James Liang Challenges The Economist, Urging Maternity Subsidies to Boost Birth Rate

Liang Jianzhang Urges Government to Increase Maternity Subsidies to Save Modern Civilizations

For today’s episode, I'll delve deeper into Chinese demographics. Following the end of the “One-Child Policy,” birth rates didn’t go up as expected; the figure went down along with the total population. In 2022, China experienced its first population net decline in 60 years.

Since 2021, local governments in China have been making efforts to boost the birth rate, mostly through cash subsidies and extended vacations for women who already have children. However, the central government is still in the process of developing a set of policies to encourage people to have more babies.

In Chinese social media, demographics have been a hot topic for a long time. Demographer James Liang (梁建章 Liang Jianzhang) has been vocal about Chinese demographics for many years. Liang is both a social scientist and a successful businessman. He is the executive chairman, former CEO, and co-founder of Trip.com Group, the largest online travel agency in China. His points of view are a must-read if you want to understand how Chinese experts view the current low birth rate problem and its potential solutions.

Source: Southern Weekly

His latest pieces mean to retort an article published by The Economist， Why paying women to have more babies won’t work？ He thinks that the Economist article has denied the responsibility of the government to sustain human civilization and limits public policies on the population to deal with the aftermath of past problems.

He believes that the purpose of fertility subsidies is not only to increase the birth rate but also to support welfare spending for families raising children. It can be seen as society's compensation for the efforts of parents in raising future taxpayers. People's contributions to society are like venture capital projects, usually following a power-law distribution; a small number of outstanding talents can create a large proportion of social wealth, and nurturing them requires a large population base.

It is not fair to assess the effectiveness of fertility subsidies solely based on input and output calculations because citizens not only pay taxes and social security but also enjoy the benefits and conveniences they bring. However, it can be certain that the economic value of people to society is positive overall. Over the past few hundred years, the human population has been increasing, but human society as a whole has become more prosperous, indicating that people's contributions to society, on average, outweigh the burdens they bring.

In terms of public policy, he thinks what should really be concerned with is macro-efficiency, that is, society as a whole obtaining greater output at a lower cost and ensuring that everyone can live a basically dignified life and that there are enough children in the future to maintain the sustainability of society. The current level of technology and production capacity is sufficient to achieve this, but there is a lack of corresponding social mechanisms.

He suggested the ultimate solution may be a basic income, that is, to provide a universal basic income to every citizen, including newborns, and to link the distribution ratio to the employment market and fertility rate. In our view, the key to solving the low fertility rate problem is to make child-rearing a paid job and ensure that the income earned by child-rearing families is stable and predictable. In recent years, many local governments in China have introduced fertility subsidy policies, but the intensity is too small. He suggests implementing a policy of heavily subsidizing fertility at the central level, which can be progressive and take into account differences between different regions and income groups.

I’ve attached the translation of his article below

Source: https://new.qq.com/rain/a/20240612A058T200

Paying Women to Have Children Won't Work"? Should Fertility Subsidies Be Provided?

On May 23, 2024, the British magazine The Economist published a cover article titled "Why paying women to have more babies won't work?" opposing the fertility subsidy policies of various governments around the world. The Economist is one of the most influential political and business journals globally, but this article lacks underlying logic, with its weak evidence and hasty reasoning forming a sharp contrast to its definitive conclusion. The article limits public policies related to the population to deal with the aftermath of past problems while denying the responsibility they should bear in sustaining human civilization.

Does the Long-term Low Fertility Rate Pose a Threat to Civilization?

The article mentions that fertility rates are declining in almost all countries, with high-income countries having an average fertility rate of only 1.6, which means each generation will be 1/4 smaller than the previous one, and the proportion of elderly people will increase significantly by 2050. The population decline over the past decade has exceeded demographers' expectations. As stated in the article, people like Elon Musk warn that these trends will threaten civilization itself, but the article asserts that these warnings are absurd without providing any explanation. It only acknowledges that aging and shrinking societies may lose vitality and military strength and face budget difficulties as taxpayers have to fund pensions and healthcare for a growing number of elderly people.

