Avocado Toast Is Under-appreciated
Boomers have been on the backs of us millennials ever since we entered the workforce. Millennials are called coddled, lazy, entitled, “The Boomerang Generation” and “The Peter Pan Generation.” Some of this is true. Still, it is most unfair, especially as many previous generations have exhibited similar same traits.
However, millennials were going to have it all. We came of age in the tech revolution and are the most educated generation the world has ever seen. The table was set for millennials to be the next “Greatest Generation” in a sense. Still, things went wrong somewhere for millennials. Millennials are struggling to hit their stride, saddled with student loans, unable to afford homes, and often working a side gig. Things were not always this problematic for young adults. After decades of policy failures and poor investments, millennials have a less bright future than their parents.
Who Is a Millennial?
Before going any further, let’s define a “millennial,” as quite a few definitions are floating around. Millennials’ most commonly accepted age range is 1981-1996, gen X is 1965-1980, and baby boomers 1946-1964.
Using this definition, we can see they entered the workforce just as the Global Financial Crisis and Great Recession hit. Trying to find work in this period was difficult for everyone. Still, younger, less experienced typically bear the brunt of unemployment. This recession was a lot harder for millennials than a typical recession.
Because millennials had just entered the workforce, they did not have substantial savings or homes that lost value in the financial crisis. However, millennials lost out on the subsequent recovery, as it became difficult to find work. During the recession, the overall unemployment rate went up to 10.6%, much higher among millennials. In fact, the unemployment rate was 15.8% for working-age millennials and did not fall back in line with the overall unemployment rate until mid-2018.
Unemployment and the Workforce
Keep in mind that the unemployment rate includes whether an individual has a job or not AND if they are also looking for one. If someone is working part-time, underemployed, or working a job outside of his field, they count as employed. After looking deeper into the unemployment numbers, it is clear that the recession completely crushed millennials. Worryingly, the labor force participation rate has decreased for young twenty-somethings since the Great Recession.
Millennials continue to have a difficult time finding their place in the workforce. Looking deeper into employment data reveals some startling information about the job market of the post-2008 world. Around 60% of the job losses from 2008-2010 were mid-income jobs, approximately $27,000 – $40,000 per year. There has been a great hallowing of the job market, where mid-level positions used to flourish.
It’s Not Robots Taking Jobs
There is a lot of fear around technology replacing low-skilled jobs. Still, it is often the case that technology replaces routine and task-oriented functions (more on why later). These are precisely the jobs and tasks that young workers need to start gaining valuable experience. Because technology replaced about 90% of these mid-level tasks, millennials accounted for two-thirds of the job loss and “jobless recovery.”
Older, more experienced workers have been pushed down the career ladder as firms replaced routine functions with technology. Firms are now looking for experienced workers that can better handle non-routine tasks. This trend will hamper millennials for decades to come as they will have to take marginal jobs. Millennials will need to perform contract and temp work years longer than any previous generation to climb the corporate ladder.
Boomers Are the Cause of Millennials’ Job Woes
The problems go back to before the boomers were born. The economy was going to cool off in the aftermath of WWII. There was a lot of investment going into the war effort and then rebuilding, and it was not sustainable. The United States went through a Golden Age after WWII as it supplied and reconstructed the rest of the world.
One could argue this is not “new growth.” You can pay workers to dig a hole and fill it back up, and it would technically be counted as growth, even if you are no better off. Not to mention the huge handouts via the GI Bill that set up a white, post-war generation for easy success. Another global impact that helped boomers was the fall of communism which led to a spur of free(er) trade.
Also, baby boomers benefited from a large workforce. A large workforce means more people out there earning and spending paychecks, having a multiplicative effect on growth. All of these impacts would come to an end, and it would be clear that a generation of Americans did not learn how to save and invest.
Boomers’ failure to understand the new economy post-WWII and post-Soviet Union led them to continuously double down on bad policies. Those policies skewed the economy instead of setting it up for long-term, inclusive success. Historically, capital investment has gone together with labor productivity. Investing in technology and equipment has been a complement to labor, not a substitute. Boomer policy decisions made it more lucrative to financially engineer wealth than invest in capital and labor that grows the economy as a whole.
Since the 1980s, boomers voted for politicians and policies (neither party has been kind to millennials) that have consistently benefited the present at the expense of the future. The supply-side policies cut taxes drastically in the 1980s, bringing the top tax rate from 70% to 39%. Crucially, these policies also reduced taxes in a way that favored fixed capital investment, but specifically financial capital, and not the type of capital that would have complemented productivity. While cutting taxes in the 1980s led to modest productivity gains, it also incentivized rampant financial engineering, all while blowing out the budget deficit.
Tax favorable financing and a relatively low-interest-rate environment led to a boom in financial engineering that started in the 1980s. Financial engineering occurs when a company or investor borrows at a low interest rate against assets to buy another firm or buy back shares of its own company. Interest payments are now tax-deductible, and asset sales receive a much lower capital gains rate. It was far more lucrative and easier for an executive to borrow money and gobble up firm shares or buy another company to increase shareholder value under these conditions. These policies fueled the wrong type of investment by buoying asset prices without real capital investment. Economic growth will stagnate without investment in fixed capital assets (factories, equipment, and technology) that increase labor productivity.
