A war is slowly brewing. It pits parents against their children and children against their parents. Longstanding social and economic trends are creating tensions between the generations. These trends, which show no sign of abating, have largely escaped the attention of the public and are rarely discussed outside of specialist circles. Yet, once seen, they cannot be unseen. And they have a distinct air of inevitability about them.
For the past few decades, a debate has been bubbling in macroeconomic circles. It centers on the question of demographics and their implications for society. As most educated people are aware, Western populations are growing older. Since the Baby Boom generation, birth rates have gone down, leading to increases in the median age in the wealthy West. This is not a good thing. Aging populations pose significant long-term economic challenges, of which few outside of economic and financial circles are aware.
Until now, debates about the implications of falling birth rates have not become part of a broader conversation. In part, this is due to the fact that macroeconomics is a nerdy discipline. Macroeconomists often appear to be communicating with each other in mathematical code, and when they speak in public, they give an audience the impression that they cannot agree on anything. Further, the abstract economic processes being driven by demographic decline are just that: abstract. Economists are rarely good at showing the public what a world with more old people than young people might look like. We need to do better, because such a world will soon be upon us.
In The Great Demographic Reversal, economists Charles Goodhart and Manoj Pradhan consider the economic implications of a rapidly aging population and predict severe problems. The most profound impacts, they say, will be a sharp slowdown of long-term economic growth and the rise of inflation. The reason long-term economic growth will slow is fairly obvious: Fewer working-age people means less production means less economic growth. The dynamics behind the inflation are a little more complex but can be explained by a simple example.
Imagine a place populated by a hundred people—call it “Bread Island.” Each person requires a loaf of bread per day to survive. Income is evenly distributed to ensure an equitable distribution of bread. Initially, fifty of the people in the economy are of working age, while the other fifty are either children or retirees—economists call this group “dependents.” In this economy, the workers need to produce one hundred loaves of bread. With fifty workers, this means that two loaves will be required of each worker. But over time the population ages, and twenty-five of the workers become dependents. The situation becomes desperate. Each worker is required to produce not two but four loaves of bread. Ever more pressure falls on the remaining workers to produce the goods needed to supply the growing population of dependents.
The pressure on resources depicted in the scenario of Bread Island can be described as a labor shortage relative to demand. This pressure leads to inflation. Prices rise when essential goods are scarce, and that includes the “good” of labour. As Goodhart and Pradhan note, an aging population continues to generate demand for labor, while the relative decline in the working-age population makes meeting that demand increasingly difficult. As is the case on Bread Island, inflation will accelerate as too many old people require too few young people to produce too many goods relative to their ability to do so. With workers in short supply, the price of labor will rise. Companies then must pass the growing wage bill along to the consumer in the form of higher prices.
Higher prices for goods and services isn’t the only effect. If we’re considering only the production of goods, inflation makes the wages paid to workers less valuable for the purchasing of products, and this renders the workers poorer. This process can take a while to become acute. If we consider savings and asset markets, however, trouble arises more quickly.
People tend to accumulate savings as they age. Typically, people in their twenties spend what they earn, people in their working years—say, between thirty and sixty—save some of their income, while people in retirement (sixty and up) draw down their savings. In other words, older people have accumulated the most capital and own most of the savings.
Foolish is the man who keeps his pension in bank notes under his mattress. The wise man invests in stocks, bonds, property, and so on. Hence, because they have most of the savings, older people will tend to be the owners of most of society’s assets. There is nothing wrong with this. It is simply a fact of life. The problem comes when old people become too numerous relative to the number of assets on offer. In that case, the price of assets rises. And as assets become more expensive, only the old are able to afford them.
Whether today’s aging population explains the remarkable rise in the valuation of stock and bond markets is much debated. Personally, I do not think it completely explains the current valuations—which are as much about income inequality as they are about aging demographics—but this could change in the future. What is not controversial is that asset inflation caused by an aging population almost certainly happens in property markets, where housing prices have risen. This kind of inflation has immediate social consequences.
Property is an asset like no other. A family can live without stock ownership, but it cannot live without a roof over its head. In a society where the growing pool of old people buys up all the property—thereby bidding up its price—young people end up renting from old people. In some cases, adult children are stuck living with their parents. (It does not require an exceptional imagination to see that this trend is likely to create an infantilized society.) We may be only at the beginning of a trend that will render younger generations property-less. Even now, younger people are getting restless as a relatively modest rush of retirees with surplus savings into housing markets drives up prices. Those with high-paying jobs who live in expensive cities find themselves stuck in rental apartments well into their thirties.
Policy makers think of the problem as one of supply and demand. “Build more houses,” they say, “and the price will come down.” This ignores the speculative pressures operating throughout the market. Price increases have been driven not by too many people chasing too few houses, but rather by too many older people with large amounts of savings chasing too few investment assets with decent returns. This trend is sure to accelerate as financial firms such as BlackRock launch funds dedicated to buying single-family homes and turning them into rental properties.
