The Saeculum Decoded
A Blog by Neil Howe
Jul 312012

This happens often.  After I write about generational drivers or changes in the social mood, readers will contact me and ask: OK, so much for the drivers and the theory, Neil—what do you think will actually happen?

So let me try to pre-empt those readers.  In my last post, I talked about how and why different generations lean toward or against the 2012 presidential candidates.  In this post, I’ll talk about the connection between generations and some of the more conventional ways pundits currently handicap the election.  I won’t exactly say who I think will win, but I will discuss some of the indicators I am following closely.

Futures Markets.  Everyone knows that Republicans believe in futures markets (and in weird options and derivatives based thereon, like CDFs) more than anyone else.  So here’s the bad news they have to swallow: Futures markets are now predicting Obama to beat Romney by roughly 16 percentage points.  (This is not the predicted voter margin in the election; it is the probability margin by which of most investors think Obama will sneak by in at least a razor-thin victory.)  That’s 57-40 percent on Intrade or 58-42 on Iowa Futures.  Obama has been leading in these markets since last fall.  Bless those markets.  Because of the “law of one price” (look this one up under “arbitrage”), all of these futures market prices have to match, worldwide.  Even brainy liberals (see Infotopia by Cass Sunstein, ) give very high praise to futures markets.

I agree that futures markets have a great track record and need to be taken seriously.  Why do they lean more pro-Obama than the weekly polls?  Maybe they sense that the sentiment for Romney is merely the way Americans vent their anger (always at the incumbent when talking to pollsters) before settling down and voting for the incumbent after all.  Or maybe they sense that the strong preference of the rising generation for a cool and pragmatic Gen Xer as POTUS really does represent where the nation is heading—and that most voters will wake to that fact come November 6.  Young Pompey once declared (to aging Sulla) that “more people worship the rising than the setting sun.”  Maybe the markets agree.

Then again, markets no less than polls can be greatly mistaken this far away from the election.  At the very least, I think that buying a Romney contract on Intrade at $4.00 and waiting to sell it once it hits $4.50 is an extremely safe trade—since sooner or later Romney is bound to have a surge carrying him at least this far.  Even John McCain in 2008 surged in early September to 0.47 in the futures markets.  It is also possible that the markets could gradually drift to a sizable Romney advantage between now and mid-October, and that after Romney wins everyone will congratulate the markets for being so prescient.

The Economy.  According to the Pew Research Center, Romney leads Obama in his handling of one big issue, the economy, no matter how you phrase the question.  And the economy—for example, the creation of jobs and the revival of wage growth—is now far more important to voters than any other issue (environment, gay marriage, immigration, foreign policy, what have you) by a very large margin.  This is a big advantage for Romney.  The unemployment rate is now 8.2 percent; looking at current indicators, it may not decline at all between now and November.  No President since FDR has won an election with an unemployment rate over 7.2 percent.  (That was the rate in November of 1984, when Reagan won re-election; and unlike Obama, Reagan brought the rate down from the date of his first election.)  See The New York TimesFiveThirtyEight column for a detailed update on the link between the economy and election outcomes.

The economy is as good an argument for Romney as the futures markets are for Obama.  Still, it has potential weaknesses.  Voters have yet to buy into Romney’s economic program—or even to understand it—in any big way.  Is Romney going to cut deficits faster than Obama?  Who knows?  However he runs deficits, Romney says he wants to do it more through tax cuts than spending increases.  Is John Q. Public OK with this?  Also, keep in mind the “no President since FDR” proviso.  If the public comes to equate George W. Bush with Hoover—and Obama with FDR—well then all bets are off.  FDR won as an incumbent in 1936 with an unemployment rate of 16.9% and in 1940 with a rate of 14.6%.

I agree that if the economy worsens in the next couple of months, or if we simply learn more about how bad the economy now is (at least one eminent forecasting group thinks we’re already in a recession, it just hasn’t been called yet), the news will certainly give a further boost to Romney.  But the link between each generation’s pocketbook and vote is seldom simple or direct.  The Silent Generation has done the best economically in recent years and will never bear much of the burden of large deficits, yet the Silent are the most anti-Obama.  For the Millennials, it’s the other way around.  Liberals often complain that red-zone Americans would switch parties if they only understood their own economic self-interest.  Conservatives say the same today about Americans under age 30.  The problem is, most people don’t respond to piecemeal economic incentives.  They either do, or do not, buy into a whole vision.

Likeability.  How much do you like the candidate?  How much would you like to have a beer with him?  These are the sorts of warm-and-fuzzy questions that many political analysts believe turn the tide in an election.  In most of the critical elections I can remember, GOP candidates have had the likeability advantage: Reagan over Carter; Bush Sr. over Dukakis; Bush Jr. over Kerry.  But this election, it’s tipping the other way: The Democratic candidate in 2012 is currently much more likeable than the GOP candidate.  It hardly matters what you ask—which candidate is more “friendly,” “connecting,” “honest,” “good,” “trying,” or “engaged,”—Obama comes out ahead, typically by double digits.  Likeability could be a huge plus in an era of great anxiety when many voters will want to go with their “gut.  It certainly worked for FDR.

Speaking of whom, there actually was a time when the least likeable candidate was, routinely, the Republican.  And that was the 1930s and 1940s.  Herbert Hoover and Alf Landon were less likable than FDR, and Tom Dewey was less likeable than just about anyone, including FDR and Harry Truman.  So Democrats, yes, can be likeable.  Are we reverting to the last Fourth Turning in party likeability?  Or is there a simpler explanation?  Perhaps Mitt Romney, whom nearly everyone who knows him would call him very “likeable,” has simply not yet had the chance to get his charm on in prime time.  We’ll see.

Intangibles & Wildcards.  I give most of the intangibles at this point to Romney.  He is the challenger, and it is an old maxim (though some disagree) that challengers do better late in the campaign.  A much larger share of his supporters say they are “enthusiastic” about this election—no doubt reflecting the higher relative energy of older voters this time around.  He also remains relatively unknown, which means that millions of Americans will be taking a close look at him for the first time in the ten weeks between the GOP convention and the election.  Since much of what is known about Romney thus far is negative (thanks to the attacks from his primary opponents and to the Obama campaign’s efforts to “predefine” him), it is likely that his strengths—for example, his intelligence, wit, and dedication to his family and the community—will get plenty of play.  Romney may surprise voters during the debates by coming across smarter and warmer than most voters are expecting.

Another possible plus for Romney is the “reverse coattails effect.”  Since the GOP are odds-on favorites to retain a majority in the House and gain a majority in the Senate, Romney could be pulled along by state and local candidates.  That assumes of course that most voters prefer to vote a straight ticket and have a single-party government.  It’s often said that Americans are happy with divided government, but according to one recent study a large (and possibly rising) majority say no, they really do want one party in charge.

Any intangibles for Obama?  Confidence, maybe.  Though Obama supporters are less enthusiastic, they are more likely to say they want to cast a positive vote for their candidate (as opposed to voting against the other guy) and are a lot more confident than Romney supporters that their candidate will win.  Obama must hope that confidence doesn’t morph into complacency and that his supporters are still ready to sprint.  Many pundits also say that Obama has an advantage in the electoral college by leading in the bigger states.  That could make a difference, but only if the popular vote is extremely close.

As for wildcards—meaning sudden big surprises—these usually break for the incumbent Commander in Chief, unless voters associate them with mistakes made by the incumbent.  An attack on Iran (by Israel and/or the United States, though the most likely date now mentioned in the media is October, after the election), would likely break favorably for Obama.  Seismic financial news (like a crash triggered by an impending breakup of the Euro) may not break as well, since it may persuade many voters that the world needs better global economic leadership.

Obama and Romney.  Let me conclude with a few thoughts on the two candidates themselves—and how they are, or are not, representative of their generation.