However, the longer-term and more fundamental issue is that if fertility rates remain significantly below the replacement level and do not rise, the population will shrink at an accelerating rate until it reaches zero. Relative to the replacement level of 2.1, maintaining a fertility rate at the current level of 1.6 in high-income countries means that the population will eventually shrink at a rate of 2 deaths per 1 birth; while maintaining a fertility rate at the current level of 0.7 in South Korea means that the population will eventually shrink at a rate of 15 deaths per 1 birth. Japanese economist Hiroshi Yoshida regularly publishes a "Child Population Clock" to alert people to the low fertility crisis. Based on the current number of children under 15 and their rate of decline, he estimates that Japan will have only one child left in 696 years. The number of children under 15 in China is 16.5 times that of Japan, but the rate of decline is faster than Japan's. Using his method, it is estimated that China will have only one child left in 542 years, 154 years earlier than Japan. The situation in Europe and the United States is better than in China and Japan, but in the long run, they are also rapidly heading towards extinction. If this population trend does not pose a threat to civilization, then what does?

Many people believe that this extrapolation is not reliable because fertility rates will not remain this low, but this is just a presumption. In fact, the downward trend in fertility rates has self-reinforcing inertia and will not naturally rebound: long-term low fertility rates, on the one hand, will push up the marginal cost of raising children for families, suppressing the willingness of young people to have children; on the other hand, it will exacerbate population aging, increasing the burden of elder care on families and society, thus reducing the energy and financial resources available for raising children; both of these factors will further lower fertility rates. Without policy interventions to break these vicious cycles, fertility rates are more likely to continue to decline, bringing the time of population zero closer.

Indeed, The Economist does not assume that fertility rates will naturally rebound, but the overall tone is that society should adapt rather than try to change this trend. This laissez-faire attitude contradicts the so-called progressive ideals upheld by the magazine. The Economist prints on the contents page of each issue the aim of "taking part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress," but this is meaningless if the foundation is gone. If we are indifferent to the potential extinction of civilization itself, then how much significance is there in caring about progress?

Modern Lifestyles Depend Heavily on Population Scale Effects

Is it feasible to wait until the population shrinks to a certain level before making efforts to increase the fertility rate? This view is also misguided. As previously mentioned, low fertility rates have a self-reinforcing momentum, meaning that the longer the delay in addressing the issue, the deeper society will be trapped in the low fertility rate quagmire, and the more challenging it will be to raise the fertility rate. Furthermore, the later the response to the low fertility rate, the smaller the population size will be at that time. The development of human science, technology, and modern lifestyles, such as the research and production of smartphones, the Internet, high-speed rail, and jet aircraft, especially their rapid iteration, are highly dependent on the global population size, particularly in industrialized countries. As the population continues to decline, the demand and supply of various industries will shrink simultaneously, investment willingness will be low, and the pace of innovation will slow down and eventually stagnate. Infrastructure will also be difficult to update due to insufficient demand and financial resources, and will eventually be abandoned. Current large cities will degenerate into medium-sized cities as the population decreases and then into small cities; airports, hospitals, schools, and parks will also be continuously closed, narrowing people's choices.