In the United Kingdom, where I live, policy makers still talk about supply and demand. But the middle classes are savvier. They instead talk of the “Bank of Mum and Dad.” Because property prices are so high relative to the incomes of even well-off younger people, the only way to get into the property market is to convince your parents to invest in a second home under your name (thereby avoiding the capital gains taxes that apply to a second home). This approach relies on family solidarity to overcome intergenerational wealth inequality, and it only works for wealthier middle-class families. It is a stopgap solution to a problem that is likely to get much worse.
Some will point out that inflation favors debtors over creditors. As prices rise, the value of debt falls relative to rising wages. Given that the young will be mostly borrowers and the old mostly lenders, does this not mean that inflation will provide some respite for the young? Yes, but there will be other effects. For one, interest rates will rise to keep pace with inflation. Also, high rates of inflation render debt less attractive as an asset class, and this will drive investors into alternative markets, especially housing. Property, being “physical,” will look even more attractive in an inflationary setting than it does when prices are relatively stable.
We seem to be headed to a future in which overworked young people may see nominal wage increases. But asset markets will inflate more rapidly than their incomes, and the rise in the prices of goods will outstrip their wage gains. In other words, they must run in place with lower real incomes while they rent property from older people because they are priced out of the property market. A young person in this situation might do his best to uphold the Fifth Commandment, but in all likelihood he will nevertheless see his situation as grossly unfair. Indeed, the parents who actually care about their children and do not want them hanging around to entertain them into their old age will find this situation tragic and inequitable.
How can such a situation not generate resentment? The old are pitted against the young. Those who are older do not consciously choose to work against the interests of the rising generation. The economics of the situation makes that choice for them. Economists refer to this as a “zero-sum game.” The generations cannot come to a mutually beneficial arrangement and instead fight over the resources on offer. When the young see themselves as pitted against the old, resentment grows, which leads to cultural upheaval.
One could read the response to the COVID-19 pandemic in 2020 and 2021 as an early shot fired in the intergenerational war. It became clear early on that the disease was dangerous only to old people and those with severe underlying conditions. Yet rather than trying to focus on this group and shield it from the effects of the disease, we shut down our societies and insisted on everyone’s taking vaccines that had been put through only the most cursory trials.
There is absolutely no doubt that this arrangement was tailored to the convenience of the old, with most of the burdens imposed on the young. Retirees, who tend to lead rather slow lives anyway, did not see their day-to-day routine change all that much. They were able to live on their pension disbursements. By contrast, the young, who tend to be more active, were subject to strict rules about what they could and could not do. Lacking large savings or pension payouts, they endured the income and employment consequences of lockdown. And the vaccines appear to have much worse side effects for the young than for the old, apparently due to the relative strength of the immune response in the young.
It is not yet clear how the rich, aging societies of the West will digest the economic and social consequences of the great pandemic of 2020 and 2021. But one possible path leads to scandal, as the young realize that they have been given a bum deal. The resulting resentment and withdrawal of support for current arrangements will be amplified as the economic effects of an aging population, effects that harm the young, become readily apparent.
Imagine that in fifty years’ time we have reached the point where the rapidly aging population of the wealthy West is distorting economic life. If the young decide that they want to solve this problem, what are their options? Put brutally, the only way the young could gain more control over resources and assets is through forcible confiscation—or worse: termination of the elderly. This could inaugurate an era of elderly murder—presumably dressed in the garb of philanthropic euthanasia, a rhetoric that is already being developed in liberal political circles. Or it might lead to massive and underfunded care home facilities where elderly people are given the barest minimum of resources to survive.
The worst aspect of the coming intergenerational conflict rests in the fact that the “young” in the abstract will not be turning on the “old” in the abstract. Rather, it will be a family drama that disrupts our most intimate relations. Children may well turn on their parents, with “euthanasia” serving as a code for patricide and matricide. A society that cannot reproduce itself is disordered, and such a society creates powerful conflicts of interest between the generations, motivating children to turn on their parents in battles for economic resources. In such a world, the disorder is truly, unspeakably perverse.
What are the underlying causes of the graying of the West? Three stand out. The invention of contraception in the last century was the first blow to birth rates. It facilitated the postponement of childbearing in marriage or even the avoidance of children altogether. The next blow came with the explosion of divorce. Divorce affects fertility through what some sociologists refer to as “trial marriages,” marriages entered into for a short period—often in peak childbearing years—and that result in either one or no children. By the time the divorce is finalized and the “trial marriage” over, the woman’s peak child-bearing years have come and gone. A less direct consequence of divorce is a culture in which fewer people get married, and those who do marry tend to do so later. This trend also lowers fertility, which explains the explosion of IVF and similar treatments in recent years.