As readers of our books and this blog know, I consider Obama (born, 1961) to be a first-cohort member of Generation X (born 1961-81).  The Gen-X dates we’ve explained and defended at length elsewhere (too many books to hyperlink!).  But what about Obama?  Does he fit the basic Xer picture?  I’ve always thought so: Son of a new-age mom; child of a broken family; growing up disoriented amid incessant travel, change, and social experimentation; coming of age agoraphobic, feeling (as he puts it) “like an outsider”; and ultimately constructing his own persona (like Gatsby), a quality I see in many successful Xers.  What’s more, Obama knows he’s not a Boomer: In his books (Dreams from My Father, The Audacity of Hope), he repeatedly mentions how he feels he came along “after” the Boomers and wants to put an end to much that Boomers have done wrong (culture wars, ideological polarization, and so on).  Back in 2008, Obama often referred to this as a contrast between an earlier “Moses” generation and his own “Joshua” generation.

Obviously, opinions differ about who Obama “really” is.  I think he is at heart a canny survivor, a masterful tactician, a pragmatist who doesn’t let emotions cloud his judgment.  He knows when to play rope-a-dope (always let the GOP make the first budget move, then counter), or when to rouse his base by inveighing against Wall Street tycoons (even while hiring them to staff his Treasury), or when to ignore his own base and make a shrewd cost-benefit call (War on Terror by Predators, anyone?).  On the Boomer cusp, Obama is certainly capable of crusading oratory—which adds to his versatility.  Many of the most memorable crisis-era leaders in American history have been, like Obama, Nomad-Prophet hybrids: FDR, Abraham Lincoln, Sam Adams.  Yet clearly Obama would need a very different and far more effective second term—and another opportunity handed to him by history—to enter these ranks.

As for Mitt Romney (born 1947), no one doubts he is a Boomer.  He’s led a committed religious life; he’s always won accolades as a driven achiever; he’s made tons of money as a blue-chip yuppie; he believes in Values and Culture and Principles; and he tends to see America’s future in heavily moralistic terms (for example, in his recent book, No Apology: Believe in America, he juxtaposes his father’s “Greatest Generation” against his own “Worst Generation”—a dark figure of speech that Obama would never use).  Will his religion be a problem?  There is lots more talk about Mormonism as a Christian heresy among older than among younger Americans, that’s for certain.  Many Millennials are impressed by the strong community ethic of Romney’s LDS Church.

One mystery about Romney, though, is the impression he gives to many of his fellow Boomers that he never shared their passionate coming-of-age experience, never broke from Mom and Dad, and never drank from the same deep well of authenticity and inner fire.  We used to call this the “Dan Quayle problem.”  Boomers have never been drawn to someone who seems to paint by the numbers.  In the GOP primaries, when running against Gingrich and Santorum, Romney consistently did worse among Boomers than among other generations.

Yet in the general election, this weakness may rebound to his advantage.  In the GOP primary, Mitt Romney consistently did better with young voters than any of the other candidates (with the occasional exception of Ron Paul).  Millennials may actually like Romney’s cool and precise 7-point memo responses.  (Romney, far more than McCain, will be able to debate Obama this fall on his own Ivy-League level.)  Silent voters, similarly, may also prefer the buttoned-down Romney over the totally unplugged Boomer radical.

Yet at some point, for all of his advantages on paper, Romney will have to show some flame, some focus, and some real killer instinct.  He will have to get ahead, stay ahead, and systematically thwart his opponent’s comebacks.  In a national election, Romney has not yet demonstrated he has that endurance and resolve.  Obama has.

Jul 222012

Comedy Central and KFC are collaborating on a new web series called, “Growing Up and Getting Out.”  See here to read the Comedy Central press release.  And here to see the KFC promotion page.  The first episode came out a couple of days ago (see below).

KFC is rolling out yet another chicken product (“Original Recipe Bites”) and is trying to pitch this one to young adults without a lot of income—which is to say, Millennials who are moving back in with their parents.  Their schtick is a contest website which not only shows the CC web series but also invites Millennials to send in their own “going back to your parents” stories.  Viewers will vote on the entries, and CC producers will choose the winners.  The winning entries will be given $1,000 per month for a year, presumably enough money for these winners to move out of their parents’ homes.


What’s my reaction?  Well, I thought the first web episode is pretty funny—thanks almost entirely to the wonderful performance of David Koechner (born 1962: Anchorman, Talladega Nights).  “Get a leather jacket… pop that collar!”

Other aspects of this story are rather depressing.  In their press release, CC says their “free rent” contest is looking for “five quintessential members of the ‘Basement Generation.’”  Basement Generation?  Really?  Meanwhile, KFC’s slogan for the whole deal (“Growing Up and Getting Out”) misses the mark by implying that these Millennials aren’t grown up just because they’re living at home and that they want to “get out” as though they feel they’re in jail.  In fact, survey data show that a growing share of Millennials continue to live at home even after they get a job (to save money) and that few regard “getting out” as their number one priority.  Many older people actually complain about just the opposite—that these Millennial kids are turning down paying jobs while waiting for the “perfect” job precisely because they don’t mind living with mom and dad.

What’s worse, “growing up” in the KFC ads is likened to the “growing up” of chicken nuggets into the bigger “Original Recipe Bites.”  This is really schlocky.

Incidentally, I at first assumed that the opening statistic on the web episode (“85 percent of college grads are moving back home”) was just an exaggeration thrown in for laughs.  Then I learned that this figure had appeared in Time, CNN, the New York Post and elsewhere.  Well, the source of this number has since been debunked, which has discomfited the GOP group American Crossroads and others which have been trying to run with it.

The real numbers of course are bad enough.  According to Pew, 53 percent of youth age 18-24 say they are living with (or have temporarily lived with) their parents; and for youth age 25-29, the figure is 41 percent.  Pew also says that, under age 30, living at home is not correlated with educational attainment.  So I think we’re safe in saying that somewhere between 40 and 50 percent of Millennial college grads in last few years have at some point come back to live with their parents.  NPR, perhaps in an effort to spin the story the other way, interviewed a Pew researcher and left the impression that the real number is under 30 percent.  That figure is too low.

Final note.  Many restaurant chains, including Subway and Chipotle, are now collaborating with networks to produce on-line entertainment.  Chipotle’s video, featuring Willie Nelson covering a song by Coldplay, is definitely upmarket—if not very highbrow and politically correct.  It has won several awards.  A far cry from KFC, as is the brand.  I’ll close with it here:

Jul 202012

Are Millennials the Screwed Generation?” asks Joel Kotkin in Newsweek.  A professor of urban studies and an astute observer of social trends, Kotkin answers his own question in the affirmative.

He describes a gauntlet of economic challenges facing today’s under-30 Americans that are, I think, pretty well known to readers of this blog.  Some of the adverse trends he cites are mostly of recent (post-2008) origin: High unemployment, falling real median personal and household income, falling median household net worth, a sharply rising share who are living with their parents, a falling share who own their own homes, and (symptomatically) a sharp decline in birthrates by younger moms.

Yet other trends prejudicial to youth, most of which he mentions, have been underway for much longer: a declining national saving rate; rising fiscal deficits; college tuitions rising faster than family incomes; a widening spread between the relative wealth and income of older versus young households; and the steady rise in the share of public spending that goes to the entitled old (pensions, health care)—versus a declining share that goes to future-oriented investment (infrastructure, research, education).

Sounds depressing, I know.  But the reason I emphasize how long many of these trends have been at work is to cast a bit of doubt on whether Millennials are really as screwed as all that.  Keep in mind that back in the early 1980s, many economists and policymakers commented on the “declining fortunes” of late-wave Boomers who came of age during the energy crises and stagflation.  At the time, experts thought that demographic size was the problem: Numbers-driven competition among young workers was depressing Boomer incomes.

Then came the early 1990s, when economists discovered that Gen-Xers–often, at that time, called “Busters”–were even more screwed than Boomers.  (Since there were relatively few of these Busters, the demographic explanation was quietly dropped.)  From the very beginning, a “reality bites” fatalism about diminished economic possibilities emerged as a cornerstone this generation’s very self-image.  Over the next twenty years, as first-wave Gen-Xers moved into their 30s and then their 40s, evidence of “living-standard decline” in their age brackets (despite two-income households and working around the clock) has steadily mounted.

So is there still a good case for calling Millennials yet more “screwed” than these two older generations?  I suppose one could argue that Millennials are uniquely penalized because the adverse trends cited above—savings decline, young-old divide, fiscal bias, etc.—are more advanced and pronounced today than when Xers or Boomers were young.  One could also point to the extreme severity of the recent recession’s impact on youth—for example, the highest unemployment rate over the most months for young adults than during any downturn since the Great Depression.  We know from abundant economic research, starting with Glen Elder’s great book (Children of the Great Depression) that extended unemployment early in life has an impact on future income that lasts long into a person’s career.

