Lifecourse Blog

In the U.S., we’re raising our top marginal rate up past 50%–but without any of the huge spending cuts.  In 2010, the typical top marginal tax rate on ordinary income in America was about 44% (35% federal, plus 2.8 in uncapped Medicare tax, plus an average of maybe 6% for state taxes).  By 2013, due to the expiration of the Bush tax cuts, a hike in the Medicare tax (thanks to Obama’s health-care reform), and a phase-out of itemized deductions, this top rate will rise by about 7 percentage points—to just around 50%.  The top rate in New York City and California will be well over 50%.

A 50%+ top marginal tax rate is today high even by European standards.  So you might be wondering… if marginal rates on ordinary income are approaching (or even exceeding) Europe’s, why has Europe always been able to extract a much greater share of GDP out of its economy in the form of government revenues?  The answer is that Europe’s *inframarginal* rates have always been much higher—meaning that Europe taxes its middle and lower-middle classes much more heavily than we do.  The bulk of their welfare state, after all, is paid for by one-rate-fits-all value-added taxes and payroll taxes.  The U.S. federal income tax code, by contrast, leaves the middle class pretty much untouched, while ramping up steeply at higher incomes.

Europe is not cutting its high personal tax rates and in the UK David Cameron is even boosting them.  On the other hand, both Europe and the UK continue to cut their tax rates on *capital* income, so that over the last decade the U.S. has come to be regarded as a punitive outlier in its treatment of capital income.  (Case in point, Cameron’s proposed hike in the capital gains tax rate is the one hike that is not likely to be enacted.)  In this new “age of austerity,” Europe is following the brutal law of “efficient taxation,” to use the economists’ lingo.  To wit, you raise tax rates on those who don’t have a choice about whether or where to earn their income… and you lower tax rates on those who do.  As the age of austerity worsens, European voters may insist that governments pin down and regulate the wealth and income of capital owners more rigorously so that they can tax capital at higher rates.  We’ll see.  I can easily envision this happening in America.  Even if the GOP wins big, I doubt that a more populist GOP party will make big cuts in capital gains or estate taxes a big priority.

As for the bond markets, it is true that the U.S. can borrow freely at very low interest rates and will probably continue to be able to do so unless or until the global economic situation becomes truly catastrophic.  The reason is that, due to America’s unique superpower status, bad news anywhere in the world (even here in the U.S.) causes people around the world to invest in U.S. bonds as a safe haven.  So even our own bad decisions cause only others to suffer.  Valéry Giscard d’Estaing (former Finance Minister of France), in a closely related context, once called this America’s “exorbitant privilege.”  Other countries do not have this privilege.  So the UK, Japan, France, and Germany all have to take bold measures against the specter of fiscal insolvency lest the same thing happens to them (sudden hikes in interest rates, and a bond market crash) that has happened now to several of the PIIGS countries.

This explains why—to bring the discussion back around to turnings—America may be the last place in the world to experience the “age of austerity,” that is, to experience the 4T mood in its full economic brutality.  To America, and to America alone, there seems to be no penalty at all to endless borrowing at zero interest rates… and if that is so, then why do any of us need to worry?  Of course, I may be mistaking here the opinions of America’s elites (e.g., Paul Krugman) for the opinions of ordinary citizens.  The midterms may be very revealing in this regard.  I’ve had several opportunities in the last few months to visit cities in the Midwest.  In each of them, I ask my hosts, what issues really concern local voters in the midterms?  And they say, the huge and growing federal deficit.  And then I say, yes, of course, sure, but what do they *really* worry about?  And then the hosts say, no, honestly, they are *really* worried about the country going bankrupt.  I found these conversations very ominous and very [4T].  Bankruptcy is all in the eye of the beholder.  If most people come to view an institution or government as insolvent, a landslide of distrust, hedging, aversion, falling confidence, and nonparticipation begins to feed on itself until, in the end, the institution or government does indeed become insolvent.  Most Americans believe that their government cannot continue to borrow for long without toppling off the brink.  That becomes an important social fact, regardless of the opinion of the Council of Economic Advisors.

Interesting news:

http://autos.yahoo.com/articles/autos_content_landing_pages/1523/generation-y-giving-cars-a-pass/

There’s plenty of hard statistical evidence that Millennial (born 1982-200?) interest in and ownership of cars is way down.  We review some of that in Millennials in the Workplace.