Divorce has a further, hidden impact on fertility by creating large numbers of single mothers. A 2016 study shows that girls from families where the parents are divorced had a much higher chance of getting pregnant in their teenage years than did their peers. And data show that single mothers have lower lifetime fertility rates than do women who get married.
The final blow to fertility is the explosion of dating apps and online pornography. The combination seems to be creating a “two tier” dating market in which a small number of men are behaving promiscuously with many women, while the rest rely on hardcore pornography as a substitute. In this “harems and peepholes” sexual culture, the women who are being used by the small number of men become jaded with relationships generally, while the men who are excluded from the dating market get addicted to the screen. The effect of these dynamics on fertility rates is not yet clear, but it seems likely to be profound. We know that young people today have less sex than previous generations did. Family formation has been falling from generation to generation. We may see a collapse in fertility rates as those currently in their teens and early to mid-twenties come of age. We can already see warning signs in the data. By age twenty-five, almost 11 percent of women born between 1980 and 1984 had given birth. That number drops to around 9 percent for those born between 1985 and 1989, and to around 8 percent in those born between 1990 and 1994.
The capitalist system, and the state apparatus that supports it, seems as strongly geared toward lowering fertility as do the cultural changes of recent decades. (In all likelihood, these factors are linked and mutually reinforcing.) State-funded welfare systems were designed in the post-war era for a low-unemployment economy. Policy makers assumed that there would be full employment, and thus welfare would be only for those who physically could not work or were between jobs. Yet these assumptions—made when unemployment was around 3 percent—were not borne out by history. Welfare didn’t preserve families; it facilitated their dissolution.
Much mythology has been built up around welfare systems constructed after World War II. But it is now evident that the system as currently set up, and the entire state apparatus behind it, has discouraged family formation and child-bearing. This is because the systems were designed with individual workers in mind, not families. In effect, the state steps into the role that the family played, as the source of economic security. Set up to alleviate the burdens of short-term unemployment, welfare become an enabler of family breakdown.
The capitalist system (if you will excuse the generalization) likewise discourages family formation and fertility. The optimal worker-consumer in our current system is an isolated individual with no or loose family ties. Such an individual is more available for work, whether in a demanding corporate career or in serial low-end service sector jobs. And all his income is spent on consumption. Marketers figured out decades ago that it was better to appeal to the narcissism and self-centeredness of consumers—the 1950s-style family-centered billboards are long gone.
Add to this the rise of the “care economy”—very much related to the aging population—which compounds existing problems. For those at the median, this kind of economy provides higher wages for women than for men. Studies show that women are averse to marrying men who earn less than they do. Thus, as our economies tilt more and more toward care jobs, wages for middle-income women will further outstrip wages for middle-income men, and the marriage gap will get worse.
Recent decades suggest that, though capitalism is very good at allocating financial capital, it is remarkably bad at renewing the social capital necessary to a functional market economy. Too many wish to ignore this problem, and some take refuge in fantasies about robots and life extension. Ultimately, capitalism cannot exist without functional and motivated people to man the machines. Nor can it exist in a society that is riven by intergenerational tensions and convulsed by the economic instabilities caused by a rapidly aging population. Either we figure out a way to make capitalism more congenial to family formation and high birth rates, or the system looks likely to shake itself to pieces.
Pessimism about the future of the rich West is one of the dirty little secrets among those who run our current system. They see that our societies are demographically unsustainable. And they have a solution: immigration. They imagine they can solve the problem of too few young people by importing young people from abroad. In their preferred scenario, bringing in new people will renew society, allowing elites to carry on while making no significant changes to the status quo.
But large-scale immigration turns out to be politically destabilizing. Immigration is currently one of the hottest and most contentious political topics. And the more immigration is relied on as an answer to demographic decline, the more political tensions will build. Nor will we reach some theoretical tipping point at which an immigrant-dominated population learns to accept ongoing mass immigration. Polling indicates that recent immigrants are more skeptical of immigration than are the native-born.
The turn to mass immigration as a solution for an aging population is fanciful and dangerous. Such a policy is sure to inflame tensions in our already tense societies. A hostage negotiator would not try to defuse a stand-off with a disaffected person by suggesting more reasons why he should be aggrieved. Yet policy makers have, for the past three decades, done exactly this with respect to immigration policy. And then they appear shocked when they experience the political volatility that results.
Something needs to change. We are marching off a demographic cliff. The effects are already making themselves felt. Policy makers and politicians need to recognize the problems of declining rates of marriage, rising rates of family break-up, and a dearth of children. And they need to address them with pro-marriage, pro-family, and pro-natalist policies. If we wish for our societies to thrive, we have a moral duty to defuse the looming intergenerational war.
Philip Pilkington is a macroeconomist and author of The Reformation in Economics.