David
P Goldman
FirstThings Number 193 May 2009
Three generations of economists immersed
themselves in study of the Great Depression, determined to prevent a recurrence
of the awful events of the 1930s. And as our current financial crisis began to
unfold in 2008, policymakers did everything that those economists prescribed.
Following John Maynard Keynes, President Bush and President Obama each offered
a fiscal stimulus. The Federal Reserve maintained confidence in the financial
system, increased the money supply, and lowered interest rates. The major
industrial nations worked together, rather than at cross purposes as they had
in the early 1930s.
In
other words, the government tried to do everything tight, but everything continues
to go wrong. We labored hard and traveled long to avoid a new depression, but
one seems to have found us, nonetheless.
So
is this something outside the lesson book of the Great Depression? Most
officials and economists argue that, until home prices stabilize, necrosis will
continue to spread through the assets of the financial system, and consumers
will continue to restrict spending. The sources of the present crisis reach
into the capillary system of the economy: the most basic decisions and requirements
of American households. All the apparatus of financial engineering is helpless
beside the simple issue of household decisions about shelter. We are in the
most democratic of economic crises, and it stems directly from the character of
our people.
Part
of the problem in seeing this may be that we are transfixed by the dense
technicalities of credit flow; the new varieties of toxic assets, and the
endless iterations of financial restructuring. Sometimes it helps to look at
the world with a kind of simplicity. Think of it this way: Credit markets
derive from the cycle of human life. Young people need to borrow capital to
start families and businesses; old people need to earn income on the capital
they have saved. We invest our retirement savings in the formation of new
households. All the armamentarium of modern capital markets boils down to
investing in a new generation so that they will provide for us when we are old.
To
understand the bleeding in the housing market, then, we need to examine the
population of prospective homebuyers whose millions of individual decisions
determine whether the economy will recover. Families with children are the
fulcrum of the housing market. Because single-parent families tend to be poor,
the buying power is concentrated in two-parent families with children.
Now, consider this fact: America's population
has risen from 200 million to 300 million since 1970, while the total number of
two-parent families with children is the same today as it was when Richard
Nixon took office, at 25 million. In 1973, the United States had 36 million
housing units with three or more bedrooms, not many more than the number of
two-parent families with children--which means that the supply of family homes
was roughly in line with the number of families. By 2005, the number of housing
units with three or more bedrooms had doubled to 72 million, though America had
the same number of two-parent families with children.
The number of two-parent families with children,
the kind of household that requires and can afford a large home, has remained
essentially stagnant since 1963, according to the Census Bureau. Between 1963 and
2005, to be sure, the total number of what the Census Bureau categorizes as
families grew from 47 million to 77 million. But most of the increase is due to
families without children, including what are sometimes rather strangely called
"one-person families."
In place of traditional two-parent families with
children, America has seen enormous growth in one-parent families and childless
families. The number of one-parent families with children has tripled.
Dependent children formed half the U.S. population in 1960, and they add up to
only 30 percent today. The dependent elderly doubled as a proportion of the
population, from 15 percent in 1960 to 30 percent today.
If capital markets derive from the cycle of
human life, what happens if the cycle goes wrong? Investors may be unreasonably
panicked about the future, and governments can allay this panic by guaranteeing
bank deposits, increasing incentives to invest, and so forth. But something
different is in play when investors are reasonably panicked. What if there
really is something wrong with our future-if the next generation fails to
appear in sufficient numbers? The answer is that we get poorer.
The declining demographics of the traditional
American family raise a dismal possibility: Perhaps the world is poorer now
because the present generation did not bother to rear a new generation. All
else is bookkeeping and ultimately trivial. This unwelcome and unprecedented
change underlies the present global economic crisis. We are grayer, and less
fecund, and as a result we are poorer, and will get poorer still--no matter
what economic policies we put in place.
