A society grows great when old men plant trees whose shade they know they shall never sit in.
A Greek proverb from a time well before the problems of our modern economies,
or the study of economics itself, is as true today as it was thousands of years ago.
But do we really live by this idea?
For the first time since the industrial revolution successive
generations are not becoming wealthier than their parents.
While there have certainly been setbacks and historical outliers from this trend
it has remained true in aggregate for the populations of most developed economies.
For a long time it was simply the expectation that peoples children would have a better
lifestyle in their adulthood then they did, but today that really is no longer the expectation,
in fact most young professionals can only aspire to live the lifestyles that their parents did.
Younger generations are finding it harder and harder to get reliable jobs,
afford comfortable homes, start a family and save for retirement.
This is despite the fact that the world is a much much richer place today than it was at any point
in the 20th century, when the baby boomers were busy building their now unassailable fortunes.
So what is going on here?
How is it that a world that is richer overall,
producing generations that are poorer than the ones that preceded them?
Is there some underlying cause to this?
If there is, is there a way to reverse it?
And if there isn’t does that mean that we can expect every generation
going forward to be poorer than the one that came before it from now on?
Oh and I suppose it’s probably also worth worth asking
Does this even matter,
since everybody is eventually going to die and pass down their wealth anyway?
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Heres a question for you all, is it better to be born into a large cohort with lots of
people the same age as you or a small cohort with not a lot of people the same age as you?
Traditional economic theory would suggest that a small cohort is preferable,
it means less competition for jobs, housing, social programs, spots in good schools, and
on a macro level, less competition for things as basic as natural resources.
But how then do you explain the baby boomers? Which despite being part
of the largest population explosion ever, are in aggregate, very wealthy.
Well, Lord David Willets a British politician, demographer
and author suggests that the opposite may be true, and that in a democratic system
being part of a larger cohort is actually preferable because it gives that group
more voting power on generational issues, and more sway in marketplaces.
When the boomers were young they voted for policies that benefited them. Low cost or
free higher education, family support systems, and strong social welfare.
When they got to the peaks of their careers their voting patterns changed again,
and now this large block of voters was in favour of lower income taxes, less business regulation,
more domestic industry protections to avoid outsourcing and global competition
and on a smaller scale things like zoning laws which would protect the value of their homes.
The push towards suburbs with mandated single family building requirements
meant that houses got bigger, and good locations got more desirable because
only so many family homes could be built there.
In the 50’s houses were basically a commodity, the majority of the expense was in building the
structure itself and it wasn’t unreasonable for the family cars to cost more than the family home.
Fast forward fifty years and houses are now investments as much as they are places to live.
In old age the boomers have now started voting to support retirement benefits, pension schemes,
medical infrastructure and to remove wealth taxes
even if that comes at the expense of all of the schemes that served them well in their young age.
Of course David Willets work focused specifically on the UK, and yes I know there
are certainly people that vote for the greater good rather than their narrow self interest, but
on average it is easy to see this trend throughout the past half century in most advanced economies.
In my own home of Australia for example the 2019 federal election was more or less decided
by a policy decision that would reduce the tax effectiveness of Australian retirement accounts.
The party that advocated for keeping the favourable tax structure ended up winning,
primarily thanks to older Australian voters.
We recently just had another election where that opposition party backed down
on their plan to change retirement account taxes and they won, very convincingly.
A 2017 British election study found that over time votes for conservative parties have shifted
from being divided by rich and working class to being divided by young and old.
A lot of what I have discussed so far came directly from Willets’ book the Pinch
and a lecture he ran at The Royal Institution,
it’s definitely worth a read if you are interested in these demographic processes.
Now a lifetime of favourable government policy can be hugely beneficial to building wealth,
imagine how much better off the average millennial would be if
they got free college or secondary schooling.
Even all other things being equal this would be the difference that a lot of young people
need to be able to put a deposit on a house, and that’s the next big issue to consider
The housing divide
David Willets small cohort theory probably omits or atleast doesn’t emphasise
one important detail that gave baby boomers another advantage over successive generations.
And no it’s not simply that they were able to buy houses when they were cheap,
certainly that didn’t hurt but it’s more a symptom of a bigger issue.
They were a big cohort, in a small world. They had all of the voting power,
and hardly any of the competition.
