US Fiscal Policy, Government Debt & Sino-US Competition (2021)

How will the pandemic affect the US short- and long-term economic outlook? The US economy is set to shrink 2.5% in 2020. This decline is very similar to the US economy's 2009 post-GFC performance. Only in the aftermath of post-WWII demobilization in 1946 did the US economy suffer a greater loss of output. The US will fare relatively well compared to its advanced economy peers where real GDP will contract 5-10% in 2020 (IMF 2021). China is virtually the only major economy not to suffer an output decline last year. The CBO now projects US GDP to reach its pre-pandemic level by mid-2021 and for unemployment to fall to pre-pandemic levels by the middle of the decade (CBO 2021). 

A hyper-accommodative monetary policy and a massive fiscal stimulus worth USD 4 tr (and counting) have helped put a floor under the US economy. If the current stimulus bill worth an additional USD 1.9 tr (or slightly less than 10% of GDP) is passed, the economic recovery will accelerate this year and beyond. Not only will an expansionary fiscal policy add to domestic demand. Households are also in pretty good financial shape (in aggregate!). Household savings have actually increased by USD 1.5 last year on the back of a stimulus-induced increase in income and a pandemic-driven fall in consumption. And this is not counting the wealth effect stemming from higher asset prices (Furman 2021). How quickly the economy rebounds and returns to its pre-pandemic growth trajectory will also depend on how much productive capacity was destroyed during the past 12 months. Economists disagree over the degree of fiscal stimulus that is needed to revive the economy without overstimulating it and triggering higher inflation (Yellen vs Summers).

The Democrats are firmly committed to adding another USD 1.9 tr of extra spending to the economy. This is why, instead of seeking bipartisan support, they have initiated budget reconciliation. This allows them to pass the fiscal package without Republican support. As the adage goes, generals are prone to fighting the last war. The same is true for economic policymakers. The lesson learnt from the 2009 crisis was that too little fiscal support is worse than too much. After all, the post-GFC economic recovery was very slow in terms of growth, employment creation and wage increase. 

It is worth asking though whether the current economic crisis is sufficiently similar to the aftermath of the GFC to warrant such a conclusion. The 2008 crisis was a classic example of what is called a “balance sheet recession” (Koo 2009). Balance sheet recessions are more severe and are followed by weaker recoveries than normal business cycle recessions. Typically, a debt overhang leads to excess savings, insufficient investment and demand and therefore translates into anemic economic growth. Simply relying on an accommodative monetary policy is suboptimal in such a situation. The government should stimulate demand through an expansionary fiscal policy to guide the economy back to full capacity.

Not surprisingly, the Democrats aree loath to run the risk of adding too little rather than too much stimulus to the economy. The post-GFC recovery, they believe, has taught them several lessons: (1) Don’t rely solely on monetary policy to stimulate economic growth – not least because it leads to increasing inequality through financial asset appreciation. (2) Go big fiscal-policy-wise, as insufficient stimulus only leads to a slow recovery of the economy and labour markets. (3) Don’t count on the Republicans to the support necessary policy measures, as they blocked and undermined Obama administration stimulus policies, especially after their takeover of the House in 2011. 

In reality, fiscal stimulus policies are often tricky to devise and and even more difficult to implement successfully. Ideally, they should be timely, targeted and temporary – the so-called three T’s (Brookings 2008). This can be a challenge if the political conditions are not right. Then there is also the question of how large the stimulus should be. Estimating fiscal multipliers with any degree of accuracy is a fool’s errand, as the GFC and euro area crisis demonstrated (IMF 2012). Future economic conditions are often difficult to predict, particularly after large, unprecedented exogenous shocks like the pandemic, making it very difficult to get the timing and the size of stimulus measures right. 

