Will boomers cause more inflation?
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Conventional economic theory holds that aging is disinflationary. Older people and households typically consume less than younger ones, and they often downsize their homes because they are empty nesters. Therefore, economic models typically take into account that an increasing proportion of old and/or non-working people is net negative for demand and thus disinflationary, as this will Research by the IMF shows†
But perhaps we are at a major turning point in this theory, at least in some rich countries like the US. Boomers live much longer and are less and less willing to shrink. Due to the coronavirus pandemic, those who are still in work (and there are many, as today’s elderly are healthier and also want to supplement their retirement savings with income) were more likely to cling to their big house rather than of doing it in a ground floor apartment. They can certainly afford it, as they still control more than half of the country’s wealth, and show a small sign to pass it on to the next generation.
Moreover, they are not only spending more on healthcare, but also on other services. Research from the National Transfer Accounts project, which tracks consumption patterns in 40 countries, found it that not only does consumption not decline with age in places like the US, Germany, France and Japan, but also that young and old tend to consume more than they earn as employees, which is inflationary.
Some of this relates to debt spending and the wealth effect of higher asset prices in recent decades. We may be moving out of that era, perhaps for a long time to come, where Federal Reserve rate hikes are driving the markets down. But I still know many older people who live much larger than their millennial children (who came of age in the post-financial crisis era and paid for them with lower salaries and expectations).
Indeed, there are venture capitalists, such as the famous Alan Patricof, who doubling of older people that are part of a “silver tsunami” of consumers who will continue to spend in good and bad markets. Patricof, who is in his late 80s, puts millions into a venture fund that invests in health, wellness and financial services for the elderly.
I can see it from both sides. I am 52, but my husband, a writer, is 68. Because he has chosen creative ventures over a high salary, he is ready to phase out as his income falls. I myself haven’t been able to set aside as much for retirement as my Fidelity advisors say I should have, in part because I had to save nearly $500,000 to send two kids to college debt-free (how’s that for consumption?). I will work forever and spend less when the youngest goes to college. My husband’s brother, on the other hand, is a retired corporate lawyer who makes some nice trips abroad each year, owns three properties in need of maintenance and does not seem to lack energy or money for consumption.
I suspect that, like most Americans, older people will be quite split in their consumption habits, with a top tier that will continue to spend like there’s no tomorrow, even if inflation bites, and a lower 75 percent that, like my own parents in the inflationary seventies, be a penny. But the bigger problem is that as the proportion of the population able to work begins to shrink relative to those who are no longer productive, as will be the case as the boomers retire, there will be more people who compete for fewer goods and services. That means prices are likely to rise — as is the political battle between boomers and millennials, who both want their share of a dwindling national economic pie.
Ed, as a Brit living in America for a long time, I’m curious how you look at consumption and production as you move into your later years (don’t get me wrong, you’re nowhere close!)? Will you continue to work and spend like an American, or will you retire to a cottage somewhere in the UK for a more modest life?
I was quite fascinated by my colleague Courtney Weaver’s FT Magazine article on “gentle parenting,” the kind that doesn’t involve punishment, star charts, or a lot of discipline. No prizes for guessing I didn’t fall into this camp, and I’m sympathetic to my friend Judith Warner’s opinion, in her book Perfect madnessthat American parents – whether gentle or firm – try way too hard to be perfect.
This collection of non-fiction in The New York Review of Books looking at pain research and the quest to understand where pain really comes from (the brain? the body? our imagination?) will be of interest to many, I suspect.
I joined the Ezra Klein Show this week to discuss what I’ve called the everything bubble — and why I think it’s popping. You can listen to the episode here†
Edward Luce responds
Rana, let me start by excluding a cottage in the English countryside, not least because my Irish wife may find it a little too Anglican for her taste. I have no idea where we will end up or if we can afford it. But it will have to be a big city, so London is very likely. As much as I love living in Washington DC, I don’t want to be one of those types who spend their fall years attending think tank seminars on Central Asian gas pipelines. I have two broad assumptions. The first is that I’m only halfway through my useful career. Although I am 54 I would expect to write and travel and contribute to my 80s and I am not afraid of that. As writers, we don’t mop floors or deliver packages, so the prospect of continuing to work would be a lifestyle choice, not a grind. This is a fascinating world and I hope I will always be lucky enough to engage with it.
Second, we were just too young to have taken advantage of the exorbitant privilege of high fixed pensions, so we are hostages to asset prices that can fall as well as rise (although our generation, until recently, only saw them rise). I don’t have huge savings because I’m a happy journalist and not a big fan of deferred consumption. But I’m starting to grow up. I only recently found out that the matching contributions from the FT are quite generous if you go for the max, which I did late. So I only have myself to blame for the years of free money that I haven’t bothered to exploit. But there are still many more to go and my eyes are starting to glaze over when I listen to actuaries. Sure, I plan too little and may pay a price for it when I’m old. But some people plan too much and I don’t envy them.
And now a word from our Swampians. † †
In response to ‘do no harm†
“ESG and social justice are beautiful and beautiful, but the reality you are referring to is that political activist companies become a bad and terrifying idea when they make threats aimed at directly dictating political decisions and government policies through their economic power. And increasingly they will dictate the political agenda if we go too far down the road we are now walking in the name of the cause and ESG. This is a real threat, and liberals may be in a big trap here. † †[W]With the best of intentions, we pollute the idea of electoral democracy in favor of the amoral instrumentalism of ‘my side can do whatever it wants to get the results it wants, because it’s good’. And that’s dangerous. Abstract and boring rules about political processes are actually important to protect us from the vagaries of fashion, from moral panic and from the personal whims of the powerful.” — A reader in the UK