In the 1950’s to the 1960’s the global population was roughly a third of what it is today,
and not to start a whole thing here, but if you were a white man in the
countries we are mostly focusing on, your competition was even less severe.
So this added back all of the apparent trade offs that we thought of earlier,
there really was less competition for basically everything,
including jobs because employers had a smaller pool of labour to choose from.
Labour force participation amongst women was very low which further reduced the supply and hence
the bargaining power of workers but it also meant that domestic duties were normally taken care of
which reduced household expenditures on things like childcare, food, and general maintenance.
These higher relative incomes combined with lower outgoings
meant that houses could often be paid off with as little as one years income.
Yes, they did have to endure higher interest rates especially in the 70’s and 80’s which were
their peek home buying decades but it didn’t really make the difference it would today.
The median home in the USA in 1985 was $82,000. That’s median, so 50% of homes,
like the ones first home buyers would be looking at would be cheaper than this,
but let’s keep it simple and stick with $82,000.
Adjusted for median household incomes that $82,000 becomes $103,000.
The Average mortgage rate around this time was 15% or roughly $15,000 per year,
it did get higher in certain years but most borrowers were fixed in
at an absolute max of around 15% so this is a worst case scenario.
The median home today costs $430,000 and the average interest rate is just over
5% or $21,500 per year just in interest payments.
Again this is adjusted for median incomes at the time
so on the surface these seem pretty comparable,
maybe the younger generations shouldn’t be complaining about unaffordable housing after all?
A lot of people brush away this comparison by saying that inflation at this time was
extremely high so these higher interest repayments didn’t mean anything but that’s actually not true.
Inflation in 1985 was 3.5%, and while it was as high as 13.5% in 1980, this was consumer
price index inflation, not housing inflation, the prices of houses through these decades
actually grew at a relatively modest rate, it was everything else that was getting expensive.
This is kind of the opposite of what we expect today where house price growth outpaces inflation
but that was not the case in the 70’s and 80’s.
So yeah the inflation argument isn’t totally fair, so is it fair to complain about how easy
it was for baby boomers to buy a house? Well no, they still had it easy for two other big reasons.
It’s not what you would expect but the high interest rates actually
kind of helped them. Saving money for a deposit in an account that pays 10%
interest per year really accelerates that savings goal.
Higher interest rates also ensured that house prices never got too high,
because the repayments would just become unaffordable.
In our example from before we were only looking at the interest paid on the loans from the two
time periods, but the thing with a mortgage is you gotta pay back the principle as well.
Paying back the principle on the $430,000 mortgage over a standard thirty year loan term will cost
an additional $14,300 per year, bringing the total annual repayment to just under $36,000.
The house from 1985 would have a principal repayment of about $3,000 a year,
bringing the total repayment to just over $18,000a year,
half of what the 2022 homebuyer would be paying despite interest rates being three times higher.
Put another way if the repayments were kept equal,
the person buying the home in 1985 could have it paid off in 5 years rather than 30 years.
So why am I focusing so much on housing? Well
despite being a very important part of life houses are also uniquely
Unproductive
Real estate is kind of unique as an asset because it doesn’t produce anything of
value. A house sitting on a block of land can appreciate in value and it can provide a home
to its owners or a rental income stream to an investor but it doesn’t make anything.
Of course there are “investments” today like crypto currencies that also don’t produce anything
of value, but their market is miniscule next to the market for real estate around the world.
Miniscule and also irrelevant. If the value of bitcoin goes to a million dollars,
well that’s great for the people that invest in it,
and it will have some minor knock on effects in other markets as people cash out to buy
whatever crypto millionaires buy, but it’s not going to put anybody on the street.
Housing affordability can do that, and it can also slow the progress of entire economies.
Every economy in the world is still for better or worse focused around
large centres of economic activity, what a regular person might call a city.
If the real estate in these cities becomes too expensive then it becomes infeasible for workers
to hold down jobs there because more and more of their income will just go to paying rent.
In the short term this can be offset by higher wages but then these centres are really just
operating for the benefit of the landlords that are lucky enough to own property there.
The money that landlords make from their properties is unlikely to be reinvested into
company growth or spent on regular consumer consumption that keeps those businesses
in business, it is likely to be slpent on more property, further driving up market values and the
amount of money that gets sucked out of productive centres to be shoved into unproductive assets.