Compared to a stable population scenario, the living standards of a society in a population decline will be lower, and they may even face humanitarian crises. During this process, knowledge updates will slow down or even stagnate, and existing experiences and skills may be lost. For example, an Airbus A380 passenger aircraft currently has more than 4 million parts supplied by over 1,500 companies worldwide, many of which specialize in the research, development, and production of specific components. As the population declines sharply, the demand for large passenger aircraft will eventually drop significantly, making it difficult to maintain production capacity, let alone develop new models. Many companies that focus on specific parts may be forced to close, and the experience, knowledge, and skills accumulated by several generations of engineers may be lost. Another example is that when the population becomes very small, if someone, unfortunately, suffers from a rare disease, they can only resign themselves to fate. In a much smaller population base, patients with the same disease are few and far between. Pharmaceutical companies have no incentive to develop drugs for patient groups that are too small. Even previous treatment options will be difficult to use due to the lack of experience among doctors. The Economist believes that relying on technological development to adapt to a low-fertility society, including caring for the elderly, is far more important than increasing the fertility rate. However, as mentioned above, long-term low fertility rates have a negative impact on technological development. Compared with a stable population, technological development in a rapidly aging and shrinking society will be slower and eventually stagnate and regress. Moreover, better care for the elderly is only an aftermath, while the birth of more children is the only way to create a better future.

People once worried that the scarcity of natural resources would constrain development, but the added value of natural resources accounts for less than 5% of global GDP and shows an overall downward trend. This implies that, in the foreseeable future, the bottleneck limiting human technological development is not the constraint of natural resources but the simultaneous shrinkage of demand and supply caused by a rapidly aging and shrinking population. In this regard, Elon Musk, who is committed to exploring cutting-edge technologies and adept at thinking from the bottom-up logic, has a more direct understanding and profound insight than The Economist. Musk has repeatedly warned that low fertility rates will seriously threaten human technological development and the continuation of civilization.

Raising Fertility Rates is a Public Policy Responsibility

Therefore, to maintain the passing of the torch of human civilization and the well-being of the current population, raising the fertility rate to the replacement level is something that must be done sooner or later, and the sooner it is done, the better.

The article also acknowledges that fertility subsidy policies have some positive effects, such as reducing child poverty by subsidizing poor parents and increasing the likelihood of employment for mothers who can afford childcare costs. However, it completely denies the core significance of subsidy policies in raising fertility rates, which is tantamount to putting the cart before the horse.

The crux of the low fertility rate is the misalignment of incentive mechanisms; the cost of raising children is borne by families and individuals, but the benefits are enjoyed by society as a whole. Before industrialization, children could directly bring economic benefits to their parents when they grew up. After industrialization, especially under the socialized pension system, young people's economic returns to the elderly are mainly realized at the societal level rather than within the family. Specifically, the value of the elderly's retirement savings at the time of redemption comes from the goods and services created by the working population; the smaller the young population, the lower the ability of retirement savings to exchange for goods and services. Therefore, the beneficiaries of increasing the fertility rate are the entire society in the future, and encouraging childbirth should be carried out at the societal level and planned for the long term. The Economist mentions that the decision to have children is personal and should remain so. This is undoubtedly true at the micro level. However, if everyone does not have children, the economy will collapse, and society will face extinction. Therefore, at the macro level, what is needed is to establish an effective incentive mechanism to ensure that the overall fertility rate of society can be restored to a sustainable replacement level, which is the proper meaning of public policy.

Are Fertility Subsidies Effective?

After listing the fertility subsidy policies of major industrialized countries around the world, The Economist asserts that the idea that governments believe they have the ability to increase fertility rates is wrong, arguing that these policies are based on the wrong diagnosis that has led to population decline to date. The article seems to suggest that pro-natalist policies are ineffective for career women, citing evidence that college-educated women only slightly delay childbearing and have similar numbers of births as the previous generation of college-educated women. This conclusion is arbitrary. To determine whether a policy is effective, it is necessary to compare the fertility status of women who enjoy the policy with those who do not enjoy the policy at the same time. In the absence of micro-data, it is also possible to compare fertility rates between countries with different subsidy levels. Since the differences between countries are huge and the data samples based on countries are limited, conclusions drawn from such comparisons need to be treated with caution.

