Perhaps the economy is a lot like the weather – if you wait long enough, it has to get better.
As we’ve noted before, income inequality is likely to improve in the US and the rest of the developed world once the postwar “Baby Boom” starts to retire. With as much as a quarter of the population removed from the labor force, there will be more jobs to go around – perhaps even too many. Wages are likely to rise and opportunities for employment will be everywhere.
If that doesn’t sound good enough, recent studies have suggested that inflation is likely to be low as the population ages, meaning interest rates will remain low and capital is likely to be plentiful. It’s starting to sound like this Depression is going to end with a golden age. Seriously.
The main demographic challenge in the future is going to be the retirement of the Baby Boomers. In the US the peak years for birth were 1952-57, meaning retirements at age 65 accelerate in 2017. The shortage of workers has to put upward pressure on wages. When income from work is increasing faster than income from investments, the result is a net decrease in inequality. Traditionally, however, this was assumed to cause a net increase in inflation – everyone has more money, so prices go up.
What is more surprising is that a series of studies of other nations shows that as a population ages the inflation rate actually goes down, and considerably so. These studies have centered on Japan, where a rapidly aging population has caused a cycle of deflation and general stagnation that the government of Prime Minister Abe is trying to address with a quick “wealth shock” of money flooding the nation. The most recent comprehensive report from Andrew Cates of UBS Singapore is not publicly available, but this chart is:
The vertical axis is how rapidly a nation’s population is aging, measured in change over the last 5 years. The horizontal is the net inflation rate they are experiencing. The trend is unmistakable – and leaves Japan way up in the corner stuck in a deflationary spiral.
This corresponds to another report, this from the St Louis Federal Reserve from last December. They noted the same effect, and went into some complex math to explain the issue. Suffice it to say that older people tend to save more and spend less, carefully making their money last through their golden years. That keeps prices in check.
From the chart above, we can see that our current inflation rate of about 2% per year is only going to go down through the next decade. That implies that low interest rates, currently about as low as they can be, should continue indefinitely. Cheap capital means even more opportunity for the generation now in school.
If you think through this, the changes we can expect are vast. For one thing, a shortage of workers implies that there may yet be room for people with a college degree or specialized skills, breaking the cycle that is plaguing the US right now. It also implies that immigration controls are likely going to be under pressure from US industry to relax – especially if US born kids do take advantage of education opportunities.
Through all of this, however, the problem of caring for the elderly remains. The big wave of Baby Boomers will drain Social Security and use a lot of Medicare, especially if they live as long as is currently believed. The high wages of the next generation will be met with higher taxes and a need to carefully manage the income we have. The resulting systems will probably make Tea Partiers who decry “socialism” have a heart attack.
No matter what, proper management of the changes ahead are going to make all the difference. This is clearly the time to reform education systems – and what we expect from them – to be ready for the next boomtime. How we pay for retirement systems with taxes is going to have to change, and will probably including taxing all income rather than limiting to the first $110k of salary. The more we can have in place the sooner we can reap the benefits and avoid the potential problems that these changes will bring.
All in all, the next economic cycle is likely to be a very good time to be alive. In K-Wave terms, it will be a Spring, a glorious re-awakening. Remember, it’s not as though these cycles are completely pre-ordained and fixed throughout history, but we do seem to keep reacting and not learning much from history. Those of us who take the long view might find it frustrating, but knowing good times are coming is comforting – and potentially profitable.