The Wall Street Journal is starting to notice the point I made last week in my series of posts on the demographic factors in the economic downturn:
As of 2008, the latest data available, people aged 65 to 74 were spending 12.3% less than they did ten years earlier, in inflation-adjusted terms. They cut spending on cars and trucks by 46%, household furnishings by 35% and dining out by 27%. At the same time, they spent 75% more on health care and 131% more on health insurance.
The impact isn’t limited to people on the verge of retiring. Younger people, too, will have to reduce consumption now to save enough money to get by in retirement. That’s one reason Richard Berner, chief U.S. economist at Morgan Stanley in New York, estimates that even after the economy recovers, consumer spending will grow at an annual, inflation-adjusted rate of about 2% to 2.5% in the long term, compared to an average of 3.6% in the ten years leading up to the last recession.
Don’t expect consumer spending to pull us out of the economic downturn. The cohorts that follow the Baby Boomers don’t have the buying power to make up for what their seniors aren’t spending.
That leaves business spending, exports, or cutting imports. Our economy has evolved considerably since the 1930s. I’m not certain that reducing imports would do anything other than creating the illusion of growth.
The push will be for increased government spending, of course, despite the ambiguous evidence that government spending’s influence on aggregate demand can spur economic growth. It’s an idea that’s too appealing to die.
All that savings should mean more investment. We don’t really need demand do we?
Steve
Uh-uh. The savings are going into Treasury bills, paying down debt, or held as cash. They aren’t going into business expansion or formation.
One answer is to raise the retirement age to 75 for both social security and medicare. Many people stop working and contributing to the economy as young as 55. Sound like political fun?
Consumer spending is the other shoe. Mass reliance on American’s buying junk in stores as an economic driver has only really been a big deal since the 60s/70s. That appears to be ending. People of Wal*Mart notwithstanding!
Medical care is not really economic activity, now is it? It does not generate persistent wealth that you can save. In fact if it keeps older and older, non-productive people alive who need resources it is negative wealth, it would seem? Keeping young productive workers healthy is wealth building, I agree. (In Switzerland DNR for old+ chronic ill patients is standard medical practice and care is tilted to the young.)
What is work? What is money? Why is “economic growth” the only economic model that explains hitting the limits on population sustainability and exploding life expectancy?
I wonder what will happen?
steve –
I think historically that the answer would have been “yes” that savings would have resulted in lower interest rates, and that mortgage rates, business loan rates etc would have benefitted, inducing various types of investment.
But now, with Fed induced artificially low rates, and a business community scared shirtless, I’m not sure at all.
How did you like Chicago?
MM –
Cosmic, man.
Drew- Chicago was great. Thanks ever so much for the Salpicon recommendation. Went there on our 20th anniversary. Wife loved it and was very, ummm, grateful! The museums were better than I remembered and the boat tour was excellent. Got hundreds of pictures. Son enjoyed his first deep dish pizza. Stayed at Blackstone and walked to museums and most places. (Couldnt resist taking son to the smoke filled hotel.)
I had not realized Chicago had become such a food town. The place has cleaned up a lot in 25 years.
Steve
Almost forgot. Thanks to Dave and Michael also. Couldnt get into Alinea. Said they were booked for weeks. Maybe next time.
Steve