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More evidence of the onset of a W-shaped recession?  Or perhaps evidence that the recent recession never ended (the NBER has still not declared an end to the recession that started in December of 2007)?
NICE QUOTE:

For now, some affluent spenders are getting thrifty. Linda Stasiak, who sells high-end skin care products to retailers like Whole Foods, said that her biggest sales increase had been for a $15.95 tube wringer, made to get every last drop out of a bottle of lotion.  “During peak time, I don’t even really remember selling them,” Ms. Stasiak said.

Last week there was a NYT feature story about a 24-year-old Millennial (born 1982-200?), a recent grad of Colgate University with a stellar academic record, who has been living with his parents (and grandfather) over the last six months sending resumes and looking for a job.  He wants an executive track corporate position.  A couple of months ago, he was turned down by an insurance company for the job he applied for—but was offered a lesser job as an insurance adjustor for $40K.  The Millennial turned it down, saying that the company made clear it was at least ten levels below the job he wanted.  The author interlaced the story with statistics on the severity of the current “Great Recession” for young adults.

The story lit up a firestorm of reader responses: no less than 1,487 comments thus far, and much larger echoes on the blogosphere.  Many of the commenters lambasted the NYT for suggesting that this privileged young man’s experience (he lives in a nice suburban home and his dad is president of a small manufacturing company) is in any way representative of the employment hardships most youth are facing today.  Even more excoriated the young man for turning down the $40K offer—and the family for letting him live at home while turning down such offers.  The most vicious remarks seemed to come from older (Generation X (born 1961-1981) and Boomer (born 1943-1960)) readers, who often cited their own tough, low-salary beginnings.  Apparently, they disapprove of this generation’s tendency to hold fast to long-term plans and dreams.  Be realistic, they insist.  Eat humble pie.  It will be good for you (to repeat what older Chinese now tell the rising “Little Emperor” generation) to “taste bitterness.”

Wow.  Stern stuff.  What’s surprising about all this indignation is just how vague these critics are about just what is *wrong* about what is going on in this story:

• The Millennial himself is not complaining.  There is no whininess.  He disavows any legitimate comparison between his own situation and what the unemployed faced, say, during the Great Depression.  He’s looking forward to a happy ending–as are most unemployed Millennials (something we know from data from Pew and others).
• The parents are not complaining.  The son gets along very well with his  (Boomer) parents and (G.I.) grandpa and runs errands for them.  The marginal dollar cost of the son living at home seems trivial and doesn’t really bother anyone—though admittedly the older folks worry sometimes about the young man’s career.  This is also typical.  The survey data indicate that today’s Millennials and Boomers get along much better in the same home than young Boomers and their own parents did 35 or 40 years ago—when many young Boomers report that they left home in anger… or that their parents simply kicked them out.  Take this trend (closer inter-generational households) and extrapolate it out over the next couple decades and you could be looking at a win-win solution to our unaffordable Social Security, Medicare, and Medicaid liabilities, a solution predicated on greater mutual dependence within families.  Our number one fiscal nightmare solved.  And this is a *bad* thing?
• There is no evidence that this Millennial is selfish or anti-community.  In fact, he expected to enter officer training with the Marine Corps but was barred at the last moment due to childhood asthma.
• The guy is clearly keeping busy, volunteering for the fire department, working for neighbors.  By the end of the article, the reader learns that he is no longer actually living at home at all, but living with brother (a guy who did get the $75 opening corporate job) to sub for a roommate who just moved out.  He is planning to temp for local eateries while there.  Totally “temp” work—as opposed to quasi-permanent “careers” that the young person does not really want—is also a typical Millennial strategy.
• There is, finally, widespread agreement among labor market economists that taking a lower initial salary, while certainly a doable and often successful strategy for long-term success, is not the only strategy.  On average, it is likely to result in a lower salary trajectory for many years to come.  Millennials plan ahead and have long time horizons.  If an executive track is important to them tomorrow, they will plan accordingly today.

So let’s move to the bottom line here.

Should we feel sorry for this young man?  No, but then again he’s not asking for that.

Did he make an irrevocable career mistake by not accepting the $40K position?  Not as far as I can see.

Is it unfair that, over the course of the business cycle, youth who graduate into a severe recession are disadvantaged in their career paths relative to those who graduate into a boom?  Yes, it’s unfair, but no more so than a lot of the other vicissitudes of fortune that hit some people and not others.  Besides, the effects of these “cohort timing” differences, while long lasting, gradually fade over time.  As Glen Elder showed, the Great Depression’s impact on the young adults of the 1930s was largely forgotten by the time this cohort reached its peak lifetime earnings years in the late 1960s.  (By then, their salaries didn’t concern most of them nearly so much as their kids’ music!).