On the other hand, of course, one would have to note the even harsher impact of the Great Recession on Gen-Xers and late-wave Boomers (households today age 30 to 60), as I pointed out in my earlier blog post.  And who hurts most during a great famine—the guy who thinks he might someday have a home and kids, or they guy who actually has a home and kids?

One would also have to weigh in the balance certain collective advantages Millennials have enjoyed early in life that their elders did not.  These include arriving as newborns in an era when mothers were more likely to say their newborn was “wanted” and growing up in an era when parents and families (if not always government) spent more time with them, more money on them, spurred them to achieve, and protected them more from harm.  Today, as a result, Millennials have become a generation of youth who commit less crime, cooperate more with each other, take fewer personal risks, and get along much better with their parents.  They are also on track to have the highest educational attainment ever (following college completion rates that actually backtracked for late-wave Boomers and early-wave Gen-Xers).

What’s more, most Millennials already know that history favors them.  Interesting factoid: When asked if being a young person is harder today than it was when your parents were kids, a growing majority of young people since the late 1990s say no, it’s actually easier being a kid today—after decades of polls (in the ‘70s, ‘80s, and early ‘90s) that leaned the other way, with Boomers and Xers bemoaning, year after year, how much harder being a kid is for them.

Kotkin asserts that this generation still believes in a very conventional definition of life success—most aspiring to a stable career and to owning a home in the suburbs.  I agree.  The data I’ve seen point in the same direction.  My favorite recent survey on this topic is the 2011 MetLife Study of the American Dream, which shows that Millennials are significantly more likely than Xers or Boomers to say that a college degree, acquiring wealth, owning a home, and (yes!) even marriage is “essential” to realizing the American Dream.  Most Millennials have a fairly concrete idea of what they want in life, together with benchmarks for getting there, and thus far most surveys (admittedly, not the depressing Rutgers survey cited by Kotkin) indicate that they remain confident that they will someday get there.

But to me, the most persuasive argument for not regarding Millennials as America’s most “screwed” generation is simply this: They are still young.  Even if the economy continues to deteriorate, a steady recovery that gets underway by the early 2020s will still save the future for most of them.  At roughly age 20 to 40, in this case, most Millennials will still be able to launch successful careers in an expanding economy.  Moreover, they will be able to buy homes at record-low prices and buy stock portfolios at record-low P/E ratios.  Which means, by the time they fully occupy midlife in the late 2040s (at roughly age 45 to 65), they may be doing far better at that time, relative to other generations, than people that age are doing today.

So who really is the most screwed generation?  When it comes to aggregate economic security and upward mobility, I think the most screwed generation already know who they are: Generation X.  Consider the scenario described above.  More chaos followed by a steady recovery starting a decade from now would come too late for most Xers—who by then (their first-wavers hitting their early 60s and thinking about retirement) may be looking at senior benefits programs whose generosity has just been cut way back in the name of fiscal austerity and renewed economic growth.  Any Xer protest is likely to be weak and ineffectual.  Most Boomers will be grandfathered, and most of the public’s attention will be focused on saving America’s future for the Millennials.

As Bill and I forecast twenty years ago back in 13th-Gen (I’ve changed the “13ers” here to “Gen-Xers”):

Reaching midlife, the Gen-Xers’ economic fears will be confirmed: They will become the only generation born this century (the first since the Gilded) to suffer a one-generation backstep in living standards.  Compared to their own parents at the same age, the Xers’ poverty rate will be higher, their rate of homeownership lower, their pension and healthcare benefits skimpier.  They will not match the Boomers’ inflation-adjusted levels of disposable income or wealth, at the same age.  Gen-Xers will also experience a much wider distribution of income and wealth than today’s older generations, with startling proportions either falling into destitution or shooting from rags to riches…  Finding their youthful dreams broken on the shoals of market-place reality, Xers will internalize their disappointment.  Around the year 2020, accumulated “hard knocks” will give midlife Xers much of the same gritty determination about life that they gave the midlife Lost during the Great Depression or the Gilded during Reconstruction.

Twenty years later, I think this prediction still stands.  As I read back over it, the only adjustment I would make is to say “early-wave Boomers” where we wrote “Boomers.”  But now let me move on to something else about Xers—the fact that the economy will recover, in part, precisely because Generation X chooses not to insist on its rightful public entitlement in old age.  We wrote about that in 13th-Gen, as well:

Nor will Gen-Xers ever effectively organize or vote in their own self-interest.  Instead, they will take pride in what they don’t receive, in their lifelong talent for getting by on their own, and in their ability to divert government resources to help the young.  Policy experts who today worry about the cost of Social Security and Medicare past the year 2025 seldom reflect on the political self-image of those who will then be entering their late sixties.  Entitled “senior citizens”?  Hardly.  Like Lost Generation elders in 1964–who voted more for Goldwater than any younger generation even after he promised to slash their retirement benefits—old Xers will feel less deserving of public attention than richer and smarter young people who lack their fatalism about life.

Even back in 1993 we had the concepts of generational archetypes firmly in mind.  As readers of The Fourth Turning know, Gen-Xers belong to same (Nomad) archetype as the Lost Generation.  The location in history of both generations, which manifests so many obvious parallels early in life, will continue (I think) to track each other moving forward.  Who is getting hurt worst in the current age of stagnation and deleveraging?  Late-wave Boomers (born after 1950) to some extent, mostly by have their home and retirement assets values hit hard; Generation X most of all; and early-wave Millennials to some extent, mostly by delayed career starts.  Who got hit worst in the Great Depression?  Late-wave Missionaries (born after 1870) to some extent, mainly by losing their savings in failed banks in the early 1930s; the Lost Generation most of all; and early-wave G.I.s to some extent, mostly by having their careers put on hold until VE- and VJ-Day.  Same archetypes, same patterns.

Koktin points out that today’s hard times are pushing most Millennials in the developed world politically toward the left—that is, toward a greater commitment to national collective action by government.  We’ve witnessed this trend in every election globally since 2008—including of course the massive 2-to-1 margin by U.S. Millennials for Obama in 2008.  (In the fall of 2012, U.S. Millennials will almost certainly give another large margin for Obama, but it will be smaller than in 2008 and whether it will be enough to win the election is uncertain; this is an issue I will handle in a future post.)

These political trends also have interesting parallels in the last saeculum.  The Lost Generation, as we document in Generations and The Fourth Turning, leaned Republican and libertarian all its life.  The Lost hated President Wilson for the fiasco of World War I; voted heavily for Harding, Coolidge, and Hoover (though it turned against Hoover with the Bonus Army); comprised the most visible and colorful opponents of FDR; and voted GOP after WWII all the way to Goldwater.  The party valence turned sharply the other way, however, for cohorts born after 1900—those who missed WWI, who belonged (like John Steinbeck) to entirely different artistic circles than the likes of Hemingway and Fitzgerald, and who were disposed to mobilize around a new trust in community after the Crash of ‘29.

Although no one collected age-graded polling back in the 1930s, some historians estimate that a very large majority—perhaps 85 percent—of voters under age 35 voted for FDR and the Democratic Party in 1936.  It is widely agreed that this is the first election in which a clear majority of young African-Americans voted for the Democratic Party rather than the party of Abraham Lincoln.  Consulting our own American Leadership Database, we are able to confirm that 28 out of 32 (88 percent) of G.I. senators, representatives, and governors sent to Congress in 1936 were Democrats.  By 1940, 75 percent of incoming G.I.s were still Democrats.

Read the numbers, Republicans, and weep.  That is, unless your new Mormon, whiz-kid, C-suite candidate is able to project a stronger, more hands-on image of strong national leadership than Barack Obama—which may not be setting the bar too high.  Anything is possible.

One last point.  To most Millennials, the whole whiney victimization card (look at me, I’m screwed!) seems like such a stale trope of Boomers and Gen-Xers, that they instinctively recoil from it.  And right on cue, a bona fide Millennial offers a cocky and defiant reply to Kotkin in the Washington Post (“Generation Unscrewed”)—though in a sardonic (“It’s the End of the World as We Know It (and I Feel Fine)”) tone that may leave all generations mystified.

