Jesús Fernández-Villaverde explains that while very low fertility has some positive aspects, it also presents significant problems. In countries with extremely low rates, like South Korea at 0.7 or Spain at 1.2, society faces a "big demographic cliff." This rapid decline in population, unless offset by massive immigration, has serious consequences for total GDP growth. This is crucial because many societal commitments, such as Social Security benefits and the ability to service public debt, are dependent on the total size of the economy.

Even if a country had no debt or social security commitments, there would still be cause for concern. First, there's a basic accounting identity: total output growth equals labor productivity growth plus labor growth. If the labor force shrinks by 1% annually, even with a steady 2% productivity growth, the total economic growth would only be 1%, a significant drop from a potential 3% growth seen when the labor force was expanding. Society would need to adapt to this new, slower reality. Secondly, population decline is not uniform across a country.

This doesn't imply that every city and every town loses 10%. What it means is that places like Tokyo still actually increase their population. This is a phenomenon called sponge cities... And other places lose 30%, 40% of population. When you're in a city or a town that loses 40% of population, well, you need to close the local high school, you need to close the local college, you need to close the local hospital.

Jesús notes that while a country like South Korea appears to be doing well despite its low fertility rate, its growth has already slowed considerably from 5-6% to 2-3%. The most severe economic problems from its demographic shift are not expected to hit until the 2030s.

There is a view that markets are not underappreciating what is happening in Asia, particularly in Japan. Jesús Fernández-Villaverde notes that he recently changed his mind on this. He points to Japan's deep and aggressive social security reforms in 2004. By introducing a sustainability index correction, Japan was able to stabilize its debt and correct many demographic imbalances. This suggests that cohesive East Asian societies with strong social consensus may be better equipped to handle these situations than other societies.

While Japan's performance has not been outstanding, it could be considered a best-case scenario for a country with these challenges. It has a high degree of social consensus and a willingness to sacrifice for the future. Jesús questions whether countries like Mexico, Spain, or Italy could achieve the kind of consensus Japan did for its reforms. This is something markets seem to understand, expecting that Japan or South Korea will manage to muddle through their problems, while being less optimistic about other nations.

Another way to reframe Japan's situation is to look beyond GDP per capita, which has been relatively flat for decades. If you look at GDP per worker or per hour worked, Japan has actually done reasonably well. This indicates that the problem isn't necessarily a stagnation in worker productivity. Instead, the issue is a demographic shift toward a much older population that is not in the workforce. This helps explain why Japan still feels like a rich, prosperous country to visitors, despite headline numbers suggesting otherwise.

This re-evaluation started for Jesús after he attended a talk by a prominent economist. The speaker argued that Japan never recovered from its early 1990s financial crisis and proposed a monetary policy solution. Jesús was skeptical that a central banker could produce miracles, believing their main job is to avoid disasters. He challenged the speaker, noting that 30 years had passed since the crisis, an equivalent time span to discussing the New Deal during the Nixon administration.

The common narrative about Japan's economic struggles might be based on looking at the wrong data. Jesús Fernández-Villaverde recalls a moment when he started to question this narrative. While in a seminar, he used the FRED economic database to look at Japan's GDP. Instead of dividing it by the total population, he divided it by the population between ages 15 and 64, which roughly represents the workforce.

To his surprise, Japan's economic performance suddenly looked much better. It was still slightly behind the U.S. but was comparable to countries like Germany, France, or Italy. This led him to believe that many macroeconomists were creating overly complicated models instead of just examining the basic facts. He points out how some claims about Japan's economy are wildly off the mark.

Another extremely distinguished economist mentioned that with better monetary policy, Japan today will be 70% richer, which is absolutely crazy. It will have basically implied that productivity growth in Japan should have been around 4% a year for the last 30 years, which is never anything that we have ever seen before in the data.

This perspective helps reconcile the data with the reality of visiting Tokyo, which appears to be a prosperous and functional city. However, Jesús adds a nuance: poverty in East Asian societies is often hidden in remote rural areas, unlike in the U.S. or the U.K. where it is more visible in major cities. Overall, the negative view of Japan's economy comes from using the wrong lens, like total GDP, instead of a more accurate measure like GDP per hour worked.

Poverty is concentrated in cities in the West, but not in East Asian countries, partly due to ethnic homogeneity. A lot of the most severe poverty in the United States, for instance, is linked to ethnic diversity. The large ghettos in Northeast cities were created by the migration of African Americans from the South to the North, starting around the 1920s, who faced enormous discrimination.

In contrast, many East Asian or continental European cities did not have these large inflows of migrants until recently. In those places, poverty tended to be located in rural areas. This creates a different perception of society. A visitor to a major Chinese city like Shanghai, Nanjing, or Beijing gets a very different feeling of the country than someone visiting a rural area in Yunnan, which can still feel like a very poor country.

This suggests that countries like South Korea and Japan may not be the 'canaries in the coal mine' for the Western world. Due to their different societal structures, they may be better able to address major concerns like Social Security commitments and debt overhangs compared to Western nations.

Despite high debt burdens and aging populations, countries like Japan and South Korea can still borrow at very low rates. Jesús Fernández-Villaverde explains this with two main forces. First, these countries have already undertaken deep and painful economic restructuring. For example, Japan's Social Security system is in good shape because its payments are indexed to the country's demographic conditions. Markets understand and account for this proactive management.

The second force relates to global interest rates. The interest rate a country pays consists of two parts: the international interest rate and a country-specific premium. Currently, real interest rates across the planet are very low. This is partly due to a "safe asset shortage," where there is more global savings than there are safe places to invest. Therefore, a country borrowing at 3% when the global real rate is 1.5% is actually paying a significant 1.5% default premium each year. This low rate can be misleading and doesn't imply a lack of risk. The situation could change dramatically in the next 20 years as the entire planet undergoes a demographic transition. If global interest rates rise, countries like South Korea and Japan could face much higher costs to service their debt.

A common critique of falling fertility rates is that it might just be a shift in timing, with people delaying having children rather than having fewer overall. While it's true that the final number of children a woman has in her lifetime—the completed fertility rate—can differ from the yearly snapshot known as the Total Fertility Rate (TFR), historical data and biology suggest there are limits to this effect.

Jesús Fernández-Villaverde points to countries like Scandinavia, which saw big delays in childbearing in the 70s and 80s. The difference between their TFR and completed fertility was typically around 0.3 to 0.4. Applying this to the United States, which currently has a TFR of 1.62, might raise the completed fertility rate to 1.9, but it's unlikely to be higher. He notes it is very hard to find any historical example where the difference is larger.

The primary reason for this is biological. Jesús explains that while you can delay fertility, you eventually run into natural limits.

Fecundity, your ability to get pregnant, especially if you have never got pregnant before, drops very, very fast after 28. So even if there's a lot of women who are thinking, 'I'm trying to complete my PhD in chemical engineering, I'm going to have kids a little bit later,' they are going to find to their big surprise that is going to be very difficult even using IVF.

Furthermore, for the numbers to rebound, women in their late 30s and early 40s would need to have an unprecedentedly high number of children, which is not happening. Even in a best-case scenario for a country like South Korea with a TFR of 0.7, adding 0.4 would only bring it to 1.1—still catastrophically low. Using an analogy, Jesús compares the situation to a football team losing 3-1 with only five minutes left in the game.

It's like when you are in the football game, it's minute 85 and you are losing 1-3. And you said, 'Oh, I still have five minutes, I may still win this game.' Yeah, maybe, but it's becoming increasingly unlikely.

A surprising and universal trend is the collapse of fertility rates, which is happening regardless of a country's rate of development. In some cases, the decline in fertility is more accelerated in the developing world than in rich countries. This contradicts the traditional model where people have fewer children as they become richer.

Jesús Fernández-Villaverde points out the real problem is not countries like the U.S., but countries like Mexico. He notes a surprising fact: Mexico now has a lower fertility rate than the U.S. In fact, non-Hispanic whites in the U.S. have a higher fertility rate than the population of Mexico, which he describes as "absolutely mind blowing."