We could put this another way: America's housing
market collapsed because conservatives lost the culture wars even back while
they were prevailing in electoral politics. During the past half century
America has changed from a nation in which most households had two parents with
young children. We are now a mŽlange of alternative arrangements in which the
nuclear family is merely a niche phenomenon. By 2025, single-person households
may outnumber families with children.
The collapse of home prices and the knock-on
effects on the banking system stem from the shrinking count of families that
require houses. It is no accident that the housing market-the economic sector
most sensitive to demographics-was the epicenter of the economic crisis. In
fact, demographers have been predicting a housing crash for years due to the
demographics of diminishing demand. Wall Street and Washington merely succeeded
in prolonging the housing bubble for a few additional years. The adverse
demographics arising from cultural decay, though, portend far graver
consequences for the funding of health and retirement systems.
Conservatives have indulged in
self-congratulation over the quarter-century run of growth that began in 1984
with the Reagan administration's tax reforms. A prosperity that fails to rear a
new generation in sufficient number is hollow, as we have learned to our
detriment during the past year. Compared to Japan and most European countries,
which face demographic catastrophe, America's position seems relatively strong,
but that strength is only postponing the reckoning by keeping the world's
capital flowing into the U.S. mortgage market right up until the crash at the
end of 2007.
As long as conservative leaders delivered
economic growth, family issues were relegated to Sunday rhetoric. Of course,
conservative thinkers never actually proposed to measure the movement's success
solely in units of gross domestic product, or square feet per home, or cubic
displacement of the average automobile engine. But delivering consumer goods
was what conservatives seemed to do well, and they rode the momentum of the
Reagan boom.
Until now. Our children are our wealth. Too few
of them are seated around America's common table, and it is their absence that
makes us poor. Not only the absolute count of children, to be sure, but also
the shrinking proportion of children raised with the moral material advantages
of two-parent families diminishes our prospects. The capital markets have reduced
the value of homeowners' equity by $8 trillion and of stocks by $7 trillion.
Households with a provider aged 45 to 54 have lost half their net worth between
2004 and 2009, according to Dean Baker of the Center for Economic and Policy
Research. There are ways to ameliorate the financial crisis, but none of them
will replace the lives that should have been part of America and now are
missed.
This suggests that nothing economic policy can do
will entirely reverse the great wave of wealth destruction. President Obama
made hope the watchword of his campaign, but there is less for which to hope,
largely because of the economic impact of the lifestyle choices favored by the
same young people who were so enthusiastic for Obama. The Reagan reforms
created new markets and financing techniques and put enormous amounts of
leverage at the disposal of businesses and households. The 1980s saw the
creation of a mortgage-backed securities market that turned the American home
into a ready source of capital, the emergence of a high-yield bond market that
allowed new companies to issue debt, and the expansion of private equity. These
financing techniques contributed mightily to the great expansion of 1984-2008,
and they were the same instruments that would wreak ruin on the financial
system. During the 1980s the baby boomers were in their twenties and thirties,
when families are supposed to take on debt; twenty years later, the baby
boomers were in their fifties and sixties, when families are supposed to save
for retirement. The elixir of youth turned toxic for the aging.
Unless we restore the traditional family to a
central position in American life, we cannot expect to return to the kind of
wealth accumulation that characterized the 1980s and 1990s. Theoretically, we might
recruit immigrants to replace the children we did not rear, or we might invest
capital overseas with the children of other countries. From the standpoint of
economic policy, neither of those possibilities can he dismissed. But the
contributions of immigration or capital export will be marginal at best
compared to the central issue of whether the demographics of America reverts to
health.
Life is sacred for its own sake. It is not an
instrument to provide us with fatter IRAs or better real estate values. But it
is fair to point out that wealth depends ultimately on the natural order of
human life.
Failing to rear a new generation in sufficient
numbers to replace the present one violates that order, and it has consequences
for wealth, among many other things. Americans who rejected the mild yoke of
family responsibility in pursuit of atavistic enjoyment will find at last that
this is not to be theirs, either.
