Barack Obama won the presidency by making his mantra, “Yes, we can.” It seems downright un-American to say, “No, you can't,” but it is getting harder and harder to avoid the conclusion that the American economy is the little engine that couldn't. Six months ago it seemed peevish to dismiss the consensus view that the economy would recover in the usual way, if a bit wanly. Now it is hard to find a talking head to argue that the economy is recovering at all. The commentariat fears a double-dip recession.
What did the forecasters miss? Among the sources of weakness they didn’t expect are:
1) the continued collapse of the housing market;
2) the refusal of consumers to return to spending;
3) the absence of small business hiring; and
4) the collapse of state and municipal finances.
In part or whole, these sources of weakness derive from long-term demographic changes rather than the so-called business cycle. It starts with the housing market. Americans bought much more housing than they needed in the decades up to 2007 because the government and banks gave them cheap leverage with which to do it. Now with the collapse of the housing market, they can’t sell it, or sell it at the price they were counting on. The overhang of excess housing could last half a century.
Retiring baby boomers will have to sell empty nests into a declining market, and this forces them to stop spending in order to replenish their depleted retirement nest eggs. The collapse of home prices wipes out the bootstrap capital and borrowing capacity for small business. And the big retirement wave will overtax pension systems and swamp municipal (as well as some corporate) finances.
These elements conspire to keep America in a vicious cycle: the imbalance of savers (prospective retirees) and borrowers (young families and entrepreneurs) keeps returns on assets low, and low asset returns force the prospective retirees to save more, which increases the imbalance. That is just what happened in Japan during the 1990s, except that Japan had a way to save effectively, that is, through exports. The “Japan-style stagnation” that some economists (including this writer, in “Walking in Lever-Lever Land”) foresaw could be worse than it was in Japan.
At length, the business commentators have recognized the demographic dimension of the continuing economic crisis. In May 2009, I presented in First Things a then-radical argument that the United States faced not an ordinary business cycle but a demographic turning point that would depress economic activity permanently—in the absence of decisive countermeasures.
There will be no housing recovery, I wrote in “Demographics and Depression.” Since 1970, the population has grown by fifty percent, from 200 to 300 million, yet the country has the same number of two-parent families with children then as now—just 25 million. In 1973, the United States had roughly the same number of family homes (those with three or more bedrooms) as the number of families. By 2005, the number of family homes had doubled even though the number of two-parent families with children had stayed the same.
Consumer spending would not return, I argued, because after asset values went down $15 trillion reduction, Americans had started saving as much as they could. If everyone is saving and no one is spending the economy will shut down. The problem, I wrote, “is not that aging baby boomers need to save. The problem is that the families with children who need to spend never were formed in sufficient numbers to sustain growth.”
Now that the economy has failed to respond to the usual patent medicine, economists have developed an interest in demographics. As Mark Whitehouse recently wrote in the Wall Street Journal, 36 million Americans will turn 65 in the next decade and 45 million in the decade after that. For them,
the resulting low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse. Low yields present retirees with a difficult choice: Accept the lower income offered by safer bonds, or take the risk of staying in the stock market. Either way, their predicament could put a long-term damper on the consumer spending that typically drives U.S. growth.
Low asset returns, as I argued in ”Walking,” stem from demographic imbalance. The industrial world’s aging population have huge savings and need assets in which to invest them, meaning young people who are able to borrow the money and pay loans with interest. The tragedy “is that most of the world's young people live in countries without capital markets, enforcement of property rights, or reliable governments. Japanese investors will not buy mortgages from Africa or Latin America, or even China. A rich Chinese won't lend money to a poor Chinese unless, of course, the poor Chinese first moves to the United States.”
Now we read more or less the same analysis in a recent Goldman Sachs research report, Current Accounts and Demographics. “The rise in ‘prime age’ savers globally may also have played an important role in the story of the ‘savings glut’, putting downward pressure on global real interest rates. Here too, the demographic underpinnings of that story could intensify in the next 10-15 years.”
A consensus is forming around the demographic view of the economic crisis, now that process of elimination has thinned the number of alternative explanations. That will be welcome news neither for the Obama administration, whose various stimulus programs have nothing to do with the problems at hand, nor for the Republicans. The Republicans did a very good job of promoting entrepreneurship in the 1980s, which set the United States on course for a quarter century of nearly uninterrupted economic growth and wealth accumulation.
But they did a bad job in the culture wars, and the cultural issues are decisive in the long run. The winning formula for Republicans was to concentrate on big-tent matters, namely economics and national security, and leave the “divisive” cultural issues to the fine print in the party platform.
The family did not do well when the Republicans were in power. It needed to grow, and instead it shrunk. Until 1970, in fact as well as in popular culture, the normative American household was the two-parent nuclear family. When Ronald Reagan took office, the number of such households had fallen from over half to just over two-fifths. The number is now down to less than a third.
As the world’s experience is showing, this is bad economics. If America does not reverse the decline of the nuclear family, its economy will decline as well. Many palliatives are available, to be sure, that would improve matters in the interim: fiscal stimulus for entrepreneurship, and a higher proportion of skilled immigrants, for example. Reuven Brenner and I have presented these solutions in a series of essays for First Things during the past year.
But it would be delusional to believe that the old supply-side magic will have the same results in 2010 as it did in 1980, when the Baby Boomers were in their twenties and thirties, and willing to take risks, rather than in their fifties and sixties, and trying to save for an increasingly uncertain old age. The country needs children who will grow up to take the immense savings of the aging baby boomers and both pay interest upon the money they borrow and put it into entrepreneurial activities.
The nuclear family, we have learned, is not only the pillar of American culture, but of the American economy as well. It needs to be supported as a matter of public policy. The sooner the Republican Party learns this, especially as it is poised to take the House in this fall’s election, the better the nation’s chances for avoiding a prolonged and painful epoch of economic misery.
Spengler’s Walking From Lever-Lever Land on “Japan-style stagnation”
David P. Goldman’s Demograhics and Depression
Mark Whitehouse’s Another Threat to the Economy: Boomers Cutting Back
Goldman Sacks’ Current Accounts and Demographics: The Road Ahead