Politically, however, the appeal of going fast and going big is easy to understand. A majority of Americans support further fiscal stimulus (Pew 2021). Poor households are in dire straits and need financial support. Accelerating the economic recovery should help boost the Democrats’ electoral prospects in the 2022 midterm elections where they will be forced to defend extremely slim majorities in both houses of congress. A combination of economic concerns and political interests help explain why the Democrats are so reluctant to seek bipartisan consensus with respect to economic stimulus. 

Last but not least, the Democrats are understandably suspicious of Republicans' professed concerns about fiscal sustainability – and rightfully so. Over the past forty years, the Republicans only proved financially virtuous when the Democrats were in power. The Republicans are typically keen on lower taxes and lower (non-military) spending. If in doubt, they opt for lower taxes only regardless of what happens to the deficit (e.g. Trump tax cuts). The Democrats have a preference for higher spending and, if it cant be helped, accept the need for higher taxes to finance higher government expenditure. Financial prudence has been at best a secondary concern for Republican majorities since Reagan. The Democrats have proven somewhat more responsible financially, at least until now. The Republican approach makes good sense, politically. Running outsized fiscal deficits limits the Democrats’ ability to increase expenditure when they come to power. In the academic literature, this is also known as “war of attrition” (Alesina 1989).

In spite of having just suffered the sharpest economic downturn since the end of WWII, the US economy is projected reach its pre-pandemic level by mid-2021 (CBO 2021) The downturn was less than initially feared due to various fiscal stimulus packages – worth a massive 25% of GDP. The fiscal rescue measures have led to a sizeable increase in public debt. The IMF now projects US gross government debt to reach close to 140% of GDP by 2025, up from 109% in 2019. Net government debt will rise to 107% of GDP, up from 107% during the same period.

To what extent the worsening financial outlook will constrain US medium- to long-term foreign policy strategy is difficult to say. Resource mobilisation is primarily a political decision, even if economic and financial conditions do influence these political decisions and ultimately de-limit what is economically feasible. Political constraints on making resources available typically “bite” first – at least during peace time. Nonetheless, as George Washington put it: “A very important source of strength and security, cherish public debt”. A high debt burden has the potential to constraint resource mobilisation.

US government debt is now projected to increase more rapidly, low interest rates notwithstanding. Although debt will continue to increase, the US is unlikely to run into any financing constraints. Federal Reserve policy is supportive in terms of interest rate rates and government debt purchases. Demand for government remains strong, not least because the dollar remains solidly the world’s dominant reserve currency (Jaeger 2012). Besides, advanced economies are quite capable of sustaining high public debt burdens at a relatively low cost (e.g. Italy, Japan). Nonetheless, US government debt is set to grow to 200% of GDP by the middle of the century given slow real GDP growth and low-ish inflation. Furthermore, implicit government liabilities related to pension and health care spending amount to 28% and 162% of GDP (until 2050), respectively, in net present value terms (or a total of 190% of GDP). While there is no hard and fast limit to US government debt accumulation, the higher the level of debt, the more difficult it is to mobilise additional resources.

The long-term trajectory of US debt brings back memories of the 1980s with respect to resource scarcity and hegemonic decline. Increasing indebtedness, including foreign indebtedness, was seen as limiting the resources available to the US to fight the Cold War. The US was facing a “guns vs butter” (or savings vs consumption) trade-off. Back then adversary was the USSR, whose economic outlook the CIA famously more than overestimated, however (GAO 1991). Today the adversary is not a planned market economy, but China whose state-led capitalist system continues to perform well. At the moment, China is well-positioned to overtake the US economically, not least because of its much higher savings/ investment rates compared to the US. In the ten year till 2019, Chinese real GDP averaged 7.5% compared to only 2.3% in the US. For 2020-25, the IMF projects Chinese real GDP growth at 5.5% compared to US growth of 1.3%.

