Over time, I have heard numerous groupings that blame the economic downturn on specific instances, often because of partisan politics. Most of those reasons being blamed really are symptoms but don't explain the downturn. Similarly, we are now hearing of economic recovery but we are wondering where the jobs are, and what is causing the recovery. In both cases, no one really gets to the economic key that explains it: Demographics.
That seems rather simplistic, but let's take some time to explore it a little. We know that you will do certain things within certain ranges of your life. (admittedly, it is a generalization and like all generalizations, it has exceptions, but they generally hold true). For example, we know that when you get into your late teens to early 20s, you will probably drink and experiment with things like drugs. We know that you will start to settle in during your mid 20s and start to define goals and move towards them socially, economically, and so on. We know that around 30, you will start to move into economic positions where you will generally start to make money and you will start to strive to build your life. And so on.
Ok, so what does that have to do with the economy and what you are talking about? Well, as life goes on, we know that about age 44, you will peak in your home buying power and you will either stay in your home, sell for a same priced home, or sell down. At 44, you only have about 20 years to pay off a home if you plan to retire in your mid 60s, so it makes sense that you wouldn't be stretching it. That is, of course, unless you happen to become a CEO of a Fortune 100 company at 55, but that isn't most people. Why does this matter?
We know that there are two very large population groups in America. The Baby Boomers and the Echo Boomers, with a big dip in between where Generation X goes. The dip is the problem.
Everyone has heard of the Baby Boomers and their impact. Their desires have driven the agendas of President after President. In their 20s, Reagan gave them tax cuts to start businesses and live like 20 year olds. In their 30s, Clinton sold them on tax increases to lower the debt to make their mortgages cheaper. In their early 40s, President Bush sold them on tax cuts for capital gains so they would make more on their retirement portfolios. And now President Obama is trying to sell them on health care for the rest of their lives, when they are most worried about it (with mixed results).
Well, the peak of the Baby Boomer generation was 1961. That was the year where their numbers started to decline and fewer of them came after that. Those numbers didn't really jump back up until the Echo Boomers, but we will get to them in a minute. The peak of the Baby Boomers is what made the housing collapse predictable.
If we know that at age 44, people stop buying up and slow their buying totally, that means that 44 years after 1961, the housing market would start to decline. Why? Simple: less demand for the same supply. Now, if the population numbers were consistent, where we had people to replace them, then you wouldn't see the dip, but it isn't. There are a lot less people in Generation X to replace them. That means in 2005, the housing market should have started to decline, and guess what? It did.
Now, the subprime industry, easing of banking liquidity ratios, and more made it worse, but they didn't cause that decline. They simply were caught not paying attention to the inevitable decline coming. More on the subprime and liquidity ratios in another article, let's stick to demographics here.
We also know that at age 49, you will have what I call the "oh sh*t" day, whereby you realize you are about to hit 50, you realize you are close to retirement and you don't have nearly as much as you want to retire. Your 401k needs more money, your house needs more payments to pay it off on time, and you want to start to limit your expenses because you realize you will soon be on a limited income.
That means your wallet tightens and you move out of the major consumer markets. You shift your purchases from Pier One to Walmart and Target. You don't shop at Macys as much as you do at Walmart and Target, or JC Penney.
Now, for the Baby Boomers, that should have meant a decline in consumer spending in 2010, not 2008. However, because of the ripples of the housing market taking a while to spread throughout the economy, and the other economic factors to make it worse, 2008 saw those 47 year olds opening 401k statements where they were losing 30% to 50% of their value, while they saw their housing value decline. They simply had their "oh sh*t" moment early. That triggered the "collapse" of 2008. They simply stopped spending.
But what about the Echo Boomers? Well, their peak is still in high school, and thus, are a significant number of years away from replacing the Baby Boomers as property owners and big spenders, but they are coming and industry is studying them like no other generation in history. That means that while we may see some recovery, we simply don't have the consumers with our current industries to support more jobs. America has been the consumer capital of the world market for a generation and it is ending. It may rebound with the Echo Boomers, but that is still almost a decade away.
So what now? Well, the good news is this: The markets have probably bottomed, but they will probably stay somewhat flat for the short term. Where they go from there depends on the strategies being taken. Here is what needs to be done:
First, give tax incentives to industries that manufacture goods, especially domestically, that limit costs. What do I mean? Solar power for one. It may not solve all the world's problems, but if I am planning retirement, solar panels means I spend less on energy bills when I get on a limited income. Waterless hot water heaters to cut my power and water bills. Anything that starts to cut our monthly expenses and is cost effective should draw out the Baby Boomers' dollars.
Second, build exports. If we are low on consumers here, search out consumers around the globe. Given our pricing, it isn't that easy and we can't rely on selling food globally as the key either. The two largest emerging markets are China and India. Both need a lot of investment to develop and both plan to invest in development. The key area for them is rural power supplies. This is where the first step does double duty. Things like solar power, wind power, and cheap ways to apply that in microgeneration could be sold to these countries fairly easily if done in a form that could be used in villages.
Remember, one big advantage is China has a lot of dollars and not a lot of things to spend them on. This gives us a sort of captive consumer, almost like giving someone Disney dollars (back in the day when they had them). It isn't good outside Disneyland so use it or lose it. All they need is a reason that serves mutual interests, and microgeneration power supplies like solar or wind that functions in a village setting would work well for both interests.
Third, keep finding more ways to forgive student loans. Yes, the Echo Boomers are going to need to find ways to avoid the massive debt of college if you want them to have enough purchasing power to buy homes, even if it means they get an advantage their parents didn't get. But another reason for this is that a number of Generation Xers don't have enough available credit because of major student loan debt. There are programs for it now, but anything to ease that debt will help them buy homes and help out the housing markets.
While these steps won't solve everything, they will lay a foundation to allow us to boom earlier rather than later. Understanding basic demographics could have averted some of the problems we have today, and could set us up for tomorrow. But we must move past ideological differences to actually evaluate situations and create pragmatic policy solutions.
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