saying before, Mutato nominated the fabula narrator, so changing the name, this is a story about you.
The present of Japan, is the future of the globe, okay? So, all of you know what the total fertility rate is, the Japan total fertility rate fell below 2.1. And you will see in a second why 2.1 is so important in 1974. Right now, it's around 1.25. Let me give you a few countries.
Iran, 1.69, US, 1.62, Brazil, 1.42,45, China, 1.0, South Korea, 0.7. Okay, why does this matter? So, you have heard the 2.1 a lot of times probably, but you may have not heard, the reason why you get this 2.1. So basically, 2.1 is the replacement rate, okay? The number of children you need to have, to sustain population levels, forgetting about net migration.
And the reason we compute 2.1 is the following. You have 1 plus the sex ratio at birth, and you divide by the probability of a woman to survive to 30. Now, this should really be like the integral of survival probabilities weighted by fertility by age. That's a little bit tricky.
So, we just take 30 because it's like in the middle of the fertility age. So if you take, the natural ratio, in a natural population with any type of, quote unquote, outside intervention, you have 1.05 boys, born for every girl. And in a country like the US, the probability that a woman will get to 30 years old, is 98.
So you get 1 plus 105 divided by 0.98 is 2.1. So the idea is, if a woman has 2.1 children, 1.07 will be a boy, 1.03 will be a woman. Of this 1.03,1 will complete her fertility age, and then she will have another 2.1, and this is stable.
>> Participant 3: Well, have you part of the age of marriage has grown from 22 for women to 28, men's 24 to 30, and that's still growing. And so, if women don't have a first child to after 30, they usually don't have a second. I mean, so the crash is.
>> Jesús Fernández-Villaverde: Yeah, but I'm just telling you something.
>> Participant 10: The age of first child, we talked about education and birth control.
>> Participant 3: No, no, I know.
>> Jesús Fernández-Villaverde: Okay, but let me, let me, let me tell you the following, which perhaps you have not thought about it. The first one is that the two parameters are used, which is the sex ratio and the fertility, are actually not the same in the planet.
Why? First of all, because there are many populations that practice selective abortions. And the best example is China, where you have around 115 boys, per each 100 girls. So think about it in this case, in a high school class of 225 of 215, there is a shortage, quote unquote of 15 women, or say six women, and in India is 110.
And in addition to it, the mortality rate, in a lot of African countries, where kids are being born now, is actually much lower. So, it can be the case in fact for most African countries, the replacement rate is not really 2.1, it's 2.6. So what we compute, in another paper, is that the wall replacement rate in 2023, is around 2.25, okay?
So it's not 2.1, it's 2.25 and this matters, and why it matters, because according to the United Nations World population prospect 2022, the world total fertility rate in 2023, was 2.3. Actually, that's not the case, because they are hugely overestimating births. For instance, they forecasted 10.6 million births for China.
China only had 9 million births. And those are the ones that the party wants to tell us. The reality is probably around eight. And I have done this I spent like two days of my life, going country by country and going to the national statistical agencies. They are overreporting.
And if you want, later, I can tell you why the United nations is overreporting. There is a very nice agency, principal agent problem of what they are doing over there. So the total fertility rate of the planet right now, is around 2.1, 2.2 perhaps, and replacement rate is 0.25.
So, most likely, the planet, is already below replacement rate. And this is only going to continue happening. So the world population is still growing, because of the momentum effect, that I was telling John before, of larger cohorts, and increases in life expectancy.
>> Participant 4: But also, most countries are declining for fertility paths.
>> Jesús Fernández-Villaverde: Pretty much everyone.
>> Participant 4: Yeah, so it's worse than what you just said?
>> Jesús Fernández-Villaverde: Yes. No, no, exactly. Because what I'm saying is we already fall below replacement rate and we are going to continue falling down, okay? But the fact that we are ready, for the first time, think about it this way.
We are the first humans in the last 100,000 years that belong to a generation where we are not replicating ourselves.
>> Participant 10: Well, there have been many non replications, but it was due to deaths, not the lack of births.
>> Jesús Fernández-Villaverde: Yeah, but even in terms of deaths, the thing is, there was kind of a law of large numbers at the planet level.
>> Participant 10: At the planet level, yes, you said.
>> Jesús Fernández-Villaverde: Okay, so, yes, China has the big civil war, and 50 million Chinese died, terrible for human tragedy. And people in Brazil are still having a lot of kids.
>> Participant 10: 1340 wasn't that great in Spain.
>> Jesús Fernández-Villaverde: But even if you look at the world level, even during World War II and World War I, world population was still increasing.
Now, this is the birth rate and the death rate, and you very clearly see how quickly this is going. Doing a little bit of eyeball, we are going to probably cross around 2055. Okay, so what I estimate is that according to the latest numbers I have, we will peak at around 9.7 billion around 2055.
Now, the numbers I'm seeing for 2023 and 2022 is that fertility is falling faster than my forecast. So 2025 may be an overestimate. Now, the United Nations is estimating 2086 and 10.43 billion. That's the peak. And then, according to the United Nations, we will go down. Why is different?