It is difficult to see how the US will grow more than 2% per year over the next ten years and beyond. Barring a productivity revolution, the demographic headwinds are strong and investment is too low. By comparison, Chinese growth is more likely to be in the 4-6% range, barring major accidents. Rapid economic growth increases the availability of resources for the pursuit of foreign policy objectives. Moreover, Chinese debt metrics are more favourable than the US metrics. China currently also spends far less than the US on defence (2% of GDP vs 3.5% of GDP in the US). Not only is China less resource constrained. Its available resources will continue to increase rapidly on the back of continued high economic growth. It can also concentrate its policies and particularly its defence policy on Asia and particularly the maritime sphere, while the US continues to be burdened by global commitments. 

Chinese government debt will increase from 53% of GDP in 2019 to just below 80% of GDP in 2025, compared to nearly 140% of GDP in the US (IMF 2020). Admittedly, Chinese government debt figures need to be consumed with caution given a large state-economy sector and potentially significant contingent liabilities related to an ailing financial system. Health- and pension-related implicit liabilities also amount to a significant 105% and 25% of GDP, respectively. China is nonetheless in better shape, not least thanks to stronger medium-term economic growth and the concomitant financial flexibility and ability to mobilise resources that come with it.

As for external debt, the US is the world’s largest debtor, while China is among the largest creditors. The US is the world’s largest debtor by a wide margin with its net international investment position amounting to a negative USD 14 tr (or -66% of GDP)! China is the world’s third largest (net) creditor in dollar terms and its net creditor position exceeds USD 2 tr (or 15% of GDP). By comparison, Japan and Germany are the largest and second largest international creditors in dollar terms with claims equivalent to USD 3.7 tr and USD 2.9 tr (or 67% and 70% of GDP), respectively. In purely financial terms, China is in a far superior position to the US. (Ultimately, of course, the ability to mobilise external resources depends on more than the level of financial assets and liabilities, but on the willingness of foreigners to provide these resources.)

Projecting long-term growth is risky business. After all, Japan was meant to emerge as “number one” once (Vogel 1989), just before it entered its lost decade of the nineties. China does face a number of significant challenges in terms of future economic growth. First, it is staring down the middle-income trap (Eichengreen et al. 2013). Doubling down on state-driven investment may lead to serious financial stability problems down the road. Second, demographic challenges will generate headwinds, not least in terms of labour supply. Third, political risk, while difficult to estimate, could weigh on the economic outlook in the medium- to long-term. Fourth, in spite of a commitment to allow markets to play a “decisive role”, the government has substantially backtracked on productivity-enhancing, market-oriented reform. Even so, while China faces economic challenges, it continues to benefit from significant catch-up potential given that its per capita income is only about ¼ the level of the US.

Finance and credit are important factors affecting the ability of a state to mobilise resources - particularly during peace time. National resource availability is not destiny, however. First, greater quantity does not necessarily translate into greater quality (aka influence and power). A large defence budget, for example, does not necessarily translate military effectiveness. In fact, resource constraints often represent an opportunity to evaluate the cost-effectiveness and quality of expenditure, leading to strategic adjustment rather than retrenchment (Leffler 1992). Second, emerging and foundational technologies (in US government speak) may offer the prospect of lasting strategic advantage. While technological breakthroughs are made more likely if arge amounts of resources is thrown at them, the relationship is not linear. Third, states can seek to mobilise additional resources by forming coalition with like-minded states (aka coalitions) that often translate into resource transfer or at least into greater collective resource mobilisation.

Nonetheless, resources do matter in view of US grand strategy. China has greater room for financial manouevre – in terms of both government and external credit – and domestic resource mobilisation thanks to a rapidly expanding economy. A high savings rate provides China with significant flexibility, as does a strong international creditor position. On the current trajectory, the US will not be able to match China’s ability to mobilise additional financial, economic and military resources one-for-one. While the level of potential resource mobilisation in the US is not set in stone, neither politically or economically, the US will need to improve the quality of its spending or mobilise additional “external” resources in the guise of alliance strategy if it wants to avoid falling behind China in terms of its ability to generate the resources necessary to engage in strategic competition. 

