To begin my one course in demography, the professor cheerily introduced the subject: “it is not that we are living longer, it is just that we are dying at a slower rate.” Until recently, this was the last time that I thought about demographics. A blog post by David Goldman for the Asia Times explores the generational factors affecting our currently depressing housing trends. See Housing Prices and Demographics
Baby Boom Retirement and New Families
Demographers have been warning about a generational oversupply of homes. Baby boomers are retiring, seeking to sell their current residences and move into smaller digs. At the same time new family formation has plunged, weakening demand for the homes those retirees are leaving.
Sometimes it helps to look at the world with a kind of simplicity. Think of it this way: Credit markets derive from the cycle of human life. Young people need to borrow capital to start families and businesses; old people need to earn income on the capital they have saved. We invest our retirement savings in the formation of new households. All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old. See Housing Prices and Demographics
Two parent families with children are the driving force in housing demand. While US population has jumped from 200 million to 300 million since 1970, two parent families have remained at 25 million. Housing units with three or more bedrooms were 36 million in 1973 and72 million in 2005. Thus, the growth in home ownership for affluent two-parent families is lagging behind that for relatively poorer childless and single parent families.
Implications
In David Goldman’s world the cycle has gone wrong, with negative implications for our capital markets:
….something different is in play when investors are reasonably panicked. What if there really is something wrong with our future–if the next generation fails to appear in sufficient numbers? The answer is that we get poorer.
The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still–no matter what economic policies we put in place. See Housing and Demographics
Completing his thesis, unless we restore the traditional family to a central position in American life, we cannot expect the same level of wealth accumulation we experienced in the 1980’s and 1990’s. Immigration and foreign investment cannot sufficiently compensate for the lack of family formation and capital. The end result:
We are going to be poorer for a generation and perhaps longer. We will drive smaller cars and live in smaller homes, vacation in cabins by the lake rather than at Disney World, and send our children to public universities rather than private liberal-arts colleges. The baby boomers on average will work five or ten years longer before retiring on less income than they had planned, and young people will work for less money at duller jobs than they had hoped. See Housing and Demographics
The Job Corollary
I have the highest respect for David Goldman, but one area that he did not touch on is jobs or the lack thereof. It is a bit like the chicken and egg problem. Do secure jobs come first, so that workers start families, have children and ultimately buy houses? Or are families formed, children born, houses purchased and jobs created and procured as an outgrowth of this cycle? I think that a secure job environment must come first.
Jobs are critical to any analysis of societal wealth. One could expand upon Mr. Goldman’s thesis and posit that we have too many people in the modern labor force. As we have discussed in this blog, technology and changing societal patterns have created a surplus of labor:
Right now the supply of people is too high. How has this happened? Medical technology has slowed infant mortality. Better medical care and pharmaceuticals lengthen lives. Women can control their own reproduction. They can enter the workforce rather than tend to large families.
On the demand side, technology has dramatically changed the nature of work. A modern factory no longer has thousands of people producing cars or steel. Gone are the Dickensian portraits of 19th century factory life. Computers, robotics and other labor saving devices allow smaller factories to produce cheaper and better products. Brains have trumped brawn, but the result is a surplus of labor. Combine improved productivity with a surplus of people and large scale unemployment ensues. To offset declining incomes households piled on debt over the last 20 years. Income can no longer can support the ever expanding amount of debt in society. See Are There Too Many People?
The trend to substitute capital for human labor has only been worsened by the Fed’s radical zero interest rate policies:
Low interest rates reduce the cost of capital, hence increase the propensity of employers to use capital-intensive technologies, substituting capital for labor wherever possible. Conversely high interest rates, by making capital more expensive, increase the propensity of employers to hire more labor and train its existing workforce to produce more output rather than investing in capital-intensive equipment….While the Greenspan/Bernanke monetary policies have increased recorded productivity growth, therefore, they have reduced job creation, in this recession creating a pool of long-term unemployed that will remain a miserable underclass until they pass on, decades in the future. See Paradise Regained
Where Are We Now?
We are in the worst of all possible economic paradigms. We have high structural unemployment, meaning that it will not be easy to reduce the unemployment rate as many jobs do not need doing. With the combined problems of a lack of jobs and poor level of family formation, housing will continue to suffer. We built too many houses with too much debt. We have not let house prices fall to clear this market of its surplus. Zero interest rates and federal supports to the banks continue to impoverish the middle class and impede job formation and hiring. Finally, food and energy inflation require an ever greater percentage of family income, and reduce needed savings for house down payments and upkeep.
People who need people also need lower prices and secure jobs. And they need them fast.
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