«

»

Mar 23

Understanding the economic squeeze on millennials

 

999942

Did rich countries like the U.S. betray the millennial generation – the people born in the 1980s through the early 2000s? Some make that claim. For example, a report in the Guardian discusses how high unemployment, sluggish income gains and student-loan debt have hit young people in Western countries hard.

While these hardships are real, most of them don’t constitute a betrayal. In general, governments don’t try to do things that raise unemployment and lower incomes. Sometimes they inadvertently make mistakes – for example, austerity in some European economies has probably been a big unforced error – but even then, they are simply being misguided, not malevolent. Even the student-loan debacle was probably a result of government attempts to raise incomes by encouraging kids to educate themselves.

As much as we’d like to believe that government can control the economy, its power is limited. Productivity gains, which drive much growth, are often due to improvements in technology. The government can spend money on research, tweak patent policies, craft more efficient financial markets and invest in early-stage companies, but it isn’t clear how much these things will really boost growth. Economists have recognized that productivity growth is slowing all over the world and that the chances of any one country’s policies being able to reverse this trend are probably fairly slim.

But that doesn’t mean the U.S. and other developed nations have done right by millennials. In some important ways, they have betrayed the young generation.

Any society faces a basic choice between consumption and investment. Producing the things that raise living standards requires physical capital such as buildings, machines and infrastructure. It also needs technological ideas, which are produced through costly and time-consuming research. If we work hard and create more capital and more ideas today, our children and grandchildren can enjoy a richer life. When the baby boom generation sacrificed time and materials to build the interstate highway system, for example, it ensured that Generation X and the millennials would have nice roads to drive on.

Unfortunately, the U.S. hasn’t done as much of this sort of investment as it might have. Since the 1980s, private investment net of depreciation has been falling steadily as a percentage of gross domestic product.

Government spending on research and development has also fallen a bit since 1980. Government investment has fallen too, not taking depreciation into account.

Because U.S. companies didn’t invest as much as before, Americans haven’t had to work as hard, and have enjoyed higher consumption than they would have otherwise. Because government also hasn’t invested as much as before, taxes have been lower, and consumers have had more money to spend on health care and other kinds of government-funded consumption.

It’s theoretically possible for a country to invest too much, of course – if you build way too much capital, you’ll spend too much time and effort simply repairing it and upgrading it, and will be poorer as a result. But the U.S. is probably well below this threshold.

So it’s a good bet that these choices mean millennials are poorer now than they otherwise would have been. Our low investment has meant more consumption for baby boomers, less for millennials.

There are other ways in which the U.S sacrificed the consumption of millennials so their parents could live more comfortable lives. Inflation, for example, has been low and stable in recent decades compared with earlier times.

Bursts of unexpected inflation redistribute wealth from lenders to borrowers, because each repaid dollar is worth less than when it was borrowed. But in the last few decades, there haven’t been any bursts of unexpected inflation. That means that Gen X and millennial borrowers haven’t gotten the same kind of break on borrowing that boomers got. Young people go into debt to buy houses, cars and to pay for college, so low and stable inflation probably hurts the young and helps the old.

Do these policies constitute a “betrayal” of the millennials by the boomer generation? It depends on your perspective. On the one hand, you might argue that each generation is free to choose to consume or invest as much as it wants. The Bible, Enlightenment philosophers and other moral authorities are silent on the exact percent of GDP that a country should invest or consume.

But it’s certainly true that the U.S. and most other Western countries have invested less in the last 35 years than they did in the previous 35. That means that the baby boomers left their kids less, relative to their own consumption, than their own parents did. In a time of slowing productivity, that has been a tough blow to today’s youngsters.

Source: Understanding the economic squeeze on millennials

Notice: This website is a repository for our posts that go out to the world, but is not used as out primary messaging medium. The absolute BEST way to reach us, and follow our posts, is on LinkedIn. We have a group there, entitled The Workforce Productivity and Compensation Institute, and you are welcome to visit and interact with us there. To visit the group, go to: https://www.linkedin.com/groups/8567153/

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>