Promoting the Euro, Reducing Dollar Dependence (2021)

The dominance of the dollar as an international currency is a source of US political power. Should US foreign policy put a greater emphasis on national security in light of intensifying Sino-US geostrategic competition, the EU is likely to sustain collateral damage (DGAP 2021 forthcoming). Aside from less cooperative trade, investment and technology policies, the US is bound to “weaponise” the dollar more extensively than in the past.

Often ‘reserve currency’ and ‘international currency’ are used interchangeably. Strictly speaking, a reserve currency is a currency which central bank foreign reserve assets are denominated in. ‘International currency’ is a more multi-faceted concept that includes other dimensions related to the various functions of money. Specifically, the private sector relies on an international currency with respect to international trade and financial transactions (medium of exchange), trade invoicing (unit of account) and investment (store of value). The public sector (aka central bank) relies on it for FX intervention (medium of exchange), FX pegs (unit of account) and reserve holdings (store of value) (Krugman 1991 quoted in European Parliament).

How does the euro compare to the dollar? The dollar remains the dominant international currency with respect to most of these dimensions. For central banks, the dollar remains far more important than the euro (FX pegs, FX reserves, foreign holdings of government debt). For the private sector, this is true, too, even if the euro plays a bigger role in terms of trade invoicing. Otherwise, the dollar is clearly dominant (FX market turnover, cross-border lending). If the dollar punches way above its weight given the smaller share of US trade, this is is due to the fact that global commodity trade is largely denominated in dollars. Aside from trade, the dollar dominates the field by a significant margin. A currency’s share in global central bank reserve holdings is single best proxy measure of an international currency’s importance. The dollar share amounts to more than 60%, or three times the euro share.

	FX market turnover (USD tr)	Government debt (USD tr)	Bank cross-border claims (USD tr)	Bank credit to private non-financial sector (USD tr)	Non-resident holdings of government debt (USD tr)	Trade share (% of global)	Trade invoicing (% of global)	FX anchor (number)	FX reserves (% of total) ***
USD	5.8	21.4	14.8	10.9	6.8	10	39*	38	60.5
EUR	2.1	18.3	9.8*	11.9*	1.2**	37	48	25	20.5
CNY	0.3	14.3	< 5	23.4	0.7			none	2.1
JPY	1.1	5.1	2	5.7	1.5			none	5.9
GBP	0.8	2.8	< 5	2.4	0.9			none***	4.5

Source: BIS Triennial Central Bank Survey (2019), BIS Debt Securities Statistics, BIS Consolidated Banking Statistics, IMF 2020, IMF Annual Report on Exchange rate arrangements and exchange restrictions, IMF COFER (% of allocated reserves), National authorities   * incl intra-euro area lending; ** Germany as proxy for euro area, *** not counting dependencies, **** best overall proxy for international currency dominance

 

The dominant international role of the dollar provides the US with leverage vis-à-vis countries that rely extensively on the dollar for international trade and financial transactions as well as for holding international financial assets. The US can prohibit US residents from engaging in (dollar-based) financial transactions with designated non-residents (primary sanctions). More importantly, the US can prohibit US residents from dealing with third party entities that engage in (dollar-based) transactions with the designated non-residents (secondary sanctions). (This prevents third parties from acting as so-called third-party spoilers and from undermining the effectiveness of the sanction measures.) Secondary sanctions effectively prevent designated entities from using the dollar, as internationally active foreign banks cannot afford to be barred from accessing the US financial system, including access to dollar clearing. The dollar is therefore a source of asymmetric vulnerability, including between the US and the EU, as targeted entities, including countries, stand to lose more from not being able to use the dollar than the US loses from these entities not using the dollar. Moreover, given the greater importance of the dollar, being barred from using the dollar is more costly to European entities than it is for US entities being barred from using the euro. Strategies to mitigate asymmetric vulnerability include autonomy, diversification and symmetry (DGAP 2021 forthcoming). 

