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.
Hey Mr. Sunshine is back! Seriously, you may be right and a lot of this is cyclical. I don’t really see a golden age coming until we get serious reform and get rid of all the debt people have. But yes, this could happen.
Ha! You can call me an optimist, but there are reasons to be positive in the next few years. We just have to survive the next 4-5, which are going to be tricky.
One of the things I didn’t get into (for space) is that this explains the high inflation of the 1970s – we’re living through the Baby Boom life cycles as they dominate the demographics and the economy. I think there’s a lot here that is not a surprise.
I agree on reform – this is the time to do it, and we’re not. I expect that when the next generation takes real power, at the start of the next cycle, we’ll have more progress. That is important, yes.
I will believe it when I see it. The cost of retirement is going to be a big drain. What about the call on low growth that you made earlier? It can’t be a golden age without growth, and that is not in the cards. Also, you didn’t comment on how this works through the developing nations which I see on the chart still have younger populations, what about their demographics?
We do have to reform how we pay for Social Security, yes. That is a very big deal and it will become a huge issue no matter what. I think Obamacare will help us manage the health care costs much better, even if it is a half-measure that keeps insurance companies far too much in the loop.
Developing nations are a different animal, yes. I haven’t thunk that through yet. What I will say is that Europe has a chance, just as we do, if they can get their act together. I wouldn’t bet on that, however, but they might have all they need to muddle through.
There is a danger in scapegoating the elderly who have made their contributions to society. I hope Americans are wiser than that. Social Security did not create the economic crisis; Wall Street machinations did! Besides, once the “Baby Boom” bulge subsides, pressure on the economy will ease in the future. Scapegoating and deflecting are old maneuvers. The Daily News condemns labor unions in NY because they want retroactive raises. Meanwhile, most working people can no longer afford to live in Manhattan and commute to Brooklyn, the Bronx, and Queens. We should not be distracted from the real problem: Very wealthy people control elections and legislation; so their interests are served at the expense of the rest of us. Ever wonder why “card counting” is illegal? Because owners of casinos have the money and power. Our politics have become more like a casino.
Certainly, we can’t blame the elderly for the situation that has developed. Dealing with the wave of retirements is going to be a challenge, yes, but it’s also a great opportunity – and that’s what we have been trying to uncover here. It turns out that the US is not seeing its population age as rapidly as many other nations and there is still going to be some population growth through 2030, largely through immigration. That may even accelerate based on what we can see coming. So there is no reason to panic.
However, we will have a lot of pressure and we are going to have to be very deliberate as to how we restructure our economy in this area if we’re going to be able to take advantage of the opportunities. The political system we have now really does not allow that, yes. It is a big problem.
This is interesting but there is a lot of reform that has to happen before we have anything like a ‘golden age’. Jim mentioned the debt and that is big but it is only one part of the problem. You have talked about a lot of reforms in taxes and so on and we need that and more. Simplification would be very good at the very least to get rid of the loopholes. But I do agree that if there really are still business cycles than a good one is coming and 2017 does sound about right.
I think if I made a list of all the reforms I have suggested I would look like a total nut! 🙂 But there is a political platform in there somewhere. There has to be a better way to run a government than we have now, yes. And all of that is important. I think that once the next generation gets a bit more power and/or the next cycle starts we will have a better shot at reform than we have now – there is far too much fear driving people on both sides to think into the future.
I have a lot of trouble with calling this a “golden age” even if the economy is much better. The world is still very selfish and run by people who are out to steal whatever they can. As long as there are people like that in charge it will all go to corruption and working people will continue to get the shaft.
I want to hear more about why you think that inequality will improve. It never has before.
Yes, I have to do that part of it – how the next generation gets control of government and reforms it. That is going to be critical.
I second Ginny Albert’s comments. If you review where the members of Congress have invested their personal money: war and security corporations. I wonder why …………
And when they leave Congress and find a corporate “post”, “assignment” “or ”job” with a sizable income …………. ah-shucks, luck of the draw.
It is always a “golden age” for some. I think we should review the term …. trickle-down …… the rich switch gravity.
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