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.
RESOURCES:
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
Comments:
"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."
On the other hand, Democrat policies promote abortion, artificial contraception and homosexual marriage, which directly affect the American family by undermining traditional values.
The decline of the nuclear family is not an economic issue, it's a social issue. The struggle of the nuclear family is more directly related to Democrat social policy which promotes relativism and undermines religious values. To blame Republicans is absurd and counterintuitive.
Should the Republicans take back Congress in 2010 and the presidency in 2012, they had better deal seriously with family and demographic decline, or once again they will be thrown out of office.
Paul Ryan's Roadmap for America deals seriously with the financial issues and the Douthat/Salam book, Grand New Party: How Republicans Can Win the Working Class and Save the American Dream, discusses ways of shoring up families. The Republicans need to pay attention to this sort of hard-headed thinking.
Of course, demographic decline in the West is somehow related to a basic lack of confidence in our culture. As Goldman remarks in an article "Why Should America Support Israel?"
"... Israel’s fertility rate has risen steady to nearly 3, by far the highest in the developed world, and not only because of large ultra-orthodox families. The Palestinian birth rate is in a tailspin. ...
Somehow Israel, even in the face of annihilation by the Arabs, has found a way to be fruitful and multiply its people.
"I see bubbles and I've got to burst one:
The one way we'll skip
The next double dip
Is, we never got over the first one."
I wouldn't tout Israel as an example here. Most of the population is deeply secular, and so most couples have a child or two (when they even have a child). The religious Jews, who mostly live on welfare so that they can study and raise large families, are the source of Israeli children. Even they can't have enough, and so Israel welcomes a huge number of Jews from the former Soviet Union.
I agree with the David in so far as if we had positive demographics (like during the boomer years), then we would be enjoying a V-shaped recovery right now...
Peace
My understanding is that Bismarck was the initiator of Social Insurance in Germany in the 19th Century; so that those without children could still receive some support from younger adults through a tax and pension system. I hear from a well-informed daughter that nations that adopt a comprehensive pension and social insurance system experience a falling birth rate, eventually dropping below the replacement (2.1 births per woman) rate.
So our culture's drive for bigger and better old age pensions is sabotaging the need to have enough children to support the old age pension system. There is definitely more to the problem than listed above; but these are certainly major factors contributing to our economic imbalances.
TeaPot562
There is a lot that is inaccurate about Scott's comment. I have many relatives and friends in Israel, have made trips there on several occasions, and have observed the following:
1. Very few Israeli Jews are militant secularists. Even my classic secular kibutznik, paratroop veteran cousins have some sort of high holiday service, Passover seder and Purim carnival, as well as a bar mitzvah for their sons. Our young adult Sepharadi former Au Pair in Petach Tikvah (middle class Tel Aviv suburb) may go out dancing on Friday night, but she first lights Sabbath candles with her mother and would not miss her father's kiddush (blessing over wine to commemorate the creation and the Exodus from Egypt) on Friday night and Saturday over lunch). I would describe the majority of Israelis as folks with a partial, but affectionate and traditional connection with the commandments, as well as a strong familiarity with the events and geography of the Bible.
2. I can't think of very many Israeli families with only one child. Most that I know have at least three.
3. It's true that the ultra-Orthodox tend to have the most children and their adult males spend many years in seminary, w/o significant employment. But the Modern Orthodox have almost as many kids and are leaders in the military, high tech, professions, etc.
4. I don't know the stats but it seems to me that emigration from the FSU has dropped significantly since the last decade.
There is a lot that is inaccurate about Scott's comment. I have many relatives and friends in Israel, have made trips there on several occasions, and have observed the following:
1. Very few Israeli Jews are militant secularists. Even my classic secular kibutznik, paratroop veteran cousins have some sort of high holiday service, Passover seder and Purim carnival, as well as a bar mitzvah for their sons. Our young adult Sepharadi former Au Pair in Petach Tikvah (middle class Tel Aviv suburb) may go out dancing on Friday night, but she first lights Sabbath candles with her mother and would not miss her father's kiddush (blessing over wine to commemorate the creation and the Exodus from Egypt) on Friday night and Saturday over lunch). I would describe the majority of Israelis as folks with a partial, but affectionate and traditional connection with the commandments, as well as a strong familiarity with the events and geography of the Bible.