Jul 032012

I just got back from eight days in Italy, on a trip that featured a wonderful stay in Tuscany hosted by my friend John Mauldin, the world-famous market analyst. While there, I got to enjoy leisurely discussions of economics and history with a handful of eminent financial experts and political notables whom John manages to entice to his villa (among them, David Tice, Rob Arnott, and Newt Gingrich.) I brought along my daughter Giorgia, whose astounding fluency in Italian saved us all on more than one occasion. We saw several Euro 2012 soccer matches in village squares with large outdoor TV screens. Italy’s victory against Germany brought screams of joy. Italy’s crushing defeat against Spain brought groans and tears. Italian flags were hanging everywhere—soccer being perhaps the sole exception to the age-old rule that Italians would rather quarrel with each other than come together as a nation.

It has been some 35 years since I was last in Italy. This is obviously a much more educated and affluent country than the one I recall. The main “autoroutes,” for example, are vastly superior to those I drove on in the 1970s—with wonderful bridges and tunnels and high-speeded entrances and exits. Intercity trains are very fast and efficient. Poverty is much less visible. Yet there are signs of recent economic stress. Driving across the Apennines, from Siena to Ravenna, we saw construction projects halted before completion and large stretches of highway closed due to lack of maintenance.

The mix of traffic on Italian autoroutes is peculiar: It’s all either trucks or high-end cars like BMWs and Volvos. Because gas is heavily taxed and because the trains are so fast and inexpensive, the middle class doesn’t use the autoroutes. The resulting speed differential between the slowest truck and fastest Beemer is dangerously large, leading to deadly accidents when two vehicles collide. We witnessed the aftermath of one deadly accident only moments after it occurred.

As everyone knows, Italy has a large public debt and, even worse, a poorly performing economy that has not managed much growth over the past decade—putting it, along with Spain and Portugal, as one of the sick “Club Med” economies that worry Euro Zone leaders and traders. PM Mario Monti is trying to whip Italy back into shape by some well-time fiscal austerity measures. Against that backdrop, let me relate an astounding scene we witnessed while touring Florence. All of a sudden, just a block or two from the Duomo, we hear a roar of automobiles and then witness a parade of about 90 Ferraris come into town. After cruising in circles around the narrow streets for a half hour, they all then parked row by row in the middle of the Piazza della Signora, right next to the Medicis’ Palazzio Vecchio and the copy of Michelangelo’s David. All the drivers, dressed in beautiful Italian racing uniforms, then just hung out for a while in the local cafes.

Now think about this for a moment: Each of these Ferraris (depending on the model) cost about $175,000 to $390,000, so that the total value of that parked machinery was somewhere in the range of $20 to $30 million. Wow. Does this look like a nation that has no wealth? Or rather like nation whose elite still has lots of fancy toys to play with while its public sector cannot make ends meet. Most of Italy’s fiscal woes are due to an unsustainable growth in total government spending (now over 50 percent of GDP, including an amazing 15 percent of GDP just in public pensions). Yet some of these woes are also due to undertaxing—or at least Italy’s chronic failure to enforce tax laws, especially on capital and business income. (For the heavily taxed middle class, which pays through VATs and payroll taxes, compliance is not a problem.) PM Monti has started a campaign to stigmatize tax evasion. He has also authorized dragnets that stop drivers in fancy cars (like Ferraris) and check their records to find out if they are hiding income. Many of the southern European economies suffer from chronic underpayment of taxes. (Some of you may recall the recent scandal in Greece over its tax on swimming pools, which almost no one pays—even after a satellite image confirmed tens of thousands of pools within the Athens area alone!)

Is it quixotic ever to expect the Italian elite to pay their fair share? In a culture which historically winks (both on the right and the left) at the dandy or anarchist who cleverly manages to defy authority? We will see. Super Mario is trying his best to reconstruct this cultural heritage. Some Italians vigorously support him. Some despise him as the technocratic errand-boy sent by Angela Merkel to make Italy sober up, dry out, and do Germany’s bidding. (Good thing we beat them in soccer!) Still others support Beppe Grillo, now number one in some polls, the comedian-turned-politician who denounces all current parties in favor of something he calls “hyper democracy,” a regime of total accountability and disgust at corruption. Grillo’s Five-Star Movement has some striking parallels in Germany’s Pirate Party. Both, interestingly, are disproportionately popular among young Gen-X voters. In future posts, I hope to say more about this multi-national movement.

One thing is certain: The image of Ferrari drivers being required to stop at Italian roadblocks and answering awkward questions about their income is an apt image of the 4T coming to Europe. In the United States, we do not have the same problem with tax compliance (at least not to the same degree). But if we did, where would we place our roadblocks? Maybe on drivers of Land Rovers. Or on amazon purchasers or Bugaboo baby strollers. I’m just guessing here.

One last note. In the Tuscan countryside, one notices virtually no new construction. Occasionally, yes, one sees an old building being retro-fitted with new interiors and amenities. But taking new pristine woods or fields and cutting trees or bulldozing roads to build a new home? Nope. It just doesn’t happen. The reason: Iron-clad regulations against any new development. Now on the one hand, you can marvel at this regulatory regime as a guarantee of a verdant and pristine countryside for generations to come. Or you can reflect on how easy these regs are to implement in a low-fertility society whose working-age population (age 15 to 64) has just begun to enter negative growth, according to the UN official projections. This declining population trend is expected to accelerate in the decades to come. Unless Italy’s fertility rises again, Italy will lose roughly two-thirds of its current population by the year 2100. As western Europe discovered during late antiquity (from the fourth to eighth century), it’s easy to leave nature alone when your numbers are shrinking.

Jun 162012

There is a moment in Homer’s Odyssey when Odysseus—now reduced to only one ship and crew—is compelled to travel through a very narrow strait.  (According to tradition, this was the Strait of Messina between Sicily and Italy.)  Odysseus knows that he must avoid the deadly dangers lurking on both sides.  On one side is the he-monster Scylla, with six long necks and heads full of sharp teeth.  On the other side is the she-monster Charybdis, a gigantic whirlpool that can swallow the largest sailing ship.

In Homer’s account, Odysseus pretty much fails.  After Scylla plucks many of his best crewmen off the deck of his ship and eats them, Charybdis later swallows the rest of the crew and his entire ship.  Odysseus alone barely escapes with his life.

Now here is my question: As the U.S. economy negotiates its upcoming fiscal gauntlet, will America fare any better than the trickster from Ithaca?

Let me explain.  Most political, economic, and financial policy experts are today expressing growing alarm at the prospect of the “fiscal cliff” or “taxmageddon” that looms on January 1, 2013, less than two months after the November election.

In part, this timing is the accidental result of the expiration date chosen when the original “Bush tax cuts” were enacted in 2001 and 2003.  That date—January 1, 2011—was extended by two years in 2010 as part of the Obama stimulus package.  So the date is now January 1, 2013.  (We really should call it, in the spirit of bipartisan amity, the “Bush-Obama tax cuts.”)

Yet the date is also the deliberate result of the bipartisan deal both parties struck last August in order to avoid a political and constitutional crisis over the federal debt ceiling.  Like so many other drunkards and addicts, Congress and White House decided at that time (for approximately the 20th time over the last 40 years) that no, we can’t start cutting our deficit right now, but we will 15 months from now, on January 1, 2013.  And this time we really really mean it.

So what, exactly, did they really really mean?  On the revenue side, they meant the expiration of the 2-percent FICA tax cuts, an end to the indexing of the AMT (Alternative Minimum Tax), and several other minor tax hikes.  All this comes on top of the expiration of the Bush-Obama cuts.  On the outlay side, they meant a long list of spending cuts—most of all, an end to emergency Unemployment Insurance, large reductions in Medicare’s rate of reimbursements to doctors, and a large cross-the-board “sequestration” (percentage chop) of discretionary outlays (mostly for the military but also for infrastructure, colleges, police, and a thousand other things that are supposed to hurt).

