Young Generations Are Now Poorer Than Their Parents And It's Changing Our Economies

a society grows great when old men plant trees who 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 people's children would have a better lifestyle in their adulthood than 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 richer place today than it was at any point in the 20th century when 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 some way to reverse it and if there isn't does that mean that we can only 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 asking does this even matter since everyone is eventually going to die and pass down their wealth anyway here's 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 an 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 favor 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 50s 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 50 years and those 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 the schemes that serve them well in their young age of course david willett's work focus 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 favorable 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've discussed so far came directly from willett's 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 favorable 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 willett's small cohort theory probably omits or at least doesn't emphasize 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 the voting power and hardly any of the competition in the 1950s and 1960s 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 and the countries that 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 labor to choose from labor force participation amongst women was very low which further reduced the supply 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 child care 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 year's income yes they did have to endure higher interest rates especially in the 70s and 80s which were their peak 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 a 000 and three thousand the average mortgage rate at this time was fifteen percent or roughly fifteen thousand dollars per year it did get higher in certain years but most borrowers were fixed in at an absolute max of about fifteen percent so that's the worst case scenario the median home today costs 430 000 and the average interest rate is just over five percent 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 rate payments didn't mean anything but that's actually not true inflation in 1985 was three and a half percent and while it was as high as 13.5 in 1980 this was consumer price index inflation not housing inflation the prices of houses throughout 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 70s and the 80s 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 higher 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 ensure that house prices never got too high because the repayments would just become unaffordable in our example from before we were looking at interest paid on the loans from two time periods but the thing with a mortgage is you gotta pay back the principal as well paying back the principal on a 430 000 mortgage over a standard 30-year loan term will cost an additional 14 300 per year bring the total annual repayment to just under 36 000 the house from 1985 would have a principal repayment of three thousand dollars per year bring the total repayment to just over eighteen thousand dollars per year half of what the 2022 home buyer would be paying despite interest rates been 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 five years rather than 30 years so why am i focusing so much on housing well despite being a very important part of our lives houses are also uniquely unproductive real estate is kind of unique as an asset class because it doesn't produce anything of value a house sitting on a block of land can appreciate in value and can provide a home to its owners or rental income stream to an investor but it doesn't make anything of course there are other investments today like cryptocurrencies that also don't produce anything of value but their market is minuscule next to the market for real estate around the world minuscule 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 impacts in other markets as people cash out to buy whatever crypto millionaires buy but it's not going to put anybody out 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 are unlikely to be reinvested into company growth or spent on regular consumer consumption that keeps these businesses in business it is likely to be spent 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 house 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 reasonably assume that this number is higher after two years of covert and record high house price growth these 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's worth the pay increase versus the increased cost 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 clear examples 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 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 down whatever's left to their own elderly children money pooling in the hands of older people means less opportunity will be afforded to younger people to do all 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 that 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 bloc that got us here in the first place the final thing we got to ask ourselves 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 interests and policies been enacted in the best interests of the majority is the foundation of democracy and i don't think that anybody is reasonably going to argue that this is a bad thing i think it's 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 counter example their generational baby 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 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 the puzzle once people become extremely rich and i'm 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 that 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 traditional 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'm sure it doesn't hurt you

Channel: Economics Explained

Views: 6,192,645

Keywords: economics, economics explained, the biggest wealth transfer in history, the post boomer boom, wealth transfer explained, the biggest wealth transfer explained, why the biggest wealth transfer is upon us, what is the post boomer boom, the boomer wealth transfer, what is the boomer wealth transfer, the economics of wealth transfer explained, wealth transfer, real estate wealth, boomers millenial wealth, boomer economics, wealth inequality, baby boomers, baby boomers vs millennials

Id: PkJlTKUaF3Q

Length: 16min 10sec (970 seconds)

Published: Thu Jun 16 2022