2. I can't think of very many Israeli families with only one child. Most that I know have at least three.
3. It's true that the ultra-Orthodox tend to have the most children and their adult males spend many years in seminary, w/o significant employment. But the Modern Orthodox have almost as many kids and are leaders in the military, high tech, professions, etc.
4. I don't know the stats but it seems to me that emigration from the FSU has dropped significantly since the last decade.
From what I can tell the arguments is roughly as follows:
(1) Our economic problems are at least largely due to demographic factors.
(2) Therefore, the solution to our economic problems will eventually need to be largely demographic in nature.
Clearly, (2) does not follow from (1). It's like saying: "My neck problems were caused by a car accident. I'm therefore likely going to need to find an automotive solution to my neck problems."
Let's grant for the sake of argument that there is a savings glut and that we need more borrowing and spending. Probably less than 1% of the people who have dedicated many years to rigorously studying this sort of problem would respond that the solution is to have more two parent families with children. It's not clear that the Republicans could drastically improve the nation's demographic and family problems. Moreover, even if they could do that, it's not clear that there would be large economic improvements as a result. Certainly, single or divorced people can be highly productive and married people with children can be quite unproductive.
There are much more straightforward fiscal and monetary policies that can lead to more borrowing and spending (more aggregate demand).
On the monetary side, the Fed can buy up long-term gov't bonds leading to lower long-term interest rates. To read more about expansionary monetary policy, please check out Scott Sumner's blog: http://www.themoneyillusion.com/
On the fiscal side, the gov't can spend directly or can hand out money which people can use, as least in part, for consumption. I'm skeptical of this latter approach, as it will likely mean higher taxation later, but there are certainly respectable economic arguments in favor of it.
Let's say we think the problems are not on the demand side, but rather on the supply side. Then the solutions might involve improving productivity through, say, lowering marginal tax rates, improving the education system, etc.
Perhaps public policies aimed at increasing the number of two parent families with children would be more reliable and efficient than the traditional fiscal and monetary policies mentioned above, but Mr. Goldman gives no plausible a priori reason for thinking so. Nor does he provide us with econometric evidence to that effect. For those who like historical parallels, remember that the Great Depression was ended by a combination of expansionary monetary policy and WWII (i.e. fiscal policy). It's not clear that demography or family values played a decisive role.
I favor various socially conservative policies, but Mr. Goldman has provided scant evidence that there is much of a connection between such policies and economic growth.
-Greg
If today's Republican party wants to help the family, they need to abandon their fetish with low marginal tax rates and look to what their Republican ancestors did in the 1948 Revenue Act, an act which the Republican Congress that year enacted over President Truman's veto and an Act which Republican President Dwight Eisenhower defended against would-be tax cutters in his own party. The low marginal tax rates of the Reagan-Bush 43 Republicans created a short burst of economic activity, but it failed to incentivize an investment in the long-term health of the economy by failing to give those who produced the next generation tax breaks not enjoyed by those who didn't. And the way to do that was what the Republican Congress created in 1948 and a Republican President defended throughout the 1950s, a tax code that heavily taxed those who did not form families and lightly taxed those who did.
I like to point out to people that in the past, when farming jobs became less available, people (and later their children) could go to the mills, often with little or no training, and maybe make even more money. When the mill jobs started to go away folks (and again later their children) could go to night school (or college during the day) and train for a white collar job. In each case the person could actually make more money if things went well. But now, now not only is there nothing better to look forward to for folks like me and my friends, there's also less and less jobs period, and those that are out there pay less. In all sincerity, I have to ask, how do we overcome that, Mr. Goldman?
PS
And while this is all going on the big boys running the big companies continue to scream that we need more and more off shore workers. And both parties shout amen to that.
I just would like to point out that according to Robert Barro the 1948 revenue act was an enormous cut in the average marginal tax rate. Maybe the biggest in the postwar era. Maybe a tax cut can be both pro-growth and pro-family.
Here's the graph of average marginal tax rate (look at the blue line): http://phillips.blogs.com/.a/6a00d834515c6d69e20120a6400283970b-320wi
If the "big Boys," as you call them, can find competent labor abroad, good for them. That probably means that we will pay less for their products and stimulate Americans to be more competitive in the labor market.