Well, guess what, the 15 months are almost up, and the macroeconomic conditions for those big deficit cuts don’t look any better now than they did back then.  If Congress does nothing and lets all of the planned deficit cutting happen after January 1, CBO expects that in 2013 (actually, in the just last nine months of fiscal year 2013) total federal revenues will rise by 2.9 percent of GDP and outlays will fall by 0.9 percent.  That’s a massive one-year fiscal drag of 3.8 percent of GDP, over half a trillion dollars, which is easily enough, says the head of the CBO, Fed Chairman Ben Bernanke, and most other sentient economists, to throw our economy back into a recession in 2013 if we aren’t there already by then anyway.  Over the subsequent two years (2014-2015), current law dictates a further deficit shrinkage of 2.4 percent of GDP.

Here is the latest CBO projection, assuming we make no changes in current law and “go over the cliff”:


As you can see, the “cliff” takes us from a deficit of -7.6 to -1.5 of GDP in just three years.  By 2017, revenue would rise to the highest-ever share of peacetime GDP.  By 2020, discretionary spending would sink to near post-World War II lows.  Fiscal tightening would be extreme while (presumably) monetary policy would keep interest rates at near-zero.  It would be the complete opposite of the early Reagan years.  Though the CBO economists do say that this scenario will throw us into a recession in the first half of 2013, they hate to be bad news bears and promise that we will pull out of it in the last two quarters.  Obviously, the recession could be much worse.

This is Scylla.  Bottom line: If are not yet in recession by late 2012, the upcoming fiscal cliff—by suddenly removing hundreds of billions from aggregate demand—will throw us into a recession.

Now maybe you say, damn the torpedoes, let’s reduce the deficit even at the cost of a recession.  Great spirit.  I sympathize and admire your gusto.  But before you commit yourself, go back to your Macro 101 (that dog-eared chapter on Keynes) where you learned that, in a severe recession, falling GDP can itself increase the deficit as fast as your fiscal cuts reduce it.  You end up with lower production, lower incomes, higher unemployment, more poverty—and government borrowing nearly as big as it would have been without your austerity policies.

Want me to be dramatic?  Consider that cutting aggregate demand by 6 percentage points of GDP over three years is tantamount to raising oil prices to roughly $350 per barrel.  Now, for extra excitement, imagine that a slowdown in China or a meltdown of the Eurozone has already put us in a serious new recession.  Or maybe Bibi says time’s up to Mahmoud and hits Iran—and global oil prices really do hit $350.  In addition to everything else.

OK, by now you may be thinking, Scylla sounds really awful.  Let’s do anything to avoid that bad boy.  Let’s just pull the rudder way to the other side.  If so, you’ve got plenty of company: Most of the American public, who don’t want to pay higher taxes next year, and a whole slew of industries who pay for K-Street lobbyist, from major defense contractors and American Medical Association to professors and builders and growers and truckers.  They’re all pointing to the people who will have to be fired if the fiscal cuts go through, many of whom won’t be able to get another job soon.

In short, there are plenty of plausible reasons why Democrats and Republicans in Washington may overcome their partisan gridlock and agree to “undo” the fiscal cliff—and defer budget balancing to another day.  So let’s assume that’s what happens: We extend the Bush-Obama tax cuts, we put off the SMI physician-rate cuts, we cancel the defense cuts, etc., etc.   So what happens then?

Well, thanks to CBO’s latest annual edition of its Long-Term Budget Outlook (2012), issued just a few days ago, we have a pretty good idea of what happens then.  The CBO runs two scenarios.  The first is its “extended baseline scenario,” which assumes that current law is not changed and that the fiscal cliff happens pretty much as scheduled.  (That’s the scenario I’ve been quoting above.)  The second is its “extended alternative fiscal scenario,” which assumes that most of the cliff is dismantled exactly as we have been discussing.

This alternative scenario is by no means a stimulus scenario.  It still projects some fiscal tightening: Taxes will still rise and outlays will still decline; and the deficit is still projected to shrink—by 1.4 percent of GDP in 2013 and by another 1.3 percent by 2015.  Even in this scenario (with the Bush-Obama tax cuts extended), federal revenue as a share of GDP in 2016 climbs back over its historical average for the past 40 years.

Yet look at what also happens under this scenario to net federal debt held by outside creditors (“net” means we don’t include one federal agency owing another federal agency—like the Social Security trust fund debt).  Because deficits remain large, this debt steadily grows.  By 2021, nine years from now, the net federal debt exceeds 90 percent, which economists Carmen Reinhart and Kenneth Rogoff (in their articles and their book This Time It’s Different) say marks a sort of danger zone in which GDP growth slows sharply and debt default is common.  Historically, the United States has exceeded 90 percent in only three years: 1945, 1946, and 1947.  By 2026, 14 years from now, the net federal debt under this scenario hits a level having no precedent, even in World War II, and is by now racing steeply upwards.

You are now looking at Charybdis, the whirlpool that sucks us under.  Like the whirlpool of Homer’s legend, it kills us after we escape Scylla, but it kills us just the same.  Yet here’s what’s really scary.  Even this scenario may be contractionary enough to trigger (or worsen) a 2012-13 recession.  In which case—like Odysseus—we get may hit by both the hydra and the vortex.

There is no reason to be overly pessimistic about the outlook.  While the window of opportunity for the U.S. economy is lot narrower than it was a decade ago, it is by no means shut.  We do need to avoid bad luck: If the U.S. economy is hit by a big shock from abroad (major Euro-zone exit, crash in China, war in the Mideast) or experiences a sudden surge in interest rates (driven by inflation expectations or declining global confidence in the U.S. Treasury), then there may be no happy “middle” outcome no matter what we do.  And even if we avoid bad luck, our fiscal navigation will require shrewd timing and trusted leadership.  Clearly, much of next year’s “cliff” has to be removed to avoid Scylla—but at the same time, a graduated fiscal tightening in the out-years must be implemented that will get us around Charybdis.  Yet would today’s public trust a fiscal promise to tighten in the out-years?

Sure, it’s possible.  But frankly, I don’t think it’s probable.  Not with America’s current generational line-up, in which so many zero-sum Boomer ideologues remain in power, too few Gen-Xers have yet stepped up into positions of political leadership, and Millennial engagement in national politics remains episodic and unfocused.  But I’ll discuss the politics—as opposed to the economics—of  the fiscal cliff in another post.

Let me just return to just one central question that may lurk in the minds of many readers: How did we get into this mess?  Why is the fiscal arithmetic so unforgiving now, when it didn’t used to be this way?  I can point to two main reasons, both of which have major generational implications.

Reason number one.  Our economy has entered an extended era of painful deleveraging—a long bust, if you will, following a long boom–something America has not really experienced on anywhere near this scale since the 1930s.  Such eras are characterized by sagging employment, production, equity prices, and confidence; by deflationary pressure; and by large declines in tax revenue at just the time when government is called upon the spend more.  Very large deficits are the result.  The G.I. and Silent Generations mostly cashed out their homes and financial assets before the bust hit—and probably don’t have to worry much about benefit cuts.  Boomers and Gen-Xers, on the other hand, have been hit by far the hardest by the recent crash and recession (see recent blog post)—and probably should worry (or simply expect) that impending budget austerity will raise their tax and cut their benefits as well.  As for Millennials and Homelanders, we may be setting them up, eventually, to buy into an economy with low valuations and enjoy growing prosperity thereafter.

Reason number two.  Benefits to Americans age 65+ keep rising as a share of GDP–thanks to the insane design of public health-care programs; to the elevated benefit levels we now think seniors deserve; plus, looking forward, to the daunting demographics of the Boom Generation.  Eventually, this means that senior spending crowds everything out of the budget.  Consider this: Back in fiscal year 1962, total federal health spending plus Social Security amounted to 2.8 percent of GDP; by 1972, 4.4 percent; by 1982, 6.8 percent.  Now look at the tables I’ve presented above.  In 2012, the number is 10.4 percent.  By 2022, according to the scenario in which Medicare reimbursement is not cut–I don’t think these cuts will ever happen—the number will be 12.6.