Dot-com Boom and Bust
Everything looked great in the 90s: The economy was booming, Al Gore invented the Internet, and the PC revolution was underway. But it was more of the same bad policies. The Federal Reserve Bank maintained interest rates at a low level for a historically prolonged period as taxes on income increased. Policymakers have increasingly relied on the Fed to grow the economy through low interest rates. Still, with favorable tax rates on capital gains than taxes on income and profits. To make things even better, the 1997 Congress cut the top capital gains tax rate to 20% versus a high corporate tax rate of 35%, allowing for more distorting “investment” shenanigans.
The Housing Boom
After the dot-com bubble, we got the Bush tax cuts and lower interest rates, adding about $1.5 trillion to the deficit over ten years. Low taxes and low-interest rates led to more of the same activity. Fixed capital investment began to pick up again but focused on housing. The problem is that housing is not a very productive part of the economy. After construction, a house produces very little economic output. Sorry, Karen, but Live, Laugh, Love does not add to gross domestic product. Investing in homes did nothing to increase worker productivity, keeping wages and living standards stagnant. Boomers began tapping into their home value to consume and raise their standard of living, which is ultimately unsustainable.
The Housing Bust
Then came the Global Financial Crisis and the Great Recession. The Fed cut interest rates to zero and launched Quantitative Easing. Quantitative Easing involves printing money to purchase bonds in the open market. The intent is to increase the money supply in hopes of stimulating lending. The government also introduced new policies to make it easier to refinance and buy homes. The Fed launched another program that helped bring down mortgage rates. Next began a splurge of home refinancing and share buybacks by corporations, so more of the same. The Fed and government policy encouraged lending for refinancing, taking capital away from small businesses, and propping up an unproductive sector for the economy.
After the Great Recession
The economy began to grow much more capital intensive after the recession, but not in the right way for workers this time. Low-interest rates and the newly imposed costs of the Affordable Care Act (Obamacare) made it much cheaper to use technology to replace workers. Historically, technology has always helped workers become more productive as it augmented tasks. Whenever we think of technology replacing workers, we think of robots replacing a barista or a cashier, but that has not been the case.
The purpose of technology investment post-2008 has been to automate many mid-level corporate jobs’ repetitive and monotonous tasks. Many of these repetitive tasks and functions are used to help train young workers. These entry-level areas are the ones that millennials would have been yearning for as they entered the workforce. So, we have seen a significant hollowing of the job market. Mid-level jobs have gone missing as more experienced workers have filled the gap where millennials would be.
As a generation, boomers forgot how to save and invest. Boomers consistently passed policies that propped up the fruits of a robust and inclusive economy: housing, healthcare, financial markets, and student loans. The capital shifted away from the things needed to increase labor productivity by propping these sectors up, leading to a jobless recovery and stagnant wage growth after the Great Recession.
Owning a Home Is Not What It Used To Be
Boomers absolutely love their houses, but why wouldn’t they? Homes have been the primary source of wealth accumulation for boomers. After the Great Depression (going back a bit, but hang in there), the government decided it wanted to subsidize the housing market by amortizing mortgages and insuring mortgages. Amortizing mortgages split the interest and principal into the payment, so homebuyers build their ownership over time. Fannie Mae was then created to buy up these mortgages from banks to have more money to lend out to homebuyers. To further sweeten the deal, mortgage interest became tax-deductible. The government-sponsored homeownership created a swell in the middle class of 16% in 1930 to 35% by 1980. Homeownership and pensions were the most significant drivers in the creation of middle-class America.
All Housing Is Subsidized
From there, boomers thought they could bring the low-income households into the middle class as well. Bi-partisan policies came into place through the 1990s and early 2000s, instituting and expanding credit for home purchases and reducing the necessary down payment to purchase a home. In 1989, only 1-in-230 buyers made a down payment of 3% or less, in 2003 1-in-7, and by 2006, 1-in-3. The government was essentially goading low-income Americans into homes they could not afford.
The pro-mortgage for everybody policy played a role in the financial crisis, but the Federal Reserve Bank did, too. The Fed has been trying to make up for the economy distorting policies that come from politicians. The Fed was hoping to overcome the lackluster Washington policies to stimulate business investment with the only tool it really has: interest rates. However, keeping interest rates so low for so long just led to more financial engineering, and the homeowners were in on it this time. Boomers were betting on home prices going up forever and facilitated an environment where home loans were available to marginal borrowers. These were created to increase homeownership and lift low-income Americans into the middle class. The idea of putting low-income Americans into homes that they could never afford seems almost cruel. So, of course, a financial crisis happened.
Bailouts Aren’t Just for Wall Street
Don’t worry; the boomers were sure to bail themselves out. Throughout two political regimes, trillions of dollars pumped into the economy, and the Troubled Asset Relief Program, the boomers managed to save Wall Street and the housing market. The government went out of its way to convert loans to fixed-rate mortgages to help keep people in homes that they never could afford, propping up the housing market. Eventually, the thirty-year fixed rate fell to below 4%, allowing many boomers to refinance and add some spending power back to the economy. Still, it would have been more efficient to incentivize businesses to hire.
