Pinch“We all know the story,” starts David Willetts in his book The Pinch.

“The parents return home from a night away to find a teenage party has got out of hand and the house has been trashed… It plays to a deep-seated fear that younger people will not appreciate and protect what has been achieved by the older generation. This is the eternal anxiety of each generation about what comes after. But what if, when it comes to many of the big things that matter for our futures, it is the other way around? What if it’s actually the older generation, the baby boomers, who have been throwing the party and leaving behind a mess for the next generation to sort out?”

As we gear up for another presidential election season, Mr. Willetts’s book should be required reading for anyone seeking office and by anyone who intends to vote. This is the age of the “Tea Party,” in which a voter’s ideological purity is measured by the redness of their face or the passion with which they hate President Barack Obama. (This is not to give the Left a free pass, of course. The hatred hurled at former President Bush makes the anti-Obama rhetoric look like schoolyard child’s play. If anything, the Right is simply playing a destructive game of catch-up.)

But at what point does the incessant negativity become counterproductive? And in the endless stream of emotionally-charged rants, where are the new policy ideas? It’s all fine and good to be “against” something or someone…but what or who are you “for”?

Like so many other aspects of life and economics, there is a demographic explanation here. The Baby Boomers are angry. They’ve watched their livelihoods slip away from them over the course of the past decade. Two market crashes and a housing bust have destroyed the dream of a comfortable retirement for many. The media—which is run by Baby Boomers in the primes of their careers—has picked up on this. In effect, we have angry Boomers reporting negative news to angry Boomers in what has become a vicious cycle of negativity begetting negativity.

We now have a political climate in which civilized debate is impossible. This is tragic because there are several issues that must be addressed today if we are to avoid unmitigated crises tomorrow. At the top of the list are Social Security and Medicare, of course. But there are also plenty of other issues. The United States (and much of Europe too, for that matter) has not invested enough money in infrastructure. With our population continuing to grow, we need more roads and, in some cases, rail capacity. The last major infrastructure push was during the Eisenhower Administration, for crying out loud. But in the politically-charged climate of today, this is a nonstarter. Just look at the hysteria surrounding the Trans-Texas Corridor a few years ago. The planned toll road and rail project–which was sorely needed to relieve the congestion on Texas highways–was demonized as an underhanded way to achieve political union with Mexico. Seriously?

Pardon Me, But Can We Borrow Your Member of Parliament?

David Willetts is a member of parliament and currently serves as a minister in the British government. He’s also one of the few politicians anywhere in the world who understands demographic trends and has the ability to explain them in a cool, almost academic manner without delving into populism. You will read David Willetts explaining how, say, divorce affects the rate of household formation and what the economic impact of this is. You will not read David Willetts pontificating about how this is an example of moral rot and thus a reason to vote for the Conservative Party to “fix” it. You will also not see Mr. Willetts using naive demographic projections that show “the Mexicans” (or “the Muslisms” or “name your bogeyman”) taking over the country by breeding.

One can’t help but wonder how a mild-mannered thinker like Mr. Willetts gets elected. He’s not angry enough.

On the Economics of Population Decline

“The pressures on families were just too much. People were getting married later (aged 26 or more) and having fewer children. One of the popular bestsellers of the day warned of The Twilight of Parenthood. How could families afford all these new consumer goods and raise children as well? It was called the dilemma of the pram [baby carriage] or the car… Pessimism about the future was pervasive.”

Sound familiar? Willetts was describing Britain in the 1930s.

As Willletts continues,

Keynes’s General Theory of Employment, Interest, and Money was written at the same time as he was wrestling with what he called ‘the economic consequences of a declining population’—the title of a lecture he delivered in 1937. He boldly reversed the obvious, by incorrect conventional wisdom that a growing population is more likely to lead to unemployment because of too many workers—the so-called lump of labor fallacy. Keynes argued the opposite: a population that was shrinking would be at greater risk of unemployment. A youthful and growing population borrowed more, and consumed more, thus stimulating demand and using resources to the full. By contrast, he argued, a shrinking and ageing population diminished demand, leaving resources unemployed.

John Maynard Keynes gets a bad rap today, and to be fair a lot of it is justified. Politicians used Keynes’s work as justification for the massive expansion of the state in the decades that followed the Great Depression. Keynes also gets blamed for chronic budget deficits, though this isn’t exactly fair. Keynes recommended deficits during recessions and surpluses during booms—to pay off the debts accumulated during the deficit years. Alas, the second part of Keynes’s advice seldom gets heeded.

At any rate, the key point to take away is that an aging population characterized by low birthrates is not good for young people seeking work. The experiences of Japan and parts of Europe would certainly confirm this.