Now contemplate these numbers for a second.  (Yes, I know, some federal health-care spending doesn’t go to seniors, but then again we’re not counting lots of benefits, like SSI and nutrition and federal pensions, that do; let’s accept this as a rough proxy.)  So here we are—going from 2.8 percent of GDP in 1962 to 12.6 percent in 2022.  Let’s also keep in mind that federal revenues have averaged 18.0 percent of GDP over the past 40 years.  And let’s say that, at a minimum over the last 40 years, 1.5 percent of GDP needs to be allocated to the payment of interest.  Conclusion?  Back in 1962, the federal government could spend 13.7 percent of GDP on things other than transfer payments to seniors and creditors—and still not exceed a typical year’s revenues.  By 2022, the feds will only be able to spend 3.9 percent of GDP on things other than transfer payments to seniors and creditors—and still not exceed a typical year’s revenues.

These tawdry numbers may clarify a lot.

For example, you might have wondered how, back in the 1960s, America’s federal government was able to pay for massive infrastructure investments (dams, bridges, harbors, parks, interstates, subsidies to colleges), plus the “Great Society” (including LBJ’s “war on poverty”), plus a stupendous Apollo project to put a man on the moon (using absurdly primitive IT)—yet also pay for a gargantuan defense establishment (did I mention the building of ICBMs, MRVs, and millions of G.I.s fighting in Vietnam?), which was roughly twice the size of today’s military as a share of GDP.  And we did it without running a deficit!

Today, by contrast, the federal government invests little, builds less, and repairs only when it has no other option.  It charges user fees where it can, has frozen the size of the civil service, and vigorously shuns any of the ambitious agendas we once embraced–such as employing the poor, educating the young, or sending humankind to new planets.  (Today, indeed, NASA is an endangered agency.)  As for defense, our policy makers are budgeting for the age of cruise-missile and predator diplomacy.  In 2012, the military spends (at 4.6 percent of GDP) less than half of what it spent in the mid-1960s—and by 2015 the OMB expects it to spend (3.1 percent of GDP) only a third.

Yet even so, the federal government is today projected to run large deficits as far as the eye can see.

OK, this post is too long already.  Time to close down.  Two posts to come I promise: One on the generational politics of the fiscal cliff; and the other on different ways of looking at the federal budget.

Jun 122012

Every three years (or so), the Fed’s Survey of Consumer Finances releases a report on “Changes in U.S. Family Finances.”  It’s a goldmine of information on how families are doing financially—specifically, how their assets and liabilities and net worths are changing by various demographic categories.

Yesterday, the Fed released a new report for 2010, its first since 2007.

I anticipated that the news was unlikely to be good, given the carnage done to family financial assets and home prices during the recent Great Recession.  I suspected net worth would be down overall, and down the steepest for younger families.  I had already seen preliminary Fed estimates of 2009 data.  And I had already ruminated over the depressing Census 2010 report on income and poverty.

But I have to admit, I wasn’t prepared for results as bad as these.  Here’s the bottom line:

Net worth basically means the total assets–real and financial, including home–minus the total liabilities of every U.S. “family.”  (Though the Fed uses the word “family,” it really means households; a “family” can consist of only one person.)  In 2007, the median for all families was $126,000; in 2010, it was $77,300.  That’s a fall of 39 percent.

What happened?  The value of homes and financial assets (often in 401(k) retirement plans) crashed—and though the Dow has partially recovered, the prices of homes haven’t.  The middle 60 percent of the income distribution was hit hardest, percentagewise, for just this reason: Most of the lowest 20 percent don’t own homes, and for most of the highest 20 percent homes constitute a smaller share of their net worth.  The hardest hit region was the West (median net worth down 55 percent) mostly, again, for the same reason—homes.

Another interesting angle: The share of families with credit card debt is down, while the share with college debt is up.  For the first time ever, education loans make up a larger share of a family’s average debt than car loans—which is suggestive of where Millennials and their families are, and are not, making their investments.

But what I want to draw real attention to is the differing trends by age.  Gen-Xers and late-wave Boomers between the ages of 35 and 54 (down by 54 and 40 percent) have been hit by far the hardest.  They bought late into the real-estate market, they borrowed most against the value of their homes, and they tended to buy in the newer, faster-growing,  and exurban regions where home prices crashed the most steeply after 2006.  They also (I suspect) tended to invest their assets aggressively, as most investment managers say young adults should.  Early-wave Boomers age 55-64 (down by 33 percent) have fared a bit better.  As for Millennials and late-wave Xers under age 35, their trend (down by 25 percent) doesn’t mean much since their net worth is still so small.

But now let’s look at families age 65 and over, a group dominated by the Silent Generation.  They have done much better (down by only 18 and 3 percent).  Most of the Silent traded down from their primary residence at or near the top of the housing boom.  Most sold or annuitized their financial assets at a much better moment in the history of the Dow.  Even if they didn’t, they are more likely than Boomers or Xers to be getting retirement checks from DB (defined-benefit) corporate or government plans that are unaffected by the market.  And even if they couldn’t or wouldn’t retire, they have been less likely to lose their jobs: 65+ Americans are the only age bracket whose employment-to-population ratio has risen continuously through the recent recession.

The new Fed study looks at income as well as net worth.  Its verdict is the same as that of the annual Census reports (cited earlier): The age 65-74 and 75+ age brackets are the only ones to experience rising real median incomes between 2007 and 2010.  Families in every younger age bracket experienced substantial declines.

OK, you might say: We’re only talking about the last three years.  Things go up and down.  Maybe this is just Brownian motion.

No, it’s not.  It’s all part of a much longer trend.  Let me now show the results going all the way back to the earliest Fed reports—that is, going back to 1983, and updating everything into inflation-adjusted 2010 dollars.

As you can see, the real median net worth of every age bracket under age 55 was better off back in the early Reagan years than it is today.  (Remarkably, the situation for age brackets under age 45 never improved much after 1983.)  Over age 65, things are much better today than at any time before 2004.  And in 2010, for the first time ever, the age 75+ bracket is actually the best off of any adult age bracket.  Back in the early 1960s, by most accounts, it was the worst off.

Now let me restate these results in a fashion that makes the generational point a bit clearer.  In the following table, I express the median net worth of each bracket as a percent of the median net worth of 35-to-44 year-olds in that year.  Take a look:

Here’s the take-away.  Back in the early 1980s, when the 35-to-55 age brackets were dominated by the Silent Generation, people that age were roughly on par with the household net worth of the elderly.  Interestingly, a 50-year-old family was 39 percent wealthier than a 75+ family.  The Silent, in short, were doing pretty well—as they continued to do relative to other generations as they grew older.  Today, a 50-year-old family is 54 percent poorer than a 75+ family.

Today’s headlines on the Fed report say the median net worth of all families has fallen to 1992 values.  Which is true, averaged across all families.  But it is also true that today’s young families are doing much worse than like-aged families in 1992—and that today’s senior families are doing much better.

All of this, by the way, was long-ago predicted.  Back in 1987, the eminent demographer Richard Easterlin wrote Birth and Fortune, a book in which he tried to explain why Americans born from the late-1920s to the early 1940s (the Silent Generation) had always done so well in the economy relative to the generations that came before and after them.  Easterlin noted that one of the most remarkable features of the 1950s and early 1960s was how the typical young man at 30 could earn more than the average wage for all working men—and could certainly live better than most “retired” elders of that era.  He also noted that since the late 1970s, the economic conditions facing young late-wave Boomers had become much tougher.  Easterlin called the Silent the “Fortunate” or “Lucky” Generation, and attributed their high incomes to their relatively small numbers—pointing out that they were the product of the “birth dearth” of the Great Depression.

Bill Strauss and I always thought that the explanation lay somewhat deeper than just demography and was connected to their location in history and their archetype.  The Silent were socialized early in life to get ahead by following the rules in a fresh-built system that actually rewarded rule-followers.  This they did, and it worked.  A good Silent joke (popularized by Woody Allen) is that 80 percent of life is just showing up.  I know very few Gen-Xers who think this is true—or even funny.

In case you’re interested, here’s what Bill and I wrote about the economic future of the Silent back in our first book, Generations, published in 1991:

No American generation has ever entered old age better equipped than the Silent.  Today’s sixtyish men and women stand at the wealthier edge of America’s wealthiest-ever generation, poised to take full advantage of the generous G.I.-built old-age entitlement programs.  Armies of merchandisers and seniors-only condo salesmen will pounce on these new young-oldsters as they complete a stunning two-generation rags-to-riches transformation of American elderhood.  Where the 1950s-era elder Lost watched their offspring whiz past them in economic life, the 1990s-era elder Silent will tower over the living standards of their children.  In 1960, 35-year-olds typically lived in bigger houses and drove better cars than their 65-year-old parents.  In the year 2000, the opposite will be the case.