According to data from European countries, a one percentage point increase in family welfare expenditures such as fertility subsidies as a percentage of GDP corresponds to an approximately 0.1 higher fertility rate. The Economist mentions that Sweden provides very generous fertility subsidies, but the fertility rate is only 1.7, seemingly implying that subsidies are ineffective. However, in reality, Sweden's fertility rate has long been among the highest in Europe, and the failure to reach the replacement level can be attributed to the insufficient level of subsidies rather than their ineffectiveness.

The article is more concerned that fertility subsidies encourage young and poor women to have children early and have more children. In the author's view, these women having more children is not unrelated to poverty and maternal and child health problems, which is not good for themselves or society. However, in the current context of continuously delayed marriage and childbearing ages and declining fertility rates, it is no longer appropriate to worry about women having children early and having more children. The average age at first birth in OECD countries has risen from 26.4 years in 2000 to 29.4 years in 2020. In China, the average age at first marriage has risen from 23.89 years in 2010 to 27.95 years in 2020.

It is not a bad thing for fertility subsidies to appropriately lower the age at first birth. From a medical perspective, it is beneficial for both maternal and child health when women give birth between the ages of 20 and 30. The probability of infertility increases with age, and if the childbearing age is too late, the risks of pregnancy complications and congenital malformations in the fetus are greater.

The problems previously brought about by young and poor women having more children can be largely attributed to their lack of income. The fact that these women are now giving up or reducing childbearing indicates that they are no longer willing to put themselves and their children in poverty and poor health, and providing them with fertility subsidies can give them more choices. If fertility subsidies are effective for them, the additional children and their mothers can actually alleviate poverty and improve maternal and child health with the cash they receive. Against the backdrop of continuous population decline, raising the next generation for the sustainable development of society may be more meaningful and more deserving of income than engaging in jobs that may be replaced by artificial intelligence.

So, will universal fertility subsidy policies have a better effect on low-income women than on high-income women? This is indeed the case, but relative to the rapid population decline, especially for a country like China with basically consistent genetic and cultural characteristics and high social mobility, the negative effects are limited. For a long time, the fertility rate of the lower social class has been higher, but the overall characteristics of the groups have remained basically stable.

Moreover, fertility incentives not only refer to cash subsidies but also include tax reductions and childcare services, the latter of which can significantly reduce the opportunity cost for high-income women. In addition to direct financial costs, nurturing costs also include opportunity costs, such as increased time spent on childcare, pick-up and drop-off, tutoring, and housework, which reduce parents' leisure time and time spent on paid work; the opportunity cost of raising children is higher for high-income women than for low-income women. Therefore, measures such as childcare services, gender-equal parental leave, and flexible working arrangements can all reduce the opportunity cost of nurturing and ultimately increase the fertility rate. Thus, fertility incentive policies are not ineffective for career women, as The Economist implies.

Are Fertility Subsidies Cost-Effective?

Another reason The Economist opposes fertility subsidies is that the cost of subsidies is too high and exceeds the cost of the problems they are intended to solve. However, while fertility subsidies are a cost to the payer, they are a benefit to the recipient. From the perspective of society as a whole, they are a redistribution of wealth, i.e., tilting economic output towards nurturing families to compensate them for making greater contributions to the sustainable development of society. This compensation can be understood as an investment in the future; parents devote time and financial resources to raising children, and when the children grow up, they support the entire economy through consumption and work, and directly contribute to society through taxation and other means. The article mentions that subsidizing fertility is aimed at all children, including those who would have been born anyway, so the cost of bringing in additional children is enormous.

Indeed, focusing subsidies on additional births, such as implementing a progressive system based on the number of children, would result in higher fertility rates for the same amount of public spending. However, this does not negate the significance of fertility subsidies. The article states that in Poland and France, it costs $1-2 million to have an additional child. We do not know the source of this data and can only attempt to reverse engineer the estimate based on publicly available data.

France's GDP in 2023 is $3.03 trillion, and family welfare expenditures such as fertility subsidies account for about 3.44% of GDP, or $104.2 billion. Assuming that fertility subsidies are given as a one-time payment to the 678,000 people born in France in 2023, each person would receive an average of about $154,000, far less than the $1-2 million mentioned in the article.