Boomers bailed themselves out, and things got harder for millennials. Because younger workers typically do not have homes, they tend to be more mobile during recessions and move to find jobs, giving them a slight edge over older workers. Still, millennials were not so fortunate this time around. Most of the bailout/refinancing activity took place in areas already doing relatively well and had the best job markets.
Hard for Millennials To Get a House
Mortgage originators like stable and verifiable income when making a loan to an applicant. However, because many millennials are working contract jobs and side gigs, earning a harder-to-verify income, it is more difficult to get a loan. Politicians want to keep housing prices high by any means necessary, and that may mean that millennials will never be able to put down 20% for a 30-year fixed-rate mortgage. Rent has gone up significantly, too. Boomers paid about one-third of their income on rent; in contrast, millennials are spending about half. The same tactics that helped launch boomers into the middle class keep millennials out, creating generational inequality.
Taxing, Spending, and Borrowing
It used to be the case that the government would only deficit spend in times of emergency or war and that spending would be offset by tax increases later. Nowadays, Washington spends a casual $4.0 trillion a year and collects $3.3 trillion, transforming the government from a borrower in times of crisis to one that borrows from its future workers. Nowhere is it more evident than in entitlement spending on social security and medicare. Technically speaking, boomers inherited these structural deficits, but they made them a lot worse, not better. Boomers have upped the benefits and delayed the costs, further increasing generational inequality.
The real root of the problem is that Social Security and Medicare are not retirement or insurance. Also, the benefits paid are only very loosely based on what participants paid into the programs. In private insurance and retirement programs, money collected is invested to earn a return before the participant needs it. With Social Security and Medicare, the money raised is sent right back out to the elderly. So current workers support the elderly, and it is not the elderly collecting what they paid into the system.
Entitlements are unfair to millennials as there is no mechanism to prevent the elderly from collecting more than what they paid into the system. For couples born in 1950, Social Security and Medicare collect $1,053,000 after paying in $701,000, a deficit of $352,000. For couples born in 1965, benefits of $1,372,000 and paying taxes of $851,000, a deficit of $521,000. Social Security and Medicare deficits are getting worse as people are living longer and in poorer health.
A House as a Retirement Plan
Notably, 45% of baby boomers have no savings in retirement, implying that they will have to tap into home equity to cover living and medical expenses. It is also becoming more and more likely that boomers will be relying on their children to help out with these expenses, too. If millennials struggle to find good jobs, and homes and pay off student loans, how are they supposed to help the boomers out in retirement? Millennials have been robbed of any fiscal choice as boomers have written checks on the millennials’ economic future. Remember the above numbers the next time a boomer calls you entitled.
Unfortunately, this problem cannot be solved by “just raising taxes.” If we add up all the taxes that one is likely to pay in their lifetime and offset that against the benefits they are likely to receive under current laws, programs, tax policies, and life expectancies, we can do some generational accounting and policy analysis. If expected payouts are higher than the expected benefits, it is called a “fiscal gap.” For example, in 2001, the generation about to be born is expected to pay a net lifetime tax twice as much as before. That is a massive burden. To restore the balance between generations, the government would need to permanently increase revenue by 64% or cut spending by 40%. If we wait for millennials to hit 50, we would need a revenue increase of 72% or cuts to all expenditures by 46%.
Millennials Will Pick Up the Tab
Boomers have been horrendous about personal savings and managing the economy, passing an astronomical burden to the youth. Boomers often admit that they will have to raise taxes, but as more and more retire, millennials will pick up the tab. To make social security solvent, we would need to increase the payroll tax by 2%-3% and subject all income above the $133,000 limit to the payroll tax to get the program back into balance. A payroll tax of 4.5% could make the social security program solvent. The real problem with these solutions is that millennials would have to pay for almost all of them. So, raising taxes does nothing to address generational fairness and the fiscal gap created by boomers.
Some articles have cited that boomers will transfer anywhere from $30-$36 trillion in assets over the next thirty years. They are implying that this transfer (some going to Gen X) will balance out the inequality. It’s not going to happen. As stated earlier, boomers will live longer in poorer health, so much of their money will be spent on healthcare. Whatever wealth is leftover will not be passed on to millennials until they are approaching 60, well past when such an inheritance would help them pay off student loans, start a family, or purchase a house.
It Goes Beyond the Money
The fiscal gap has already begun to harm millennials and future generations. It is no secret that millennials are delaying marriage, buying a home, and starting families. The implications are that future generations may delay starting a family even longer or may not have one at all. It is already a severe issue in advanced economies like Germany and Japan, which face rapidly aging populations and massive social welfare obligations. Young workers in Japan suffer such bleak prospects that many cannot even fathom having a family. Without a concentrated effort to fix the fiscal gap, millennials and future generations will have no choice but to pay devastatingly higher taxes. So the next time a boomer calls you lazy or entitled, remind him that you are unwillingly supporting his life instead of yours. Ok, boomer.
The Theft of a Decade: How the Baby Boomers Stole the Millennials’ Economic Future by Joesph Sternberg
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian