The Great Stagnation

Dynamism and innovation are withering away in much of the Global North

Decline: it’s happening, faster and harder than you think.

It’s not exactly news but I don’t think many people realize just how bad things are looking for the future growth, dynamism, scientific contribution, and global relevance of many nations across Europe and East Asia.

Do you think I am exaggerating? Consider the following facts:

• The U.S. economy is now 50% bigger than the EU economy. A decade ago, these two economies were about equal in size. Bear in mind, the UK only made up about 15% of the EU economy, so Brexit is not the main factor.

• California alone is on the verge of having a bigger economy than Japan.

• As the UN points out, many nations have entered an age of ultra-low fertility. Most Northern nations will struggle to maintain growth and reduce deficits due to shrinking working-age cohorts and ballooning elderly populations dependent on pensions and healthcare. Fertility rates in 2022 (most have gone further down since then): U.S 1.7, EU 1.5, Russia 1.4, Japan 1.3, China 1.2, Taiwan 0.9, South Korea 0.8. This will mean the virtual halving of workforces every generation in some nations.

While the West, Russia, and China have entered a phase of geopolitical conflict not seen since the end of the Cold War, these nations share much in common in terms of facing similar threats of decline. These countries provide the bulk of scientific discovery and technological innovation in the world and it is highly unlikely that other nations in the Global South will be able to pick up the slack.

The United States and China are emerging as virtually the only games in town. China’s dynamism will be increasingly hobbled by its shrinking working-age population: it is forecast to shrink by about 240 million between now and 2050, a 1 percentage point reduction every year. However, China has already emerged as a scientific superpower with massive output in terms of scientific papers, patents, and economic applications of technology. What’s more, China’s GDP per capita is about one third that of South Korea’s, suggesting there is ample scope for more upward productivity growth.

The U.S. for its part has continued to have relatively high demographic and economic growth, at least compared to the rest of the developed word. America’s assets include relatively high fertility, brain gain from the rest of the world, cheap energy, a pro-innovation regulatory environment, and vast quantities of private investment capital. The degree of America’s domination of cutting-edge fields—tech, AI, biotech, space…—has become downright embarrassing for other developed countries. Consider the global lists of most valuable companies.

Based on workforce size projections, already large growth disparities between the U.S. and Europe (including Russia) and Japan will increase further. The Census Bureau forecasts that the working-age population (18-64) in the U.S. will rise by around 16 million between 2020 and 2050, or an 8% increase. In the EU by contrast, Eurostat forecasts that the number of 20-64 year-olds will fall from 262.3 million in 2022 to 236 million in 2050, a 10% drop. In Japan the decline will be even more dramatic, 15-64 year-olds being expected to fall from 75 million in 2020 to less than 60 million by 2043, a 20% drop.

The case of Europe is sadly instructive. In 2002, the EU pharma sector, which I consult for, used to invest almost as much in R&D as the U.S. Two decades later, U.S. pharma invests $27 billion more than the EU in R&D every year, or over 50% more. The gap in biotech is even bigger. In space, Europeans have increasingly resorted to SpaceX to launch satellites instead of their own, once strong, space sector.

It isn’t that Europe has no success stories. On the back of breakthrough anti-diabetes and anti-obesity drug Ozempic, Denmark’s Novo Nordisk has become the valuable company in Europe. Airbus continues to mog Boeing in commercial airliner manufacturing. Nonetheless, it is striking that of the 10 most valuable companies in the EU, only one was founded during the last 30 years (Prosus) and three are French luxury brands (LVMH, Hermès, and L’Oréal; it is good that the French have been able to monetize and rejuvenate their centuries-old Prestigious cultural capital so well, but still, this is very telling).

Addressing adverse trends in Europe will be a Herculean task. The EU institutions are pivoting to a more pro-competitiveness agenda under Commission President Ursula von der Leyen’s second term. However, raising birth rates and undertaking pro-growth reforms at national level will be much easier said than done.

In this year’s parliamentary elections, the French overwhelmingly voted for two blocs—the nationalists and the left—who want to reverse Emmanuel Macron’s (gradual!) raising of the retirement age from 62 to 64. The left thinks the real problem in France is “neoliberalism” and failure to tax the rich (the French State reduces inequality through redistribution more than any other major economy, public spending accounted for over 57% of GDP in 2023, and public debt is now over 110% of GDP).

What is to be done? A first thing is to correct one’s prior assumptions about the future. It is very hard to make accurate predictions about technological breakthroughs and their impact; and equally hard to make political predictions, such as whether the current Russia and Chinese régimes will endure, or even whether the United States and the European Union will hold together. But we can have a high degree of certainty about demographic trends, at least for the next 30 years, as well as their impact on the size of workforces and on public finances. These will strongly affect nations’ growth, dynamism, power, relevance, and contribution to global goods such as science and technology.

I never tire of pointing out the degree to which national power depends on demographic and economic foundations. Since the 1950s, so many have predicted the decline of the American empire, due to periodic economic downturns or foreign policy disasters (Vietnam, Iraq, Afghanistan…). Yet these prophecies have so far been very premature and that is because, beyond the day-to-day storm and thunder, the demographic, economic, and technological trendline of the United States continued to be upwards.

In terms of responding, Europe and East Asia need to do everything possible to become economically competitive and encourage people to raise families. Much of this will be easier said than done. It really is not clear what it would take to stop South Koreans and Taiwanese rage-quitting out of existence. I try to contribute in my small way by documenting and raising awareness on developments in emerging reproductive technologies and natalist policies with the Genetic Choice Project (which now has over 1100 subscribers and followers).

Another way of responding is encouraging economic and scientific cooperation between these aging societies, to at least make the most of their dwindling human capital. The EU has worked in this direction, for instance by sealing R&D deals for joint research projects with the UK, Japan, Canada, South Korea, and other countries, as well as data-sharing deals with nations like Singapore. As a civilian technocratic multi-state polity, the EU is often better positioned to develop international standards and partnerships than are the United States and China. Standards that work for the EU’s 27 diverse nation-states will often also work for nations like the UK, Canada, Japan, and so on. Generally however, the picture for international cooperation in the Global North is increasingly grim, as we seem to have entered a period of lasting conflict between the West, Russia, and China.

In this setting, the future of the United States looks comparatively better than just about any other developed country. But America also has severe weaknesses. The country’s challenges include fertility decline, obesity, drug epidemics, an entitlement crisis, and above all political polarization. Polls show a “Europeanization” of values, with a collapse in the number of young Americans saying patriotism, religion, or having children are important to them.

Modernity was a multi-century great wave of demographic-economic growth and techno-scientific breakthroughs. In much of the Global North, that wave is finally receding with a serious concurrent threat of stagnation and irrelevance. America is fortunate to still have some momentum but it will need to take measures to encourage families and economic growth if it is avoid also falling into stagnation. And if Americans would hate each other a little less, that wouldn’t hurt either.