Babies Beget Babies. That’s Both a Problem and a Policy Lesson.

Trying to accelerate economic growth is both a worthy and challenging pursuit for policymakers. But there are few if any magic bullets out there. The impacts of effective ideas are often measured in tenths or hundredths of a percentage point.  Example: A policy that shifts immigration toward higher-skill workers lifts the level of GDP only by about 0.4 percent by midcentury, according to the Penn Wharton Budget Model (PWBM)—proof that good ideas matter, but big growth gains are hard to come by. When you survey pro-growth policies, you find far more ideas with that class of impact than ones that generate huge increases in the real world. Likewise, artificial intelligence may eventually deliver growth rates that today appear science fictional, but economists are typically more cautious. Another example from PWBM, which estimates AI will give a temporary boost to productivity growth peaking around 0.2 percentage points in the early 2030s before fading back toward trend, with only a small lasting lift—on the order of 0.04 percentage points—thereafter. (It’s easy to find economists more optimistic—I’m more optimistic, for what it’s worth—but also ones who are less.)  Still, regulatory and investment policies should be supportive. When you’re dealing with an advanced economy projected to grow at something like 1.5 percent over the long run, every little bit helps and is worth fighting for. That context—moving the needle is hard—is helpful to remember when absorbing this finding in the new NBER working paper, “ The Empathy Channel in Fertility “: “Being around babies makes people want babies.” That reality creates a potential self-reinforcing downward loop afflicting countries where birth rates are below replacement. Fewer births today mean less baby exposure tomorrow, which further erodes the desire to have kids. In the authors’ model, this dynamic could account for about 13 percent of the overall fertility decline. From the paper: “Modern patterns of residential segregation by age, privatized childcare, and reduced community contact with infants may have eroded a source of fertility motivation that was once widespread.” Child subsidies can help—but only at the margin, both by making kids more affordable and by increasing the number of babies in the social environment, which in turn nudges others toward parenthood. A reasonable takeaway for birthrate worriers is to look at lots of different policies—housing affordability would be a biggie—and keep expectations modest.  Economist Jesús Fernández-Villaverde of the University of Pennsylvania has argued that aggressive policies like child subsidies, easier reconciliation of family and work, and maternity leaves might push fertility back to about 1.7 or 1.8 children per woman. But as he told me in a 2023 podcast chat: You are never coming back to three. You are never coming back to four. The point I have argued to policymakers is if you are in a society where the fertility rate is 1.8, you can handle a gently decreasing population. What you don’t want to be is in front of a demographic abyss. So policies, in my reading of the evidence, help you to go from disaster into gentle decline. And I think the evidence supports that that can be achieved. That’s the pattern across the growth policy landscape. Whether the lever is immigration, AI, or child subsidies, no single fix moves the needle far. Most policies raise the level of GDP or deliver temporary boosts rather than permanently lifting growth rates. But stack enough of those gains—a slightly larger workforce here, a modest productivity bump there—and the economy ends up meaningfully bigger over time. Of course, a true AI-driven growth surge would change that arithmetic entirely. The post Babies Beget Babies. That’s Both a Problem and a Policy Lesson. appeared first on American Enterprise Institute - AEI .