Thanks for the link. This helps prove my point. Given that the top marginal rate under the 1948 revenue act was 82.13% (see http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213), we see that it's possible to cut the average marginal rate while leaving the top marginal rate quite high. Why? Because few people pay the top marginal rate. It doesn't exist to actually tax at that rate, but to redirect behavior in such a way that the top rate (indeed, top rates) is avoided.
By flattening the rates (and by offering other tax breaks, such as the earned income tax credit -- which is available to individuals whether they have children or not), Congress lost the ability to so redirect behavior. One way in which they lost the ability to redirect behavior is by making the dependency exemption less of an inducement to form families and have children. When 47% of households pay no federal income taxes, having a dependency exemption which cannot be used does nothing to reward marriage and having children. That is, to have any impact, the exemption must in fact, not just in theory, reduce one's tax burden. If we want people to invest in the next generation of workers, we need to reward that investment in the same way we now reward capital investment, by giving it incentives, including in the tax code. But to do that, there must be a corresponding disincentive if the investment in future workers is not made. The 1948 Revenue Act did that. The low marginal rates and EITC credit have significantly weakened both the incentive to marry and have children and the disincentive not to do so.
If, on the other hand, you oppose Congress directing behavior through the tax code, then you must, to be consistent, oppose the favorable treatment of capital investments. I know very few conservatives who oppose that use of the tax code to direct behavior. If you favor that, then you ought to also favor the use of the tax code to favor family formation -- that is unless you don't believe family formation is as important to the health of the nation as is capital formation.
You' re right, you "don't know the stats". My short comment did not contain any "inaccuracies". Israeli arabs are having the children (aside from the Orthodox Jews). Most Israeli Jews are merely culturally Jewish, and as in the American Catholic case, being merely culturally Jewish or culturally Catholic in an advanced democracy means you have a child or two.
You make a claim to authority, "I know, I've been there and have friends there, etc." Claims to authority are lame (unless you are the pope or a saint)--that's why I didn't mention I have a doctorate in political science. Moreover, your anecdotal evidence is not borne out by the numbers. The "numbers" or stats stand on their own and don't need a claim to authority.
"Bibbit, the reality is that we are living in a global economy including labor markets. In the long run this will stimulate a level of trade that will create more jobs in the first world and help to ease the problem of family and demographic decline.
If the "big Boys," as you call them, can find competent labor abroad, good for them. That probably means that we will pay less for their products and stimulate Americans to be more competitive in the labor market. "
________________________
I'm sorry, maybe I'm just not bright enough to see it, but I don't see it. In the first place, the long run you speak of has already cost me a home due to the combination of time out of work and making much less money when working. This long run will probably cost me even more when it's finally over. In the second place I don’t see it stimulating trade when we are manufacturing less and less. And even it does stimulate manufacturing, those jobs still pay less than the jobs we've been losing, jobs like mine. It may be nice to get a shirt manufactured in China that sells cheap, or a dishwasher, or whatever else you may need, but you still can't buy a home made in China unless you live there. Those (home) prices, though they may have fallen, still aren't where they were when I was making the salary I am making now. I'm making 1990's wages, and many of my friends are in the same situation. Being able to buy clothes and appliances cheap is nice, but those saving don't add up to the cost of a house, certainly not where I live, which is one of the more expensive housing markets. In the end it seems to me that the leveling off you speak of means that wages in jobs like mine and many others level down, way down, to meet the price of overseas wages. I do not see how that helps a recovery in any way.
Think about it: If demographics are destiny, then the pill is the big bang.
One long-term trend that impacts our economy—and the mood of us who are unfortunately a bit too tied to material wealth—often goes unmentioned. After WWII, the US (plus Canada and a few other countries) had huge advantages, given many of our competitors had been reduced to rubble and many of their most productive people killed. These relative advantages have inevitably dissipated. We are now more or less back to an equilibrium level of investment and labor resources relative to competitors. Unfortunately, we are grown lazy. It will be some time before we learn to live and work the way current realities demand.
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.
All of these things not only indicate, but plainly show that thing's haven't been "picking back" up except in the fevered dreams of the media talking heads.
Other than the make believe "stimulus" bills, which have been little more than credit card funded "grants" which only act as taps on a brake, there has been no interruption in the continued economic malaise, so the term "Double dip recession" is either completely ignorant, or dishonest.