First of all, because the United Nations is assuming much higher birth rates than what we are actually observing in the data. And second, because they are assuming recovery of fertility. Now, is fertility going to recover? Who knows? That's my point before, that maybe in 20 years, you will be laughing about Villa Verde's stupid forecast about the world.
But I just don't see anything in the data that suggests that fertility is going to recover.
>> Participant 10: Why do they say fertility is going to recover?
>> Jesús Fernández-Villaverde: Okay, do they give a reason, or did they just say, we think it's going to recover? No, to the best of my understanding, they just don't want to continue having forecasts where it goes down is down, is down, is down, they basically want to do something that does like this.
>> Participant 10: Are they still defining a narrative of we need to control population?
>> Jesús Fernández-Villaverde: Remember I was talking about a little bit of a principal agent problem.
>> Participant 10: So as soon as we get them to say the crisis is the crash of population, then they'll be understood.
>> Jesús Fernández-Villaverde: Yes, exactly.
>> Participant 10: We always have to make the narrative into a crisis.
>> Jesús Fernández-Villaverde: Exactly, but that's why they don't want to make those adjustments so quickly, because I think they are worried that we may shut down the agency, the population agency.
>> Participant 3: So the air will be cleaner cuz there's fewer people polluting.
>> Jesús Fernández-Villaverde: Yeah, well, the air is getting cleaner anyway. But yes, it's ugly.
>> Participant 3: If you calculated what would happen to Korea at the current rate, in 100 years, it'll be 18 million, down from 45.
>> Jesús Fernández-Villaverde: Okay, so this is one of my favorite things I have ever done.
>> Participant 3: Yeah.
>> Jesús Fernández-Villaverde: The rule of 85. Okay, so this is something I propose in a paper, it's kind of a fun thing to do. And the good thing about this is you can compute it in your head. So, life expectancy around countries like Spain or Japan, where, for whatever the reason, we don't like to die, is 85 years, okay?
So if you want to know what the long run population implied by today births are, assuming we can keep the number of births constant, which, coming back to your point, is a big assumption. Is just how many births today times 85. And that's so easy, I can explain this to the undergrads and they see the point.
So South Korea had 230,000 births in 2023. You multiply by 85, you have a population of 19 million. Right now, they are 51.6. And that's assuming that the number of births is not going to go down, which it will go down even just because the new cohorts of women is much smaller.
>> Participant 10: Because when you have less women, you have less births.
>> Jesús Fernández-Villaverde: Exactly, yeah, yeah. No, but this is, even in the amazing case that South Korea is able to stabilize the number of births at 2030, 1,000 a year, they are bound to have a decline of 51.6 to 18 million.
>> Participant 9: So how about North Korea?
>> Jesús Fernández-Villaverde: Okay, I actually was very interested in that, I spent a little bit of time searching for numbers, and no one seems to have very good numbers about real births and fertility in North Korea. But, yes, because I was worried, the problem basically, with South Korea is that they are not going to have soldiers in the army.
I mean, North Koreans are just going to walk in and
>> Jesús Fernández-Villaverde: Yeah, exactly. No, but the point is, if you look at countries like Taiwan, which is in a similar situation, Taiwan is just not going to have soldiers over there.
>> Jesús Fernández-Villaverde: But China is so big that even if you still have half of the population, you still have a lot.
When Mao Zedong, they told him about a nuclear war, and they said half of Chinese will die and he said, well, you still have another 500 million. So that's a little bit the perspective of these guys.
>> Participant 4: You should wrap up.
>> Jesús Fernández-Villaverde: Yeah, of course. Anyway, the only thing I want you to tell them to convince is population changes matter a lot in the way you want to think about growth.
This is not a paper about Japan, it's just that Japan has been ten years ahead of the rest of us.
>> Participant 5: Can I ask, what about life expectancy? I'm not thinking about the 90 year old Italians who can be 120 year old, but there are eastern Europe, there are lots of countries where relatively young population type of countries where life expectancy is not very high.
>> Jesús Fernández-Villaverde: But are you thinking about what will happen if life expectancy grows a lot or?
>> Participant 5: Sufficiently, so they're on balance in the working age for range-
>> Jesús Fernández-Villaverde: Yeah, but remember that the most, so what happens in countries that have lower life expectancy is not that people die when they are 40 and 50, it's that they die when they are 68, 70.
>> Participant 5: But I'm thinking about Eastern European countries, they die in their 40s.
>> Jesús Fernández-Villaverde: Not that much anymore, that was in the 1990s, after the fall of communism and stuff like that. The big differences, so if you compare the US, so why does the US live five years less on average than Japan or Spain?
Because a lot of US people kill each other when they are teenagers, and because the US has a lot of traffic accidents.
>> Participant 5: And it seemed recently, it's true that they're small, like Moldova, there are a number of countries that
>> Participant 10: I'm taking over organizers since John had to leave and.
>> Jesús Fernández-Villaverde: Yeah, yeah, sure, sure, sure, I'm happy, I'm happy
>> Participant 3: Sorry.
>> Jesús Fernández-Villaverde: No, but the point I'm trying to make here is, even if Moldavia or Romania is able to go from 75 to 85, this is not a first order.
>> Participant 3: Women are just revolting against having kids.