Would America be a better place if today’s young Millennials were eager to leave their parents at all cost, even if it meant taking a job they hate?  You’ll have to explain to me why.

To be sure, one might reasonably argue that not everyone, not even everyone with excellent college credentials, can hold out for a $75K salary.  True enough.  But not everyone wants to hold out for a high salary.  And many of those who do will ultimately change their mind.  Maybe even this young man.  So?

My question is: Why do the sober-minded, future-oriented career choices of today’s Millennials make so many Boomers and Xers jump up and down in agitated condemnation?

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Farrell pulls out all the stops in this histrionic, if not hysterical, overview of the America’s economic prospects.

Still, there’s no denying the mounting bad news: China has peaked, Europe’s in trouble, and the American economy has hit a “rough patch” at the very least.  The Dow is down seven straight days.  The fear about inflation is being eclipsed once again (as we always warned) by fears about deflation.  The long bond keeps climbing.  The gap between the TIPS (inflation-adjusted) rate and nominal rate keeps narrowing.  The Fed continues to pump reserves into the banking system (literally half of the money supply created in the U.S. over the last 234 years has been created in the last three years), but the velocity of money plummets because no one wants to lend… or borrow.  Initially, everyone said, well, we’re just too uncertain about America’s immediate political, regulatory, and economic future to want to lend.  Increasingly, potential lenders are beginning to wonder: If I just hoard my cash, will it be worth *more* a year from now than it is today?  Central bankers fear nothing more than the psychology of deflationary expectations.  They fear it even more than inflation.  It is the one monster against which they have no weapons.

Some (most notably Krugman) say we need a vast expansion in fiscal stimulus.  Keynes to the third power.  It is certainly too late for that for Europe.  (After all, they actually need to worry about a collapse in their exchange rate.)  But it may even be too late for that for the United States.  We’ve simply taken the “debt” cure too many times—its side effects now exceed its efficacy.  Farrell excerpts a good quote from the Economist: “Borrowing has been the answer to all economic troubles in the past 25 years. Now debt itself has become the problem.  A society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets” is over, “the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. … The battle between borrowers and creditors may be the defining struggle of the next generation.”

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Two somewhat different takes on the Millennial (born 1982-200?) leading edge in the workplace.  The first is in the NYT Magazine:

http://www.nytimes.com/2010/05/30/magazine/30fob-wwln-t.html?pagewanted=print

It is called “The Why-Worry Generation,” quotes us, and ultimately agrees with our positive take on how Millennials are handling the current downturn.

An Generation X (born 1961-1981) apparently disagrees and has written a rejoinder called “Children of the Bull”:

http://blogs.babble.com/strollerderby/2010/06/01/generation-y-or-children-of-the-bull/

Best quotes from this Xer:

First the dripping sarcasm: Nothing was too good for the Children of the Bull, and everyone from jewelers to five-star hotels clamored for the business of their parents, offering up treasures ranging from emerald earings for little Emma to luxury tropical vacation camps for tiny Caleb. But all that money bought other things too, goodies that should not have been purchased so thoughtlessly.

Then the self-revelation: While as a die-hard Gen X slacker myself, I fervently admire the Children of the Bull’s refusal to buckle down and serve The Man, any casual survey of economic data circa 2010 tells you that their burst of self-confidence is probably fueled not by their unique resilience but by the monetary energy received from one last desperate hit from the parental financial tit.

Finally, the bottom line: How the Children of the Bull will deal with making it on their own has yet to be determined.  But I’m betting they will handle it the same way as every generation before them:  they’ll give up on expecting employee paradise and get to work.

In our new book, needless to say, we disagree.  (Though I love this Xer’s style—so archetypal!)  We say that it’s not this young generation that will change, but the behavior of the older generations who manage them—at least in those companies that don’t go bankrupt.

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I was invited to go to this Peterson event in downtown DC, but was sick and so I missed it.  Not, I must confess, that I was eager to listen to twenty-five mostly-Silent (born 1925-1942) high muckety-mucks all the say the same thing…  at great length and at great detail… about the deficit.  Believe me when I say: I have heard it all before.  WP columnist David Broker, an honest good-government type (and also a Silent), gives a pretty good account here of what actually transpired.  And a pretty good assessment of this commission’s poor odds of success.  Alan Simpson put it right in his usual humorous style: “a suicide mission.”