Reserve currency diversification is not a viable strategic option in the short- to medium-term. There simply is no alternative to the dollar given the dominant role it plays in the international economy. In spite of Beijing’s internationalization efforts, the renminbi will not be a rivalling the dollar as long as China is not prepared to more fully open its capital account, modernise its financial markets and improve governance (Jaeger 2010). As the third-largest international currency, the Japanese yen accounts for a mere 5% of global reserve holdings and does not offer an alternative to the dollar. Autonomy is not a realistic option as long as the dollar continues to play a dominant role in the international economy and the euro share remains relatively small, especially with respect to its role in financial transactions. Creating greater symmetry is therefore the only viable medium-term strategy and consists of proactively promoting the euro as an equal to the dollar. The more US relies on the euro and the more the euro becomes a substitute for the dollar for other countries, the more symmetrical (currency) interdependence between the US and Europe will become. Not only will greater symmetry limit the costs for Europeans in case of dollar weaponisation. It will also make using the dollar weapons both less effective and more costly for the US. Should the euro emerge as the dominant international currency in the long run, autonomy (aka not using the dollar) might become an option. But don’t hold your breath.

International/ reserve currency status is underpinned by a number of prerequisites (Cohen 2018).

(1) Economic size: For a currency to be used extensively by the foreign private and official sector, the issuing country needs to have a large economy and extensively engage in international trade and/ or finance. Economic size also matters because foreigners want to hold risk-free assets denominated in the reserve country’s currency. Only a large country can issue a sufficiently large amount of liabilities to meet foreign demand without suffering from a debt overhang and thereby undermining the currency.

(2) Financial development: A sophisticated and developed financial system is necessary in order to entice foreigners to transact in the currency and/ or hold financial assets denominated in it. At the very least, foreign central banks require safe (aka sovereign) assets of high creditworthiness and strong liquidity. The private sector is also more inclined to hold and transact in assets if financial markets are well developed and offer a range of investable assets. 

(3) Closely related is the issue of predictability and stability (aka “effective governance”). This condition comprises issues such as political stability, property rights, rule of law as well as general economic stability. Foreigners are quite unlikely to hold a large share of their foreign assets in a country characterised by a high degree of political, financial and/ or economic risk (or where risks can be priced).

(4) Foreign policy ties. A country that has adversarial political relations with other countries will find it more difficult to get other countries to invest in it. An adversarial relationship with country A will make country B think twice before holding large amounts of assets that are the liability of country A (e.g. US-USSR during Cold War). The political risk of asset freezes and perhaps even debt repudiation would be too high, thereby reducing the attractiveness of the currency to country B in terms liquidity and solvency. 

(5) Military reach. Military power provides foreign asset holders with assurance that the country will not be overrun militarily (and default on its liabilities). Sometimes military power can also be used to lean on other, typically friendly countries politically to support the reserve currency (e.g. Blessing letter). 

How do the dollar, the euro, the yuan and other international reserve currencies compare in terms of these five pre-requisites? The US continues to have the largest economy and the largest capital markets. In terms of international trade, it is roughly comparable to both EU and China. While Chinese bond markets are not that much smaller than US market, the renminbi continues to suffer from restricted convertibility, limited liquidity and governance challenges. Euro area government bond markets are only about half the size of US markets – and even smaller if non-investment-grade debt is excluded. The data do not capture the level of development of financial markets. Not only is the US more attractive size-wise, but also in terms of market sophistication, development and liquidity, including tightness, immediacy, depth, breadth and resiliency (IMF 2020). Structurally speaking, however, both the renminbi and the euro do have a potential to become international currencies rivalling the dollar. As suggested, the Japanese yen does not. Neither does the British pound.