Based on the original text in The Economist, we speculate that the author assumes only a small portion of the birth population is due to subsidies, but since subsidies are given to all children, the author counts all subsidies as the cost of having additional children. Assuming that 1/8 of the children are born due to subsidies and the remaining 7/8 would have been born without subsidies, using the above calculation, the cost of having an additional child would be $1.232 million (i.e., 8*$154,000), which is consistent with the figure given in the article. However, this estimation is absurd.

The purpose of fertility subsidies is not only to increase fertility rates but also to support the welfare expenditures of nurturing families, which can be seen as society's compensation for their parents' efforts in raising future taxpayers. It is not because this compensation is intended to increase fertility rates that the cost of subsidies received by children who would have been born anyway should also be fully attributed to the additional children born. Based on this serious overestimation of the average investment in fertility subsidies, the article states that only a very small number of citizens have sufficient productivity to generate fiscal benefits to offset these investments. However, even if this statement holds true, it does not prove that fertility subsidies are a losing proposition. Just as in venture capital projects, the success of a very small percentage of projects can compensate for the losses of other projects and generate an overall surplus.

People's contributions to society are like venture capital projects, usually following a power-law distribution; a very small number of outstanding talents can create a very large proportion of social wealth, and nurturing them requires a huge population base. Therefore, a more reasonable criterion for judgment is whether the average return is higher than the average investment. France's per capita GDP in 2023 is $44,400, and taxes and social security contributions are equivalent to 48% of GDP. Based on a life expectancy of 83 years, the average French person pays a total of $1.77 million in taxes and social security contributions over their lifetime, far exceeding the $154,000 in fertility subsidies. Since the denominator used to calculate per capita taxes and social security includes all working and non-working populations, the calculation of lifetime accumulated taxes and social security should use per capita life expectancy rather than average working years.

Of course, the above comparison of input and output is not fair because, in addition to paying taxes and social security, citizens also enjoy the benefits and conveniences they bring. However, it can be certain that people's economic value to society as a whole is also positive. Over the past few centuries, as the human population has grown, human society as a whole has become more prosperous, indicating that people's contributions to society, on average, outweigh the burdens they bring.

People are Ends, Not Means

The Economist completely measures the value of fertility by the future output of children, and based on seriously misleading estimates, it reaches its core conclusion, but the article's more fundamental fallacy is that it only sees life as a tool for economic output while ignoring the intrinsic value of life itself.

In fact, the survival and reproduction of each person has the value of maintaining human genetic diversity and inheriting language and culture, not to mention giving more meaning to the lives of their relatives and friends. Even from a purely economic point of view, the value of people also includes consumption and the population base for nurturing outstanding talents, not just being trapped in work in the usual sense. With the advancement of communication and transportation, the Matthew effect of the strong getting stronger is constantly being reinforced. Previously, companies could survive by being the best in their local area, but now they may need to be in the top one or two in a certain field across the entire network to survive. Therefore, market share and profits will gradually concentrate on a few top companies. Coupled with the prospect of artificial intelligence replacing more jobs, more and more people may not have tradable skills in the labor market, thus becoming an ineffective population in terms of work. From a macro perspective, this is a great thing because society as a whole can invest less working time to obtain greater economic output. However, according to The Economist's logic, which measures people's value by economic output, these so-called ineffective populations should not be born from the perspective of public spending. This means that technological development makes more lives lose value, which is a denial of the intrinsic value of life.

People are ends in themselves, not means. Work is only the price that people need to pay in order to survive, reproduce, and realize their own wishes. The smaller this price, the better, and the greater the economic output, the better. Therefore, what policies should really be concerned with is macro-efficiency, that is, society as a whole obtains greater output at a lower cost, and ensures that everyone can live a basically decent life, and that there are enough children in the future to maintain the sustainability of society. The current level of technology and production capacity is sufficient to achieve this, but there is a lack of corresponding social mechanisms. The ultimate solution may be starting income, that is, letting every citizen, including newborns, receive a universal starting income for all, and linking the distribution ratio to the employment market and fertility rate.