Higher housing prices also reduce social and geographical mobility.
A 2020 pew research study found that 52%
of young American adults between the ages of 18 and 28 still live at home with their parents.
One could also reasonable assume that this number
is higher after two years of covid and record high house price growth.
Those young adults are financially bound to where their parents live,
if they get offered a really good job in a different city they would have to decide if
it was worth the pay increase versus the increased costs of living on their own. If they decide it’s
not then they miss out on a good job and a business misses out on a productive worker.
The concentration of wealth in a particular generation is something that can have very
real consequences for entire economies, and these effects are only going to get
more pronounced as populations continue to age, places like Japan are a clear example of this,
and they don’t have the same kind of housing problems that we do in the west.
But long term,
does this even matter?
I don’t want to get too morbid here, but people eventually die
and their wealth will get transferred down to their children or some other beneficiary.
So the concentration of wealth in a single generation is at worst a transient issue.
I actually made an entire video last year about the great wealth transfer,
which is the process of the baby boomers dying and, leaving their wealth behind.
The problem we discovered in that video was that a lot of the wealth
that is being passed down is coming in the form of private family businesses.
In brief the problem with that is that often these small businesses
need the owner to continue operations and the people that stand to inherit these businesses
are either unwilling or unable to run them.
Small businesses are a huge part of the economy and losing them will do a lot of harm.
Now a glimmer of hope here is that these businesses can be sold by their inheritors to
people that do have the skills and desire needed to run them. Perhaps they will sell them to people
who have themselves got the money they need to buy the business from their own inheritances.
The problem here is the type of people that will actually be receiving this money.
Most people don’t receive money from their parents passing until they are pretty old themselves,
often approaching the end of their careers or starting retirement.
If the money gets handed down to them they are likely just going to use it
to fund their own retirements and then just hand it down to their own elderly children.
Money pooling in the hands of older people means that less opportunity will be afforded
to younger people to do all of the things that they do to build a functioning economy.
Buying a house, getting a good job and you know, starting a
family so that there is a continual supply of workers to run an economy.
You can’t run an economy on people waiting to
get old enough to finally do something with their lives.
Economists call this the intergenerational wealth problem,
I like to call it the Prince Charles Paradox, but it is something we are going to have to address.
Things like wealth and estate taxes are commonly proposed solutions, but
even if they did work, they are going to be very unpopular amongst the huge
voting block that got us here in the first place.
The final thing we gotta ask ourselves is if this is,
Is this all the boomers' fault?
I know a little bit of intergenerational bickering is all good fun but blaming
our current economic issues on a single generation is not going to be very productive.
Voting in your own best interest and policies been enacted in the
best interests of the majority is the foundation of democracy
and I don’t think anybody is reasonably going to argue that this is a bad thing.
I think it is also very important to look at examples of economies where this has not happened.
The second largest economy in the world, China is a great counterexample.
Their generational blaby boomers are known locally as the lost generation
because they spent most of their working life in a dysfunctional economic system.
They were also too old to truly benefit from the rapid economic expansion that
took place in the decades after the economy started opening up.
This meant that despite still being a large portion of the population
they did not enjoy the same economic prosperity as their western peers.
Economic prosperity was also something
that the boomers enjoyed that wasn’t necessarily within their control.
The last half of the 20th century by historical standards was very peaceful,
the world also opened up to international trade and growth was put into overdrive by
an abundance of cheap energy in the form of fossil fuels.
It was a great time to make a fortune, and people did.
Which is probably the final piece of this puzzle. Once people become extremely rich, and I am
talking about multi millionaires and billionaires here, they don’t normally become poor again.
The clump of billionaires that came from this generation
will be skewing these figures to make them look worse than they really are.
Remember in a group with one billionaire and 999 people who are completely broke,
the average member of the group is a millionaire.
Most billionaires are pretty old and these people will be making
outsized impacts on their generational wealth statistics.
again if we look at billionaires by age in China a country where voting
by the general population doesn’t really happen in the tradition sense
we can clearly see that wealth comes from periods of strong economic conditions,
not just having the ability to bend public policy to suit you and your peers.
Although of course, I am sure it doesn’t hurt.