He argues that demographic transitions in emerging economies are happening faster than they did in advanced economies. Fertility is not only dropping more rapidly but is also likely to stabilize at a lower level. He speculates that in 50 years, the countries with the highest fertility rates might be rich, advanced economies like the United States.

Jesús offers a few explanations for this phenomenon. The modern, skills-based economy requires enormous investment from parents, particularly in time, which is especially costly for people in emerging economies. He also notes a historical shift. For 200 years, there was a negative relationship between income and fertility. Now, for the first time in the last 20 years, richer people are having more children than poorer people. This suggests family formation is becoming a luxury good.

Another significant factor is a growing dualism in social norms. In many developing economies, women aspire to the lifestyles of women in advanced economies, often seen through social media. However, their potential male partners may still be stuck in traditional gender roles. This mismatch hinders the formation of marriages and results in fewer children being born.

When asked if this is due to social media or women having more economic power, Jesús acknowledges both are important but says he has shifted his view more towards the influence of social norms. He points to the dramatic drop in fertility across the Middle East and North Africa. For example, Egypt's total fertility rate is dropping so fast it may be below replacement rate by 2027, decades ahead of United Nations' forecasts. Morocco and Tunisia are already below replacement rate. This is happening in countries where women have not joined the labor force in large numbers, suggesting that changing social norms are a powerful driver of falling fertility, independent of purely economic factors.

A notable demographic shift is occurring in Israel. According to data from the Israeli National Institute of Statistics, the fertility rate of Jewish women has surpassed that of Muslim women for the first time since 2021. This reverses a long-standing trend where the much higher fertility of Muslim women caused anxiety within Israel about maintaining a Jewish majority in the long run. Even secular Jewish women maintain a relatively high fertility rate. Jesús Fernández-Villaverde suggests this points to a powerful change in social norms within the Muslim population in Israel.

This example connects to a broader economic model where technology is the ultimate decider of social structures. Jesús describes this perspective as being like a "right-wing Marxist," where technology, or the "forces of production," shapes society. However, the process is not immediate. The way technology translates into new social norms can be complex and may take several generations to unfold.

The effects of a major technological change, like the invention of the contraceptive pill in the 1960s, may take decades to fully materialize. Early generations are socialized in a world without the technology, creating a conflict when it is introduced. It might take two or three generations for the societal norms to fully adapt.

The problem is that to really look at the consequences of big deep changes in technology, sometimes you need to wait 80 to 90 years. So maybe what with a big collapse in fertility in 2025 is the consequences of the social revolutions of the 1960s, of the sex revolution, of the change in the quality of men and women. It just takes 60 years to work it through the system.

This long-term view is a critique of much of modern empirical economics, which tends to focus on very short-run effects. Studying the impact of a policy over just five years misses the deeper, generational shifts in socialization. The fertility collapse seen today might be the delayed consequence of the social revolutions from over 60 years ago.

Janet Yellen's research on abortion highlights how its availability changes the dynamics of couple formation. When abortion is accessible, an unintended pregnancy no longer automatically triggers a marriage, as was common with "shotgun marriages" in the past. While contraception reduces pregnancies, abortion further decouples pregnancy from the necessity of forming a couple.

This links to the work of Alice Evans, who argues that a key demographic issue isn't that existing couples are having too few children (the intensive margin), but that fewer couples are forming in the first place (the extensive margin). The idea that these trends are driven by technology, such as the contraceptive pill and abortion access, suggests they might be tractable and not just amorphous cultural shifts. This opens up a discussion about whether these material factors can be influenced, even if the specific policies might be undesirable for liberal or other reasons.

A key distinction in fertility research is the difference between the extensive and intensive margins. The extensive margin concerns the decision to have at least one child, which might depend on factors like finding a partner. The intensive margin is about deciding to have, for example, a third child instead of a second, which is more influenced by costs like local schooling or housing.

Jesús Fernández-Villaverde argues that a significant trend today is that more women are choosing to have zero children, a shift on the extensive margin. One reason is that career-focused women, such as a chemical engineer with a PhD, may not prioritize marriage or children. Another major factor is the decreasing supply of suitable male partners. Jesús suggests that failures in the educational system have disproportionately harmed a segment of the male population.

