An excellent recent article in the Economist newspaper succinctly summarizes the effect that aging baby boomers are apt to have on US economic fortunes, from the article:
These boomers have lived a charmed life, easily topping previous generations in income earned at every age. The sheer heft of the generation created a demographic dividend: a rise in labour supply, reinforced by a surge in the number of working women. Social change favoured it too. Households became smaller, populated with more earners and fewer children. And boomers enjoyed the distinction of being among the best-educated of American generations at a time when the return on education was soaring.
Yet these gains were one-offs. Retirements will reverse the earlier labour-force surge, and younger generations cannot benefit from more women working. There is room to raise educational levels, but it is harder and less lucrative to improve the lot of disadvantaged students than to establish a university degree as the norm for good ones, as was the case after the war. In short, boomer income growth relied on a number of one-off gains.
A handy chart posted with the article of an IMF study of the lifetime net tax burden of each age cohort starkly presents the dismal reality:
Note the big line stretching left in the 60-69 cohort. That’s the net tax burden (positive) of the largest bulge of boomers. In other words, this cohort will burn up more than $300 billion in government benefits than it contributes in taxes. The top line shows where this money will come from–future generations. If nothing is done to adjust the social welfare state, future generations will pay nearly $400 billion more into government coffers than they receive in benefits.
Is this any sort of way to structure an economically vibrant society? Where the aspirations of the young are quashed under the mountain of obligations inherited from the old? The demographic reality depicted in the chart is why nothing of Keynesian economics has any hope of working today. More Keynesian deficit spending today to keep the boomers in the lifestyle to which they’ve become accustomed simply means more growth-impeding burden to be borne by the productive members of society tomorrow. And, as the article points out, though a Keynesian inflation might otherwise be the answer, inflation can be very hard to instigate among a population that is growing old and dying. Print more money and it’s velocity will concomitantly decline, as the following chart of money velocity indicates:
That big bulge in velocity in the nineties roughly coincides with what was presumably the post-war generation’s period of most frenzied economic activity according to life cycle metrics, as the boomers reached middle age, and their children entered their teen years. And it’s not just money that has more velocity, i.e., demand, during growth years and less during maturity and aging. The Economist points out that a pair of Federal Reserve economists recently found a correlation between the S & P 500’s price-earnings ratio and the ratio of middle-aged to old workers. The price of shares relative to their earnings declines as the number of old workers relative to middle-aged workers increases.
Demography drives economic outcomes, yet it is being all but ignored as the driver of economic stagnation in the developed world. Contrary to the world’s central bankers, all things economic can’t be fixed by the expedient of diluting the value of the currency. And things can be made quantifiably worse by pursuing fiscal profligacy, that other of Krugman’s Keynesian programs. Increasing the debt burden, which necessarily falls to the young to repay, is exactly the opposite of what should be done.
The Great Recession tipped all of Europe and the US into a several-decades-in-the-making economic stagnation very similar to that which Japan has experienced for two decades now. Japan since the Meiji Restoration had been a shooting star in the economic and nationalistic firmament, burning too brightly to last for very long. Europe and the US are flaming out now. The reason for all is the same–the populations that got them rich are growing old and dying, but along the way are taking as much with them as they can. There is nothing short of a baby (or immigration) boom that can save the developed world (and much of the less developed world) from economic stagnation–not austerity, not inflation, and without increased population, not faster growth. As resistance to immigration grows and fertility plummets in the developed world, the days of heady growth are over. The days of each generation being better off than the last are over. The consolation prize is that life in the developed world is still quite comfortable, and will likely be so for some time.
In the meantime there might be some intergenerational conflict over the dwindling economic pie. The baby boomer generation has political clout due to their numbers, but otherwise, the math is not on their side, or as the article puts it:
The political power of the boomers is formidable. But sooner or later, it cannot escape the maths.