Tobold's Blog
Sunday, December 03, 2023
Rich world demographics and macroeconomics

My generation, the boomers, is named after our numbers. The "baby boom" after World War II until the mid-60s, when the contraceptive pill was invented, created an unusually large generation in most rich countries. And most of my generation, me included, have now retired, with relatively few of us being left in the workforce. Now, if you read articles or watch videos about macroeconomics, you will have heard that this is causing a lot of concern among economists. They talk about "old age dependency ratios", with fewer and fewer working people supporting more and more retirees. And thus they project an economic decline of the first world countries, among gloom and doom. To me that proves two things: Classical economic indicators like GDP are horribly bad at describing the economic situation, and textbook economics are frequently very much detached from the real world. My prediction would be that actually things are looking up.

Just compare the anecdotal evidence you have yourself: Among the people you know or have heard of, are there are lot of cases of elderly people moving in with their kids, because they can't afford housing anymore? I don't know a lot of those cases, but I see and hear many cases of the opposite: People in their 30s still living with their parents, or people in their 30s only able to buy a house with finance from "the bank of mum and dad". The economic error is to consider only production, which is going down when fewer workers are available, instead of wealth. Yes, of course, there will be some flow of wealth from the younger generation paying pensions to the elderly. But a much larger flow of wealth with be in the other direction, with the younger generation receiving huge amounts of money either as gifts from their parents or inheriting it. We know that, because we know who is currently holding most of the wealth, very often in the form of houses, and it is the boomer generation. Of course wealth is even less well distributed than income, and if you are a member of the younger generation and your parents don't own a house you are out of luck; but in aggregate we are looking at the upcoming biggest wealth transfer in history from old to young.

But inheritances aren't the only good news for younger people. It is macroeconomically obvious that our economies will pivot: Up to recently, economic growth was mostly demand-limited. There was plenty of supply of everything, and it was people's spending that limited GDP. In the future, more and more, economic growth will be supply-limited: Fewer people working will produce fewer goods and services than there is demand for. The good news part of that is that in an economy which is supply-limited, the value of an hour of work is going up relatively to the value of capital. We are already seeing the first examples of companies having to pay employees more money, because of a shortage of talent. Note that even in an economy with falling GDP, if a larger part of the money is going to the working classes, the economy will feel better for the average person.

The macroeconomic situation after World War II also was supply-limited, with many countries still having food rationing for years after the war ended. A limited supply of goods and a shortage of labor led to one of the biggest economic booms in history, which was especially exceptional in that the newly created wealth was much better distributed. Life was good for the average person, which then led to people having all those babies. While of course the process won't be painless, I do think that it is very possible that another such boom is ahead. Economies do operate in large cycles. A shortage of labor might just be what is necessary to right things.

In theory I would agree, but here in the UK things happen to reduce the bargaining power of the limited labor supply (from prohibiting union action, enforcing one-sided wage deals) and also to drastically reduce inheritance tax. On top of that working in academia I always hear about the large salary increase, which in my field hasn't happened (it was less than halve of the average).
I think that companies and individuals desperately seeking a worker and willing to pay more applies more to certain professions than to others. A lack of let's say plumbers is probably felt more intensely than a lack of academics in for example English literature.
The issue with what you describe above is that for the wealth to trickle down from boomers to a younger generation your boomer relatives needed to be wealthy to begin with. Seeing as how historically minorities have been less wealthy in the US, for a bunch of historical reasons i wont get in to, younger minorities are going to be in an even worse spot seeing as how they are now dealing with increased cost of living and likely no inheritance to speak of.

To talk about my personal anecdote. My father was a chemical engineer working for Union Carbide in Puerto Rico. He was grossly underpaid and despite his lofty sounding title never accumulated wealth. My mother was a school teacher and despite retiring 6 years ago due to illness has been forced out of retirement 3 times now (and is currently working) in order to support herself.

I'm a SQL Developer and make a decent income so I'll be fine but I know I have no inheritance coming to me when they eventually move on.

Wealth trickling down through inheritances will be life saving for some folks and largely whatever for others, but either way it doesn't fix the major problems facing Millennials, Zoomers and future generations.
You touched on something that I always think is interesting when models are cited - they almost never seem to be able to capture all variables. Economic models, climate models, population models, how the human body works, they always seem flawed and I've always thought it was because we're modeling based on limited information. We think that we know the major drivers of systems of systems and then we realize that some seemingly minor variable has an outside impact. Then the models are updated. It seems like it much easier to identify the tensile strength of steel than it is to determine how 300 million people are going to behave, however it seems that both are treated equally when it comes to how models are presented to the layman.
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