You basically have now 20, 25% of boys at the very bottom of the distribution that basically like to spend their days smoking dope and playing video games. This is not very good marriage material. And women who are not high in the distribution themselves in terms of qualities as partners, they said, well, between marrying a lousy husband or staying at home single, I'd rather stay at home single.

Since being a single woman in an advanced economy is a perfectly viable option, many choose it over a bad partnership. This changes the dating market significantly. For example, in a city like New York, a single 28-year-old man without major physical defects can have as many dates as he wants, as a large portion of his potential competition is effectively out of the market.

While these are societal problems, Jesús is skeptical of social engineering as a solution, warning that attempts to tweak social behavior often have unintended consequences. Instead of trying to create policies to fix dating dynamics, he suggests focusing on "no-regrets" policies. Things like more affordable housing and capping the educational arms race are beneficial for society in general, and if they also lead to more reasonable fertility levels, that is an added bonus.

Limited housing supply, particularly in wealthy areas, leads people to have fewer children and to delay starting families. Focusing on increasing the housing supply is an attractive policy because even if it fails to increase birth rates, it is still a beneficial action for society. Jesús Fernández-Villaverde agrees, calling housing the number one priority.

In Brazil they have public housing... you apply for a lottery... people who win the lottery and get early access to public housing have 0.5 children more on average. That's a lot. Gigantic. It's a gigantic effect.

This illustrates the powerful connection between stable housing and family size. Jesús argues that even if someone wins a housing lottery and chooses not to have children, society still benefits from providing them with a home. It is a no-regret policy.

A common counterargument is that the total stock of housing relative to the population isn't at historic lows. However, this misses a key demographic shift: the average household is much smaller now. Jesús shares a personal example: his childhood home housed seven people, but now his father lives there alone. This means society needs many more effective units of housing to accommodate the same number of people.

An economist in Vancouver, Jens von Bergman, quantified this by estimating the "doubling up" effect, where adults live with parents or roommates out of necessity. His research found that cities like Toronto and Vancouver would need a 40% increase in housing units just to meet the demand of people already living there who are currently doubled up. Jesús notes the absurdity of land constraints in vast countries like Canada or the US, pointing out that even a city like Philadelphia has ample abandoned or low-density areas that could be developed to double its housing stock and improve livability.

There is a growing trend of over-educating people, particularly in the humanities. Jesús Fernández-Villaverde notes that the internal rate of return for a humanities degree is likely negative. While he personally loves philosophy and history, he believes the average person pursuing these degrees isn't driven by a deep passion for thinkers like David Hume. Instead, college and graduate school have become the path of least resistance.

This over-education has significant consequences. It delays family formation and can set individuals on lower-income paths than they might have otherwise found. Pushing more people toward professional trades could be a beneficial policy, helping to address labor shortages in the experience economy and supporting family formation.

This issue is particularly acute in countries like South Korea, where life prospects are heavily tied to admission into a few elite 'sky' universities. This creates an intense, competitive educational race that limits fertility and establishes a high-stakes game very early in life, potentially filtering out those who bloom later. As a solution, Jesús proposed a new system to the Korean government. Instead of a ranked entry exam, a minimum threshold would be set, for example, 8 out of 10. Any student scoring above this threshold would be deemed qualified for a top university.

From this pool of qualified candidates, admission would be decided by a lottery. This system would disincentivize the 'insane level of competition' where students fight for marginal gains, like moving from a 9.1 to a 9.2 score, which is often just statistical noise. It would also distribute talent more evenly. A top student who loses the lottery would attend the next-best university, raising its caliber and creating a smoother gradient of quality across the entire educational system, rather than a steep cliff between the elite and everyone else.

While it may seem rational for students in a country like South Korea to pursue university degrees due to the high wage premium, the same logic doesn't always apply to students in the US or Europe. People often pursue degrees, such as in the humanities, that may not be in their direct material interest. This behavior can be explained by several factors, including hidden subsidies and the nature of decision-making.