	Gross domestic product (USD tr)	International Trade (US tr)	Gov’t bonds (USD tr)	Corporate bonds (USD tr)	Market cap of listed domestic companies(USD tr)	Convertiblity	Governance (= stability, rule of law)	Military power & foreign policy ties
US	21.4	4.9	23.0	22.6	30.4	High	High	High
Euro Area	18.3	5.4*	10.2	9.9	5.6	High	High	High
China	14.3	4.3	15.2	9.3	8.5	Low	Medium	High
Japan	5.1	1.6	10	3.5	6.2	High	High	High
UK	2.8	1.6	3.2	3.3	1.9	High	High	High

Source: WTO, BIS, IMF, World Bank, Bloomberg                                                                   * EU-28, not EA-19 (excl. intra-EU)

 

The euro area largely meets the conditions that are necessary for the euro to become a dominant international currency. After all, it is already an important reserve currency. (3) Good governance, rule of law and respect of property rights are all in place and do not represent obstacles to further growth. (4) EU foreign policy ties may be somewhat weaker than those of the US. But its foreign policy ties are sufficiently strong so as not to represent an obstacle to the rise of the euro as international currency. (5) Similarly, the EU, let alone the euro area, is not a military power comparable to the US. But the EU is a militarily sufficiently strong actor to alleviate concerns about its geopolitical position and stability. To the extent that becoming the dominant reserve currency is akin to a reverse beauty pageant, strengthening Europe in some of these areas would nonetheless be helpful. The main obstacles, however, are to be found elsewhere.

(1) Promoting the use of the euro in international trade. The extent to which countries use a currency for international trade invoicing largely reflects an economy’s importance as a trading partner. The choice is typically between one’s own and the trading partner’s currency. (If two non-reserve-currency countries with one another, they will have to choose in what reserve currency to transact.) As for using the dollar or the euro, countries whose primary trade partner is the US will not switch to the euro. Central banks will not make dramatic changes to their currency preferences either, whether in terms currency pegs or reserve holdings – at least not on account of its use in international trade. Only increasing economic size and the euro area’s importance in international trade can help lend support. However, the main reason why the dollar seems to be more prominent in international trade is not due to the size of US trade but its role in commodity markets in dollar. Given network effects, it will be difficult to get economic agents to switch from dollars to euros. In order to do so, the euro needs to be made a more attractive currency more generally.

(2) Promoting the use of the euro in international finance. First of all, it is essential to create a large pool of safe and liquid assets. Euro-denominated government bond markets are too fragmented, a sizeable share is too lowly rated, liquidity is much lower than in the US bond market and investors may have residual concerns about the long-term stability of the euro area as a whole. This calls for completing monetary union and creating a pan-euro area government bond market backed by the full faith and credit of the euro area governments. It is difficult to see how this can be done without supra-national taxation powers. Completing monetary union would make it more attractive for foreign central banks to hold euro-denominated government bonds.

(3) Integrating euro capital markets. Creating a safe asset also helps lay the foundation for creating truly European financial markets. European capital markets are too fragmented. National regulation makes it more difficult and burdensome for euro-area banks, financial service firms and investors to operate in and prevents the scale, efficiency and diversification necessary to compete with US capital markets. 

If the EU wants to lessen its asymmetric vulnerability vis-à-vis the US, it needs to complete monetary union and create a pan-European capital market. The euro area needs to create a safe asset of sufficient quantity and of sufficient liquidity. As the euro becomes a real substitute to the dollar, the US private sector and other foreign entities will face increasing incentives to hold and transact in euros. This would help transform what is today an asymmetrical interdependent relationship between the US and the EU into a more symmetrical one, thereby rendering the use of the dollar weapon more costly and less effective – whether it is used for primary or secondary sanctions purposes.

