By John Richardson
THE US Federal Reserve is increasingly coming round to the understanding that demographics shape demand.
Now one of my LinkedIn contacts has brought my attention to this second paper, from the main Fed’s Washington DC-based Research & Statistics and Monetary Affairs department. In an exact mirror of the arguments we have been making since 2011, it finds that:
- As the boomers reached working age in the 1960s and 1970s they increased US labour supply, leading to a surge in economic growth and higher interest rates in response to higher inflation. Too much demand was chasing too little supply.
- Demand received a further boost from greater numbers of women joining the workforce for the first time.
- But because the Babyboomers have themselves had few too-few children, the demand dividend of all those extra babies in now turning into a demand deficit. In a Washington Post report on this second Fed paper, the newspaper writes as follows: The boomers are by far the largest American generation on record, with 76 million people born between 1946 and 1964. They are substantially more numerous than the 47 million members of the Silent generation that preceded them, as well as the 55 million Gen Xers, the 66 million millennials and the 69 million post-millennials, according to Pew Research Center.
- This demand deficit has led the Fed researchers to conclude that demographic changes account for a 1.25 percentage point decline in annualised economic growth since 1980 – about half of the total decline since that year.
- And now that ever- greater numbers of the Babyboomers are entering their retirement years with not enough young people replacing them, too much supply is chasing too little demand – as the chart above illustrates, which details the decline in spending as you get older. This explains today’s global oversupply of manufacturing, low returns on investment and persistently low inflation.
The crucial conclusion is missing from this latest research paper, though, which is that the Fed’s attempt to reverse this trend was of course futile. Cutting interest rates to stimulate demand that was simply never there in the first place was never going to work.
All that instead has happened has been asset bubbles and more investment in unneeded industrial capacity that has made manufacturing overhang even worse. US petrochemicals serve as a very good example of this.
Meanwhile, asset bubbles in equities, commodities and real estate have benefited a relatively small number of Americans. This has worsened income inequality, which even before this misplaced economic stimulus was already on the rise because of ageing populations.
The core of the problem is that there are not enough well-paid new middle class jobs being created US due to today’s demand deficit. Companies across most industrial sectors are finding little reason to invest in innovation and then new capacity because of today’s demographics-driven demand deficit. This helps to explain the fall in productivity growth. Automation is of course another factor here.
Sure, plenty of new jobs have been created since the Global Financial Crisis, but they have too often been low-paid jobs. A job in a fast food restaurant involving a zero hours contrast is no substitute for a job on a car-assembly line with full healthcare benefits.
Yale University economics professor Robert Shiller, writing in the New York Times, quotes US Bureau of Labor Statistics (BLS) on median usual weekly earnings in constant (1982-84) dollars (employed full time).
The total increase since this data series began in 1979 has been only 1.2%, or 0.03% per annum with the increase at less than 1% since 2009, says Shiller – who developed is a Nobel Laureate in economics and helped develop the Case-Shiller US house price index. This data implies that there has been hardly any income growth in a generation.
Shiller, in his same article, details the three-phase result of this income stagnation:
- Whilst few people study economic data, nearly everybody knows how much they are paid. So income comparisons have made not only amongst peers, but also more importantly between generations.
- People realise that they are less well-off than their parents, and so they have become angry, resentful and conspiratorial.
- Ethnic nationalism has created what Shiller calls “an ego-preserving excuse for self-perceived personal failure.”
We haven’t reached the fourth phase yet, which would be widespread ethnic, religious and racial conflict. The history off the 20th century teaches us about what the outcomes can be of this fourth phase.
How we stop this from happening will be the subject of many future blog posts.