Jesús Fernández-Villaverde explains that even in the United States, university education is heavily subsidized. Public universities receive significant state funding. Even private universities like the University of Pennsylvania are not funded by tuition alone. Their budgets are often a mix of tuition, endowment funds, and federal grants, with the latter implicitly subsidizing both undergraduate and graduate studies.

So if you go and decide to do a PhD in philosophy at Penn to write that brain direct through dissertation on Martin Heidegger, just to put salt on the bund, you are probably going to have package aid from Penn, which basically means your stipend and tuition, and that's implicitly paid by the federal government.

Furthermore, people are not always perfectly rational when making major life choices. While individuals make good decisions in frequent, low-stakes situations like grocery shopping, choosing a college or a degree is a one-time decision fraught with uncertainty and influenced by social norms.

I'm a strong believer in people making good rational decisions when they go and buy bananas... However, in life there are decisions like going to college, going to graduate school that you do only once in your life. And there is a lot of uncertainty about the parameters involved in making that decision.

Jesús notes that even he, a self-described rational agent, feels he chose the wrong undergraduate degree. This highlights how easily students can make suboptimal choices. A significant part of the problem is a lack of information. He found that even his senior economics students at Penn were mostly clueless about the financial rates of return for different majors. Simply providing this data is a low-cost, high-impact policy.

This is also a very, very no regrets policy to just make students or young people aware of the rates of return from various degrees. I can't imagine any possible argument against giving information.

A major problem with pro-natalist policies, such as baby subsidies, is their inefficiency. They struggle to target only the babies that would not have been born otherwise. Even a very successful policy that increases birth rates by 10% still spends over 90% of its budget on babies that were going to be born anyway. This makes most subsidy programs unaffordably expensive for the small impact they have.

A better approach is to target specific margins where decisions are being made. For example, since many couples stop at two children, offering a significant subsidy for the third child could be effective. Jesús agrees, noting that in the U.S., a large part of the fertility decline comes from families moving from three children to two. He suggests that small cash payments are unlikely to influence this decision, which he calls an "infra marginal" expense.

What type of things I can imagine. I don't think that 5,000 extra pounds will make a big difference pushing people to go to 2 to 3. But things like if you get to the third kid, college tuition is free for all three kids will make a huge difference.

Jesús also raises the idea of creating subsidies that encourage highly educated, successful professionals to have more children, arguing it would be good for society. However, a more neutral way to frame this is to address the distortionary effects of flat subsidies. Flat payments provide a much stronger relative incentive to people with lower incomes. To create a neutral system that doesn't favor any income group, policies should scale with earnings. For instance, making childcare fees tax-deductible rather than offering a flat subsidy ensures the benefit is an equal share of income for everyone. Jesús agrees this is a better formulation of his underlying point, emphasizing that any policy must be designed with a country's entire complex tax system in mind.

To better understand declining birth rates, the first step is to get much better data. Jesús Fernández-Villaverde argues that many important policy decisions are currently made with wild guesses due to a lack of detailed demographic information about who is and is not having children. He is highly critical of existing data sources.

I'm extremely critical with the world population prospects of the United Nations. I think it's a little bit of a scandal how bad that data is.

Beyond raw data, well-designed surveys could reveal whether people are aware of the likely outcomes of their choices. For instance, do students majoring in philosophy understand their potential career paths? A simple, non-regret policy could be to provide them with this information before they enroll. Similarly, surveys could assess if people are aware of how quickly female fertility declines after age 28.

Imagine that we can agree on a five page summary of professional outcomes based on college majors. And before letting you enroll into college you need to sign that you have actually read this.

Jesús is skeptical of large-scale experiments to study this issue. Since fertility choices play out over decades, any experiment would take 20 or 30 years to yield results, which is too slow for making decisions in real time. Finally, he points to a structural problem within the economics profession itself: it fails to adequately reward the difficult work of data construction. Academics are incentivized to write fancy models or empirical papers rather than spend years building useful datasets, which hinders progress on data-dependent issues.