Now let me contrast this to what we predicted back then about the future of Gen-Xers:

Sometime around the year 2010, Xers will hit a hangover mood like that of the Lost in the early 1930s and the Liberty in the late 1760s: a feeling of personal exhaustion mixed with a new public seriousness.  The members of this forty- and fiftyish generation will fan out across an unusually wide distribution of personal outcomes, reminiscent of a night at the bingo table.  A few will be wildly successful, others totally ruined, and the largest number will have lost a little ground since the days of Boomer midlife.

Going back to these 21-year-old passages is so much fun!  Let’s not stop here.  Consider the following remarks, especially what we predicted back then about the intense protectiveness of Gen-X parents.  (Anyone catch the “Are You Mom Enough?Time Magazine cover last week—pitched to a whole generation of attachment parents?)  Here they are:

Gen-Xers will make near-perfect fifty-year-olds.  On the one hand, they will be nobody’s fools.  If you really need something done, and you don’t especially mind how it’s done, these will be the guys to hire.  On the other hand, they will be nice to be around.  More experienced than their elders in the stark reality of pleasure and pain, Xers will have that Twainlike twinkle in the eye, that Trumanesque capacity to distinguish between mistakes that matter and those that don’t.  In business, they will excel at cunning, flexibility, and deft timing–a far cry from the ponderous, principles-first Boomer style.  In sports, the combination of Xer coaches and Millennial players may well produce a new golden era of teamwork and civic adulation.  In the military, Xers will blossom into the kind of generals young Millennial soldiers would follow off a cliff.  Their leading politicians may strike old Boomers as affable, sensible, quick on their feet–and more inclined to make deals than to argue about abstractions.

In the early 21st century, Gen-Xers will make their most enduring mark on the national culture.  Their now-mature keenness of observation and their capacity to step outside themselves will kick off exciting innovations in literature and filmmaking.  They may become the best on-screen generation since the Lost.  As parents of growing children, they will by now be too affectionate, too physical–too eager to prevent teenagers from suffering the same overdose of reality they will recall from their own youth.  In so doing, Xers will tip the scales toward overprotection of children–much as the Liberty did in the 1780s, the Gilded in the 1860s and the Lost in the 1930s.  Midlife parents (mothers especially) may hear themselves criticized by Millennials for “momming” a pliant new generation of Adaptives.

Enough wild digression.  Let’s get back to the main point of this posting.  Just-released Fed data confirms what we have always known about likely economic trajectory of today’s generations: Through the Third Turning and into the initial stages of the Fourth, the Silent will prosper, Boomers will cope with declining expectations, and Gen-Xers will get hammered.

Thoughout history, we have argued, inequality both by class and by age reaches its apogee entering the Crisis era.  Indeed, part of the historical purpose of the Crisis is tear down dysfunctional institutions, vacate positions of entitlement and privilege, rectify the inequality, and create a tabula rasa on which the rising generation can build something new.

Mar 252012

Some generations come of age in inflationary eras, when midlife bond owners suffer but when young debtors can easily escape from the consequences of bad choices—since the real value of debt just seems to melt away under the impact of rising nominal wages. Boomers came of age in such an era. Other generations come of age in deflationary eras, when midlife bond owners are rewarded but when young debtors are relentlessly punished. Millennials are coming of age in such an era.

In this post, I’m going to publish one of our recent Social Intelligence articles, on “Why Young Adults Aren’t Buying Homes.” There’s a lot going into this mix, but pay special attention to the role debt is playing in slowing both this generation’s willingness to spend—and their ability to buy a home.

First-time home buying by young adults is way down, according to a new white paper by the New York Fed and an annual report by the Joint Center for Housing Studies of Harvard University. The Fed data show that only 9 percent of 29-to-34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. The Harvard study shows that the share of householders under age 35 owning their own home in 2010 was just 39.1 percent, the lowest since 1995.

This is bad news for a housing market that is still struggling to recover from the Great Recession. Even upper-end houses are affected, since without first-time buyers, lower-end owners will struggle to “buy up.” It is even worse news for Millennials and late-wave Gen Xers.  Homeownership rates for young adults dropped during the 1980s and reached post-war lows around 1990, but then made a gradual, if partial, recovery in the 1990s and early ‘00s thanks to declining interest rates.  Since the recession, however, homeownership rates for young adults have plunged back down to near-1990 lows despite record-low interest rates and very attractive prices for a new home. What’s going on?

The big-picture story, concludes a recent study by the Chicago Fed, is simple. First, young couples are not giving birth to children as young as they used to—and childbearing is strongly associated with home purchasing.  Yet this only partly explains the dearth of home buying because the homeownership rates of young couples with children have fallen sharply as well. The second long-term driver, argues the Chicago Fed study, is “heightened income risk”—which basically means the declining prospect of income growth among young households. That doesn’t sound good. And it isn’t.

Lately, much of this “heightened income risk” represents the greater likelihood of unemployment—which today is 14 percent for people age 25 and under versus 7 percent for people over age 25, according to the U.S. Bureau of Labor Statistics (BLS).  Also according to the BLS, less than 47 percent of 16-to-24-year-olds have had a job since 2007—the lowest rate since the BLS started keeping records in 1948. Even for young adults who do land jobs, their average wage is declining over the long term. According to recent research from the Economic Policy Institute, the average wage in 2011 for male college graduates ages 23-29 was $21.68 per hour—an 11 percent decline in inflation-adjusted dollars over the last 10 years. Wages for females in the same age and education group were down 8 percent during the same time period.  (For both men and women who went straight from high school into the workforce, the real declines according to EPI were similar.)

OK, now let’s imagine a 30ish couple for whom everything has gone right: They have college degrees, they’ve never been unemployed, and their wage growth has kept up with that of older Americans.  For them, there’s yet another hurdle: debt, specifically college loans.  According to another recent New York Fed study, total student loans outstanding are at an all-time high of $870 billion dollars—more than the total for credit cards ($693 billion) or auto loans ($730 billion). For someone in his or her 30s, the average college loan balance is now $28,500, and balances over $50,000 are common. Debt at this level stifles consumer spending and can render many young people ineligible for home mortgages, no matter how low the interest rate.

Note: the estimate of $870 billion in student loans made by the New York Fed a couple of weeks ago was superceded last Thursday by a report by the Consumer Financial Protection Bureau (a federal agency).  The CFPB’s new estimate is that total outstanding student loans passed $1 trillion late last year.

Young people who can’t buy a home are renting in larger numbers.  They are also moving in with their parents in larger numbers.  Increasingly, Boomer parents intervene to help their adult children buy their first home, either by cosigning the mortgage or by lending the money to them directly. Direct lending is not only good for Millennials, but also for Boomers parents who may enjoy getting a return of 4.0 percent on their assets rather than 0.4 percent on a low-risk CD. And as much as Boomers love their Millennial kids, they may also want their own space back—finally.

For anyone following the rising trend in multi-generational households (especially young adults living with their parents), take a look at this new Pew study.  Tabulating Census data, the study notes that whereas in 1980 only 11 percent of 25–35 year-olds were living with their parents or grandparents (a postwar low point), by 2011 that figure had doubled to 22 percent.  Millennials have now moved back to the way young adults lived before 1950 and the building of suburbia.  They’ve moved back to the “Frank Capra” household.

So what do most Americans think about the economic hardships facing today’s young adults?  While older generations usually resist any claim that young “have it harder” than they did, this time may be different. A recent Pew Research Center study found that a plurality of the public (41 percent) does indeed believe young adults are having the hardest time in today’s economy, and large majorities (70 to 80 percent) agree that it’s harder for today’s youth than it was for them to find a job, save for the future, pay for college, or buy a home.

Yet if older people may be worried about the economic future of today’s youth, Millennials themselves aren’t.  The Pew study also found that despite the difficult times they face, Millennials remain very optimistic about the future.  Nearly 90 percent of 18-to-34-year-olds polled in the study said that they either make enough money to lead the kind of life they want now, or expect to earn enough money in the future. Optimism is one of the most defining characteristics of Millennials, and in these tough times, it is arguably their best asset—that and their understanding and patient Boomer parents.