In terms of diversification, autonomy and symmetry, creating greater symmetry is also the least costly strategic choice if the goal is to reduce European asymmetric vulnerability. Symmetry typically allows to preserve the benefits of cooperation, while reducing the potential vulnerability risks associated with it (DGAP 2021 forthcoming). (Diversification is also often a cost-effective way to reduce asymmetric vulnerability, while autonomy typically carries often significant opportunity costs.) Nonetheless, issuing a reserve currency does carry potential costs, including an overvalued currency, potential debt overhang and policy responsibility. To the extent that the euro becomes a more prominent international currency, these costs may increase from today’s levels. But it also confers important potential benefits such as lower transaction costs, seigniorage, increased macroeconomic flexibility, and – crucially from the point of view of asymmetric interdependence – leverage due to non-residents relying on the reserve currency (Cooper 2009, Jaeger 2012, Jaeger 2013). 

Unless the EU is prepared to foist the euro on other countries through political means, it will need to make the euro an attractive and effective substitute to the dollar in terms of store of value, denomination and medium of exchange. The euro area already meets good governance and political stability criteria. In order to promote the euro, it will need to create a truly risk-free assets and increase the attractiveness of euro financial markets. Once private sector increases its reliance on the euro, central banks are likely to adjust their reserve holdings in favour of the euro. To get there, the euro area/ EU needs to take very important and far-reaching decisions with respect to sovereignty, fiscal integration, banking and capital market union. How this can best be done is outside the scope of this Policy Brief.

International monetary regimes have historically been characterised by unipolarity or at least a clear-cut dominance by one currency – with the possible exception of the interwar period. The ‘multipolar’ character of the international monetary system is often blamed for its rapid demise (Kindleberger 1973) – though this is debatable. There is little theoretical reason to believe that a bi- or even tri-polar regime is necessarily unstable. They may be economically less efficient. However, by enhancing diversification and creating greater symmetry, such a system would also be more difficult to exploit by any one state.

Historically, Germany sought to prevent the deutschmark from becoming an international currency for fear of losing control over monetary policy and due to its potential impact on export competitiveness – and perhaps due to an intelllectual commitment to ordo-liberalism. Proactively promoting the euro would represent an important shift in attitude (Frankel 2012). Economically, the successful promotion of the euro as an international currency to a position co-equal with the dollar has economic costs and benefits. Politically, it would reduce the degree of asymmetric vulnerability vis-à-vis Washington and it would help insulate Europe somewhat in case Washington shifts towards a more extensive use of the dollar weapon. Promoting the euro as an international currency is the only realistic option to blunt, if not necessarily to neutralise the dollar weapon.

Demographics and International Politics (2021)

Demographics features little to not at all in international relations theory. International power, economic might and population size can be found in indices of comprehensive national power This is mere description, not theory. Historians of international politics, occasionally, incorporate demographics into their narratives. A case can be made, for instance, that the significant population growth differential between Germany and France after the 1871 Franco-Prussian War contributed to the emergence of Germany’s semi-hegemonic position in continental Europe. With WWI approaching, demographic changes more directly impacted defence planning and policies and ultimately affected the fragile and complex balance of military power (Clark 2013). 

Political scientists seem more attuned to demographics, as are economists. The political scientist’s youth bulge is the economist’s demographic dividend (or window). Rapid population increases combined with lack of economic opportunities may lead to increased risk of political instability (Gerling 2018). Political instability, civil wars and even terrorism in countries may be partly fuelled by strong population growth (e.g. Middle East, Africa, West Asia vs Latin America). Young men, in particular, are prone to take greater risks and in the face of economic challenges have less to lose than middle-aged men with mortgages (Tamas et al. 2019). Demographers are quite obviously even more attuned to the link between demographics and politics. Emmanuel Todd, a demographer and a teacher of mine, predicted the demise of the USSR on the basis of differential population growth rates among Soviet republics (Todd 1976).

Certain subfields in economics also take demographics seriously. There is the life-cycle hypothesis (Ando & Modigliani 1962) and, relatedly, the so-called demographic window. Changes in the age structure of a society and particularly in the dependency ratio may increase or decrease an economy’s saving/ investment/ growth potential, thereby also affecting the level of inflation/ interest rates/ economic growth (Bloom et al. 2003). While economists seem to agree that demographics is important, they, curiously, do not agree on whether, for example, population aging leads to higher or lower inflation (Goodhart & Pradhan 2017).