Geopolitical Concerns for the Future

“What do Afghanistan, Iraq, Yemen, Congo, and Somalia have in common? They are all teenage countries. They all have a median age of 19 or under. Afghanistan is one of the youngest countries in the world: its median age is 16. This makes it harder for tribal elders to exercise authority over the youthful Taliban.”

This is a topic we have covered quite frequently.  See “The Iran Protests and Demographics” and “The Arab Spring and Demographics” as examples.

Willetts continues,

These young countries in particular have massive surges of teenage males. These young men will need food and worthwhile jobs—a challenge in of itself. And how will they secure a position in society? One theory is that they will fight for it—either within their countries or by being sent abroad to fight—Europe’s solution to its similar demographic challenge in the nineteenth centuries.

China’s population growth meant that it was at its most youthful at the time of the Cultural Revolution. For Iran it was the time of the fall of the Shah. The median age of Russia in 1917 was 15. France was going through this sort of demographic turbulence at the time of the 1789 Revolution. Riding such a demographic surge of young people is the greatest single challenge to any social and political system—most do not survive it.

Bottom line: Expect the Middle East, North Africa, and South/Central Asia to be geopolitical tinderboxes for some time to come.

On Anglo-American Exceptionalism

Willetts makes an interesting comment that the relatively small and mobile families of the English-speaking world are not a new phenomenon but rather an old Anglo-Saxon tradition made possible by the existence of a powerful (though limited) state with a strong central authority and an ingrained tradition of honoring the rule of law.

In Medieval England, the Crown and its system of royal courts were powerful relative to local aristocratic lords. This limited the local barons’ ability to abuse the subjects in their territories and made the clannish system of large families unnecessary. When your rights are protected under the law, you don’t need a large extended family for protection. (Interestingly, this was not the case in Scotland, where a tribal clan system of extended families existed in the Highlands until 1745—when a band of highlanders led by Bonnie Prince Charlie marched on London and came a hair’s breadth from toppling the British government.)

Small families need civil society and markets and commercial services more because of the lack of mutual support of a large family. This is one reason why England’s financial services industry was one of the first to develop. Without a large family network to turn to for capital, you need a bank.

This is yet another explanation for the unorthodox development of Britain and then later the United States. Like most explanations, this is not a “grand unifying theory.” But it is interesting food for thought.

On the Economics of Divorce

To illustrate the effects of divorce on the economy and society, Willetts uses the example of a nuclear family with the mother in law living with the family. The husband, wife, children, and grandma represent one household. But what happens after a divorce? The man moves out, grandma moves to a retirement home, and the woman and children are left in the original house.

Instead of one household there are three. That means we need much more housing, though households are smaller. (Britain’s population rose by 8% in the 35 years from 1970 to 2005 but its number of households rose by 30%). As it is more expensive to run three households than one, people will feel poorer even if there is the same amount of money to go round as before. At the same time, these demographic pressures put up house prices much faster than inflation. So people find themselves asset-rich but cash poor. They stop saving and instead they borrow against the equity in their properties.

It’s hard to blame the housing boom on divorce, but Willetts does make an interesting point. Interesting too are his comments on the mass entry of women into the workforce after the 1970s:

More women went into the jobs market too. Once reason was simply the urge for personal fulfillment through education and work. Women have indeed been liberated. But it is not the whole story. There is also the financial pressure of needing a second income to maintain living standards. It is also an insurance policy as more and more marriages break down. And if some women are choosing to work, pushing up their household income and the prices they can afford, everyone else is under pressure to join them as well. As Avner Offer puts it, “By choosing individually to work, women found themselves collectively compelled to work.”

Willetts resists the urge to criticize or moralize. Instead, he merely points out what “is” so that (hopefully) we can get a better understanding of the factors driving housing inflation.

On the Transfer of Resources

I would like to finish with one last insightful observation. Willetts explains that in traditional societies, communal and family resources are transferred “downward” to younger people. In the simplest example, able-bodied men hunt and share the meat with the young. But in the modern welfare state, resources are transferred “upward” to the elderly. The cost of pension and health benefits far exceeds that of schools and child tax credits.

This is interesting in that it shows the effects that demographics have on voting and democracy. Retirees vote; children do not. If you want to get elected, you cannot risk incurring the wrath of pensioners. We have thus voted ourselves a society in which greater and greater amounts of resources are allocated to the “past” rather than to the “future.”

Willetts goes on to explain his views on other issues, such as climate change, that I consider comparatively less important. But I would repeat my earlier comment that The Pinch is an insightful work that ought to be read by anyone running for office—or voting.

Charles Lewis Sizemore, CFA

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