Previous posts in this series:
The Breakdown
The Breakdown: The Young Aren’t Getting Enough Education
The Breakdown: Education Is More Necessary Than Ever
The Breakdown: Baby Boomers Have Higher Incomes
The Breakdown: Baby Boomers Drove the Housing Bubble
The Breakdown: Age and Employment
In the previous posts in this series I’ve suggested some changes in attitudes, particularly a perverse resistance to education, that may pose economic problems for the United States going forward as well as some issues related to demographics, income, and employment that I suspect are posing economic problems for us now. In this post I’m going to sketch some additional economic implications of the demographic realities I’ve pointed and propose some of the implications that all of this might have for policy.
The huge demographic bump represented by the post-war generation, those born between 1946 and 1964 and colloquially referred to as “Baby Boomers”, has been working its way through American society over the period of the sixty some-odd years like a goat through a python. If you were to divide American society into 18-year cohorts there would be roughly four of them. I have documented that the cohort represented by the Baby Boomers is larger than the others, better educated, and have higher incomes, not merely in the sense that seniority conveys higher income but in the sense that they’ve had higher real incomes throughout their working careers at each stage of their careers than the cohorts that have followed them have had at the same stage.
The Baby Boomers have had a profound impact on the U. S. economy from their earliest years. A good example of this is the baby food industry. Before World War II prepared baby food was a specialty industry, a relatively small market niche. After the war the industry boomed into a multi-billion dollar one, buoyed by the large numbers of babies born it grew seven fold in 1945 and doubled again between 1948 and 1950. By 1991 the industry was relatively stagnant.
As the Baby Boomers aged other industries grew from niche businesses into major powerhouses as well: children’s television, toys, later popular music and clothes, then higher education and finally real estate. I’ve already documented the impact that the cohort of those born between 1946 and 1964 have had on the housing industry.
Right now we’re still in the thros of an economic downturn that began as housing prices turned south beginning in 2006. Suddenly, an assumption that had held true for decades had failed. It was obviously true that housing values could go down as well as up and the speculation that had fueled the housing bubble collapsed, doing a pretty fair job of taking the financial system with it.
I’m going to argue that was no coincidence. In 2006 the oldest Baby Boomers turned 60. Today the oldest Baby Boomers are 64, the youngest 46. They’re in their peak earning years and the last decade or so has not treated them kindly. Ten or so years ago many thought that the security of their retirements was assured by the sky’s the limit stock market where values could go nowhere but up. In 2000 the DJIA was around 10,000. Today the DJIA is around 10,000.
Five years ago many of the post-war generation were confident in the value of their houses, in many cases their primary vehicle of wealth. Houses are worth less today than they were five years ago and a quarter of all those with mortgages owe more on their mortgages than the houses they’re financing with them are worth. I’ve mentioned before that Baby Boomers are more likely to be underwater in their mortgages than the cohorts that preceded or followed them.
Those in the post-war generation are now entering the phase of their lives in which, if they follow the patterns of those who’ve preceded them, they’ll spend less and save more. That will have the greatest implications for the industries that have benefited most from their spending, especially education and housing. Increasingly, those in the cohort will be downsizing their houses rather than upsizing them, will be less likely to buy second homes or investment property, and more likely to be looking to sell than to buy. Added together that suggests to me that the housing market is unlikely to recover its heights any time soon.
It may also be the case that Baby Boomers simply won’t buy as much stuff as they used to. That will have profound implications for retail and the manufacturers of consumer products, not just here but everywhere that manufacturing depends on the American consumer.
Since the beginning of the recession in 2007 much policy has been targeted at restoring the status quo ante, propping up the industries that were suffering and getting back to “normal”. I think it’s possible that most of those efforts have been in vain. The industries, particularly housing and retail, that were dependent on lots of consumer spending can’t be returned to normal. The demographics and patterns of the distribution of wealth just won’t support it.
I don’t know where or when future economic growth will emerge. It certainly doesn’t appear to be emerging quite yet but when it does it will be along what the economist Arnold Kling refers to as “sustainable patterns of specialization and trade”. No pattern can be sustainable that depends on demographic assumptions that are no longer true and will become less true as time goes on.