Historians studying the Middle Ages have argued that the plague lifted the land per capita ratio and hence real incomes. This in turn may have contributed to the economic and cultural flowering known as the Renaissance (Getz 1991) – not least by affecting the political-feudal power structure. Most economists attribute China’s rapid economic development in part to the introduction of a one-child policy in 1980. Perniciously, demographic change can also create the conditions for genocide. Strong population growth and concomitant land shortages at the very least preceded the Rwandan genocide of the mid-nineties (Diamond 2011).

Demographic factors have played an important role in the history of the United States and Brazil, or indeed any country in the Americas. In addition to forced migration (slave trade) and its social, economic and political impact, voluntary migration driven by wage differentials due to a more favourable land-labour ratio in the new world can be linked to US continental expansionism (Kagan 2007). Today, the legacy of US immigration may in part explain why public policies aimed at income redistribution are far less significant in the US than in other, more ethnically homogenous OECD countries (Alesina 2001). 

Similarly, understanding Russian history is helped by an appreciation of demographic forces (and geography). Genghis Khan is supposed to have engaged in particularly brutal military tactics as his armies moved across the Eurasian landmass in the 13th century making it a point to kill or decimate most of the (male) population that got in their way. (This also allegedly explains why 0.5% of the world’s male population is descended from Genghis Khan (Nature 2015).) After the retreat of the Mongols, the road to Russian eastward expansion all the way to the Pacific was wide open, demographically speaking, at least in the south. Today, Russian about its demographic position in East Asia is factor affecting its policies towards China.

Rapid demographic change like the genocide of American Indians in the wake of the Spanish conquest may explain even bigger phenomena like climate change. The human destruction and subsequent civilizational collapse wrought on the indigenous populations by European colonisers led to large swaths of agricultural land not being cultivated. This contributed to a sharp drop in temperature around the world (e.g. Little Ice Age) and helped bring about political instability as far away as Asia (Koch et al. 2019). A combination of climate and disease agents can also help explain the stagnation and collapse of mighty empires (Harper 2019). Demographics sometimes also matters at the rhetorical level. Germany used Lebensraum rhetoric to justify territorial expansion (Tooze 2006). (If German policymakers actually believed in their own rhetoric, this would elevate rhetoric to a reason or even a cause (Jaeger 2020).)

Macro-structural changes often have macro-level effects. This does not mean, of course, that macro factors do not have micro effects and vice versa. It is important not succumb to the so-called "fallacy of identity" (Fischer 1970).) In practice, it is often difficult - or at least very arguable how - to tie macro-level causes (or background conditions) to micro-level effects. It is also true that historical events often cannot be properly understood unless they are put into a broader macro context. This was Fernand Braudel’s point about longue durée and histoire événementielle (Braudel & Wallerstein 2009). Macro-variables such as demographic change, climate and pandemic, geography provide the context within which event history happens. They do have some sort of causal effect, even if tying macro-conditions to micro-events can be difficult to do convincingly, for there is almost always both structure and agency involved (Jaeger 2020). 

All of which is to say – I think – that demographic factors feature much more prominently in other fields of social and historical enquire than in international relations. Here are questions that might be worth exploring. Are countries experiencing demographic decline less likely to go to war (all other things equal)? Do youth bulges make states more inclined to engage in armed conflict (and why)? Might China’s one-child policy make society and state more reluctant to go to war? What impact will Russian demographic decline East have on Sino-Russian relations? How will projected rapid demographic growth in Africa and West Asia affect global politics? How will global population growth affect demand for and conflict over resources? What geopolitical and economic implications will demographic decline in Eastern Europe have on EU politics? It is quite possible that some of the questions have been tackled by researchers and related insults published in academic journals (e.g. Urdal 2012). Either way, how demographics affects international politics is, by and large, an understudied field, or at the very least deserves greater attention from both researchers and policy-makers.