I’m inclined to think that this vast fiscal impasse will become a very important component—if not, when the bubble bursts, the actual crux—of the emerging Fourth Turning (Crisis).

As an issue, it has all the prerequisites.  It is something everyone has long known was coming, but also something that everyone just preferred not to think about.  It is something which, if left unsolved, will surely result in disaster.  Yet it is also something which, in order to solve, requires huge changes in habits and behaviors, and in long-term winners and losers, throughout America.  And this is the key point: One could, in theory, imagine solutions that would involve completely different winners and losers, and realize completely different visions of America’s future, that is, in terms of its political economy.  At one extreme, for example, you solve it all by just cutting taxes—a lot.  Or at the other, by just cutting benefits—a lot.  And you have a polarized Prophets archetype running the country that has divided itself (I’m speaking now of its most engaged and passionate leaders) into two largely irreconcilable camps.  Each camp has its own vision.  And each camp already believes that its own corner solution is inadequate: In other words, many in the GOP want a balanced budget with *less* government spending than now; and many Democrats want a balanced budget with *more* government spending than now.

Even aside from the psychology of the Prophet, it’s perfectly understandable why one side or the other will never feel that the moment is quite right to settle on a long-term solution.  Each side wants to go to work when it’s on top.  The GOP feel, reasonably, that hey why not wait for a couple of years until we get a new commission in which *we* outnumber *them.*  Similarly, not many leading Democrats were eager to join a commission set up by George W. Bush.

The bickering and gaming continue as the new recession has hugely speeded up the disaster deadline—like turning on all the boilers in the Titanic’s engine room while the iceberg looms.  We’re in real trouble.

Let me further add that it’s not just happening to us, but to every other major economy in the developing world.  Just look at the per-GDP public debt in Japan, or the headlines about Greece (are Spain and Italy and the rest of the “Club Med” next?)  The trigger to the chain reaction is unlikely to start with us.  But, once the chain reaction starts, we may be a big part it.

If any of you are interested in the global fiscal situation, here is a just-released report (http://www.bis.org/publ/work300.pdf?noframes=1) by the Bank for International Settlements (“The future of public debt: prospects and implications”).  These are bankers giving advice to other bankers.  Their language is typically very dry and cautious.  But they use words like “daunting” and “frightening” in this report.

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Nice piece in the Christian Science Monitor.  Dovetails with our overall narrative about how the Millennial (born 1982-200?) are responding to economic adversity—and how that differs from, say, the way young Generation X (born 1961-1981) responded to their youth recessions (1980-83) and (1991-92).

A very nice piece by Morley Winograd and Mike Hais.  If you look at surveys over time, you will notice that Boomer (born 1943-1960) have *always* been relatively partial to the ideal of rural/wilderness living; and Generation X (born 1961-1981) to the ideal of creative and diverse urban living (now called new urbanism, mixed use, infill paradise, what have you).  Millennial (born 1982-200?) show a partiality to the small town and the suburb—yes, the suburb: take that all you apocalyptic Boomers who have always expressed such hatred for the brave new world your parents built!  Keep in mind, though, that for single Millennials this remains their ideal for their stable, married, familied future, not necessarily for the present.  The favorite destination for single Millennials remains big and busy (and now safer) cities.  NYC tops the list.

btw, when NCLB was legislated back in 2001, no provision was bitterly resisted by teachers unions and the majority of Democratic leaders as the rule that school children in persistently failing districts eventually be given the right to choose new schools.  Go back and look at the record.  This was a Bush monstrosity that would unravel the very fabric of our public school system, etc., etc.  Now this principle is accepted across the political spectrum, and even the unions are conceding.  Reason, imo, is the rapidly growing impact over the last ten years of Gen-X parents.  Districts everywhere in America are now wooing parents with slogans about how they want to “be their choice” of schools.   What a sea change!

IMO, this is a generational shot across the bow. Expect a lot more of this in the years to come.  Bill and I used to talk about up-card and down-cards in our theory. Up-cards are things we expected and have already come to pass. Down-cards are things we expect but have not yet happened to any significant extent. Young-adult dissatisfaction with unfair income transfers to Boomer (born 1943-1960) is a down card. It hasn’t happened yet but surely will happen. We didn’t see it with Generation X (born 1961-1981), because, well, they’re Xers. They all try to find their own individual solutions and survival strategies. But Millennial (born 1982-200?) are different. They will organize and be heard. And Boomers will not dare stand in their way.
Nice X/Y Quote: “Recall that there was once a reason for the unionization movement. History repeats itself….The pendulum swings the other way.”

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