This series has been the most interesting thing I’ve read on a blog in some time. Fascinating. Because the conclusion seems to be that we are all talking around and past the realities as we argue tax rates and stimuli.
I seem to recall about 5 years ago listening to someone on NPR — no memory of whom — pointing out that the boomers were going to have a hard time unloading their homes. You can’t sell 10 houses to eight people. Particularly not big 5 bedroom houses in far-flung suburbs. I know when we finally dump the kids off in college (or prison, depending on how things go,) we’ll be out of suburbia and into a city in a heartbeat. And maybe not a US city.
The Japanese have blazed this trail a bit and the Europeans as well. We can push hard to raise immigration, or somehow convince people to start having a hell of a lot of babies, but I wonder if the more rational course isn’t to accept the reality and adapt. No doubt we’ll see some drop in living standards, but some of that will be an abstract drop, not a real one. I don’t think I’ll see a two bedroom apartment in NYC or SF or Paris or London as a step down from a suburban home, though no doubt it will look that way on a balance sheet.
In any event, it confirms me in my decision to stay out of the housing market for now. Renting has its disadvantages, but nothing to equal the 50k or so we lost on our last home, a home we barely escaped at all.
That’s a realization that came to me about 35 years ago. I recall the precise moment. I was having lunch in the home of a member of Northwestern University’s English Department who mentioned what he had paid for the home in 1968 and what the house next door sold for the previous week—in less than 10 years the value of the house had increased at least five-fold. As we discussed the situation it became apparent that Baby Boomers entering the housing market was having a profound effect on prices.
I then began to muse over what would happen when they began to sell…
This is why the Obama Administrations approach is so misguided, IMO. It is trying to return to the old normal and that just isn’t possible. And McCain would have tried the same thing, probably using different policy tools, but his ultimate goal would have been the same.
Take for example health care reform, it isn’t. Dave’s posts and one I’ve made over at OTB show that the impact has been at best minimal while massively increasing the government’s commitment to health care expenditures. That is foolishness given that we are likely to see a massive change in how our economy works and that we are likely looking at 10 years for a recovery from the financial crisis (see Rogoff and Reinhart’s work on this). We really do need health care reform, but we haven’t gotten it. In my view, we’ve essentially entrenched the current system even further into our economy. The current system that is broken.
Take a look at the financial bailout bill, that will essentially ensure bailouts (bail-ins if you like) like we saw the Long Term Capital Management. That, I think more than anything set off the spiral in terms of moral hazard and risk taking. Now we’ll enshrine that kind of policy into formal law.
At the same time we have huge fiscal problems not just with the deficits due to stimulus spending and TARP money, but also Social Security and Medicare. Add all these things up and they point to deficits that are staggering when you get out another 15 to 20 years from now.
There are alternatives, but they mean no longer doing business as usual. Problem with that is lots of people are getting rich that way, but it is not a recipe for general growth and prosperity in our economy. So those getting rich, and are already rich, will use their influence and money to retard or stop such alternatives from being implemented. Classic rent seeking, which is why in the end democracy and voting are bankrupt systems for allocating resources. They are too easily subverted from the well intentioned goals of those who argue for such a move. And we keep right on putting more and more decisions on how to allocate resources under the auspices of democracy, government and voting.
The bottom line is that if the goal is to get back to 1995 or something like that then that goal needs to change because that is no longer realistic nor attainable and we’ll waste a huge amount of resources in the attempt. Of course, I have little hope of this actually happening. For all his rhetoric Obama is just like all his predecessors: your run of the mill politician.
I agree with Michael – great series. I’m going to have to chew on it for a while. But for right now I can at least say that Lex Luthor may have been mistaken.
For posterity, Dave had an additional entry on the Breakdown about Boomers driving the Housing Bubble:
http://theglitteringeye.com/?p=11577
Thanks for pointing that out, PD. I’ll update the links at the top of the post.