Specifically, it is based on electronic currency, and a certain proportion of the added value of each transaction in the economy is distributed to all citizens in real time. If the overall wages in the employment market rise, it indicates that the market lacks people, and the distribution ratio will be adjusted downward; otherwise, the distribution ratio will be adjusted upward. Starting income maintains the incentive mechanism of more work and more gain on the basis of universality, avoids inflation, and maintains the stability of the employment market through the embedded feedback mechanism. Tilting the distribution towards children can be used to increase the fertility rate, and this tilt can be continuously strengthened until the fertility rate returns to the replacement level. The current conception of starting income is more of a thought experiment than a realistic plan. We will discuss it in detail in subsequent articles.

China Needs to Return to Fundamental Logic to Think about Population Issues

China's fertility rate in 2023 was only around 1.0, far below the average level of 1.6 in high-income countries, and thus, China needs fertility subsidy policies far more than these countries. However, The Economist's article does not mention China at all, and it is not known whether this is because China's efforts to encourage fertility are too small or because it is difficult to convince people that China, facing such a low fertility rate, should not subsidize fertility.

China's fertility rate is vastly different from that of Western countries and is far below the replacement level, but so far, China's response to the low fertility rate is still lukewarm. This may be because Western fertility rates are not particularly low, and addressing low fertility rates is far less urgent than in China, so there is no consensus in the West to strongly encourage fertility, which in turn reduces the importance of the topic in China.

As a media outlet with global influence, The Economist is a setter of topics and a controller of discourse. However, like this article, many of The Economist's analyses are only extensions based on the limited historical experience of the world, especially the West, rather than deductions based on the underlying logic of civilization. For a long time, Chinese society has been accustomed to determining the importance of issues from a Western perspective. Many hot topics and their narratives, such as population explosion, equality movements, and climate change, all originate from the West. This "good" student mentality of following in the footsteps needs to change. In particular, in the face of the unprecedented challenge of low fertility rates, we need to return to the fundamental logic to think deeply and explore solutions, and we cannot think it is not a top priority because it is not that important in the West.

We believe that China has special advantages in solving the problem of low fertility rates. Culturally, we are a nation that worships ancestors and focuses on long-term and overall interests, and we are prudent and far-sighted. In terms of mechanisms, China has a strong central government and strong execution capabilities. In our view, the key to solving the problem of low fertility rates is to make childrearing a job with income and to ensure that the income of nurturing families is stable and predictable. In recent years, many local governments in China have successively introduced fertility subsidy policies, but the efforts are too small. We suggest implementing policies that heavily subsidize fertility at the central level, which can be progressive and take into account differences between different regions and different income groups. For example, each first child can be subsidized 1,000 yuan per month, each second child 2,000 yuan per month, plus a 50% reduction in social security and income tax, and each third child and above 3,000 yuan per month, plus a full exemption from social security and income tax. Considering that China's economy is in urgent need of expanding domestic demand, each child can also be given a one-time cash reward of 100,000 yuan and a reduction in mortgage interest rates.

The fertility subsidy policy aims to reduce the economic burden of nurturing families, stimulate fertility willingness, and stabilize the birth population. The implementation of this policy can also alleviate the gap between the rich and the poor and improve people's quality of life and happiness while boosting domestic demand, driving investment, and promoting economic development. In the long run, this policy will increase the fertility rate, maintain the sustainable development of the population, and lay a solid population foundation for ensuring China's innovation capabilities and comprehensive national strength, achieving the rejuvenation of the Chinese nation, and ultimately allowing the economy to return to its fundamental meaning - to enhance individual well-being and promote the sustainable development of society.