Mar 192012

This is called a preemptive posting.  If there’s ever a question I get asked a lot, it’s this: When did the Fourth Turning start?  So rather than wait for someone to ask again, let’s get right to it.

Readers of The Fourth Turning already know that 4Ts in history are dated and internally subdivided into stages by four critical events.  The first event, the catalyst, triggers or starts the 4T.  It is “a startling event (or sequence of events) that produces a sudden shift in mood.” The second, the regeneracy, marks the beginning of “a new counter-entropy that reunifies and re-energizes civic life.” The third, the climax, is “a crucial moment that confirms the death of the old order and triumph of the new.”  The fourth is the resolution, “a triumphant or tragic conclusion that separates winners from losers, resolves the big public questions, and establishes the new order.”

So to ask when the current 4T began is to ask, when was the catalyst?

Pending stunning new developments, I believe the catalyst occurred in 2008.  It’s a date that is looking better and better as time goes by.  The year 2008 marked the onset of the most serious U.S. economic crisis since the Great Depression.  It also marked the election of Barack Obama, which could yet turn out to be a pivotal realignment date in U.S. political history.

Let’s look at each of these separately.  First, the economy.  Yes, the U.S. recession technically started in December of 2007, but neither the public nor the market felt it until the spring and summer of the following year.  In fact, if I had to give the catalyst a month, I would say September of 2008.  The global Dow was in free fall.  Banks were failing.  Money markets froze shut.  Business owners held their breath.  Thankfully, America’s leaders succeeded in avoiding a depression by means of a massive liquidity infusion and fiscal stimulus policies whose multi-trillion-dollar magnitude has literally no precedent in history.  Today, for the time being, the U.S. economy seems safe again, though to be sure it has emerged weaker and more fragile—and certainly more leveraged—than it was before.

Yet at the time, behind closed doors, many of America’s top leaders believed that they were skirting the edge of a catastrophe that could have exceeded 1932 in its destructive potential.  And they were probably right.  Treasury Secretary Hank Paulson later recounted (in On the Brink) that in the last two weeks of September, 2008, they were only “days away” from “economic collapse, another Great Depression, and 25 percent unemployment.”  At one Thursday-evening meeting, Fed Chairman Ben Bernanke famously urged legislators to “break the glass” and pass a bailout package with the simple admonition: “If we don’t do this, we may not have an economy on Monday.”

And, to add even greater edge to this catalyst, we were at that time just six weeks away from the election of Barack Obama, who brought a new party to power and was America’s first African-American President.  Would he have won without the meltdown?  Who knows.  It would have been a much closer election.  Yet as time goes by, we may see something more important in the 2008 election—how it may mark the beginning of a new political realignment.  Admittedly, it’s still too early to say.  Obama’s approval ratings are still relatively low, and the GOP—though showing deep fissures and light turnouts in this year’s primaries—may still experience a resurgence.  This is a call that will be much easier to make a year or two from now.

People have asked me how confident I am about 2008.  All I can say is, the catalyst has to be sometime around 2008 given the generational dividing lines.  As a rule, a new turning starts a few years (typically 2 to 6) after each living generation (especially the new youth generation) enters a new phase of life.  2008 was 4 to 6 years after the oldest Millennials reached age 21 and graduated from college—and 3 years after the oldest Boomers (born in 1943) started to receive their first Social Security retirement checks.  In terms of phase of life, this is right on.

On the other hand, 2001 was too early—and Bill and I repeatedly explained this to many readers who once told us that 9/11 “must be” the catalyst.  We agreed that the mood shift was sudden and dramatic.  But we pointed out that it the living generations were simply too young: The oldest Millennials, for example, were barely college sophomores.  As time passed—and as the Greenspan bubble welled up under the U.S. economy and as public disillusionment set in over the U.S. invasion of Iraq—our initial doubt was justified.  9/11 will go down as one of the more famous crisis precursors in American history.  A crisis precursor is an event that foreshadows a crisis without being an integral part of it.  Other such precursors in American history include the Stamp Act Rebellion (1765), or Bleeding Kansas (1856), or perhaps the Red Scare (1919).  Incidentally, the media did several retrospectives on the 1919-20 bombings in the wake of 9/11—since they represented, prior to 9/11, the most destructive act of political terrorism by foreigners ever attempted on U.S. soil.

OK.  Now let’s move on to the next question: Where is the regeneracy?

I think it’s pretty obvious that the regeneracy has not yet started.  So how long do we need to wait for it?  And how will we know when it starts?  Those are good questions.  I recently went back over The Fourth Turning to recall how we dated the stages of the each of the historical 4Ts.  And I found that we were very explicit about dating the other three stages (catalyst, climax, and resolution) for each 4T.  But we were always a bit vague about dating the regeneracy, treating it more like an era than a date.  There is a reason for this.  We may like to imagine that there is a definable day and hour when America, faced by growing danger and adversity, explicitly decides to patch over its differences, band together, and build something new.  But maybe what really happens is that everyone feels so numb that they let somebody in charge just go ahead and do whatever he’s got to do.  I’m thinking of how America felt during the bleak years of FDR’s first term, or during Lincoln’s assumption of vast war powers after his repeated initial defeats on the battlefield.

The regeneracy cannot always be identified with a single news event.  But it does have to mark the beginning of a growth in centralized authority and decisive leadership at a time of great peril and urgency.  Typically, the catalyst itself doesn’t lead directly to a regeneracy.  There has to be a second or third blow, something that seems a lot more perilous than just the election of third-party candidate (Civil War catalyst) or a very bad month in the stock market (Great Power catalyst).

We are still due for such a moment.  We have not yet reached our regeneracy.  When it happens, I strongly suspect it will be in response to an adverse financial event.  It may also happen in response to a geopolitical event.  It may well happen over the next year or two.  Given the pattern of historical 4Ts, it is very likely happen before the end of the next presidential term (2016).  Which means we already know who will be President at that time: Either Obama or Romney.  (Or at least this is high probability: According to Intrade, it is now over a 96 percent bet, so if you disagree you can make 25-to-1 by betting against global future traders.)  It’s interesting that both men are temperamentally similar—cool, detatched, capable of gravitas–and that one could imagine either playing a Gray Champion role if history required it.  It’s also worth noting that Romney is the only GOP candidate who could steal a sizable share of the Millennial vote that would otherwise go to Obama.  (Romney has consistently done better in the GOP primaries with voters under 30; Santorum and Gingrich with voters over 50.)

Next question: When will the 4T climax take place?  To be honest, I have no idea.  On timing, let me toss out my guess based on the typical pattern of historical 4Ts: The climax may arrive around 2022-2025.

And when will the resolution occur and the entire 4T come to a close?  Again, there is no way to know.  If the 4T turns out to be of average length, I would say 2026-29.  At that time, an entire saeculum will draw to a close.  And the first turning of a new saeculum will commence.

Let me add one more thought.  Bill and I once explained the dynamic of seasonal turnings by applying a four-fold typology of social states invented by Talcott Parsons.  It seemed to work pretty well.  Parsons said that each state was defined by the demand and supply for social order, each of which could be high or low.  So here are how the four turnings may be defined:

Demand for Order        Supply of Order

1T     High                            High

2T     Low                             High

3T     Low                             Low

4T     High                            Low

The point here being that 4Ts are pretty chaotic.  During 4Ts, the future seems much less certain than in retrospect.  They are mostly defined not so much by how much institutions provide order, but by how much people want order.  Here’s where the Millennials will play a key role.

Nov 022010

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.

Jul 302010

This article in USA Today draws some parallels to the 1930′s and today’s economy. Interesting to think about: The Dow first closed above 10,000 back on March 29, 1999.  That’s back when Bill Clinton  was still President, George W. Bush had not yet announced his intention to run for the White House… and three months before Lance Armstrong won his **first** Tour de France.  Now Lance is too old to keep up with the peloton.  And the Dow is still around 10,000.

Provocative Quote:

If history were to repeat itself and stocks are in the 10th year of a 16-year secular bear market, as Rosenberg believes, the Dow, which closed Friday at 10,097.90, could fall to 5000.