It will be painful for conservatives to admit
that things were not well with America under the Republican watch, at least not
at the family level. From 1954 to 1970, for example, half or more of households
contained two parents and one or more children under the age of eighteen. In
fact as well as in popular culture, the two-parent nuclear family formed the
normative American household. By 1981, when Ronald Reagan took office,
two-parent households had fallen to just over two-fifths of the total. Today,
less than a third of American households constitute a two-parent nuclear family
with children.
Housing prices are collapsing in part because
single-person households are replacing families with children. The Virginia
Tech economist Arthur C. Nelson has noted that households with children would
fall from half to a quarter of all households by 2025. The demand of Americans
will then be urban apartments for empty nesters. Demand for large-lot single
family homes, Nelson calculated, will slump from 56 million today to 34 million
in 2025- a reduction of 40 percent.
There never will be a housing price recovery in
many pans of the country. Huge tracts will become uninhabited except by vandals
and rodents.
All of these trends were evident for years, and
duly noted by housing economists. Why did it take until 2007 for home prices to
collapse? If America were a closed economy, the housing market would have
crashed years ago. The paradox is that the rest of the industrial world, and
much of the developing world, are aging faster than the United States.
In the industrial world, there are more than 400
million people in their peak savings years, 40 to 64 years of age, and the
number is growing. There are fewer than 350 million young earners in the
19-to40-year bracket, and their number is shrinking. If savers in Japan can't
find enough young people to lend to, they will lend to the young people of
other countries. Japan's median age will rise above 60 by mid-century, and
Europe's will rise to the mid-50s.
America is slightly better off. Countries with
aging and shrinking populations must export and invest the proceeds. Japan's
households have hoarded $14 trillion in savings, which they will spend on
geriatric care provided by Indonesian and Filipino nurses, as the country's
population falls to just 90 million in 2050 from 127 million today.
The graying of the industrial world creates an
inexhaustible supply of savings and demand for assets in which to invest
them-which is to say, for young people able to borrow and pay loans with
interest. The tragedy is that most of the world's young people live in
countries without capital markets, enforcement of property rights, or reliable
governments. Japanese investors will not buy mortgages from Africa or Latin
America, or even China. A rich Chinese won't lend money to a poor Chinese
unless, of course, the poor Chinese first moves to the United States.
Until recently, that left the United States the
main destination for the aging savers of the industrial world. America became
the magnet for savings accumulated by aging Europeans and Japanese. To this
must be added the rainy-day savings of the Chinese government, whose desire to
accumulate large amounts of foreign-exchange reserves is more than justified in
retrospect by the present crisis.
America has roughly 120 million adults in the 19-to-44
age bracket, the prime borrowing years. That is not a large number against the
420 million prospective savers in the aging developed world as a whole. There
simply aren't enough young Americans to absorb the savings of the rest of the
world. In demographic terms, America is only the leper with the most fingers.
The rest of the world lent the United States
vast sums, rising to almost $1 trillion in 2007. As the rest of the world
thrust its savings on the United States, interest rates fell and home prices
rose. To feed the inexhaustible demand for American assets, Wall Street
connived with the ratings agencies to turn the sow's ear of subprime mortgages
into silk purses, in the form of supposedly default-proof securities with high
credit ratings. Americans thought themselves charmed and came to expect
indefinitely continuing rates of 10 percent annual appreciation of home prices
(and correspondingly higher returns to homeowners with a great deal of
leverage).
The baby boomers evidently concluded that one
day they all would sell their houses to each other at exorbitant prices and
retire on the proceeds. The national household savings rate fell to zero by
2007, as Americans came to believe that capital gains on residential real
estate would substitute for savings.
After a $15 trillion reduction in asset values,
Americans are now saving as much as they can. Of course, if everyone saves and
no one spends, the economy shuts down, which is precisely what is happening.
The trouble is not that aging baby boomers need to save. The problem is that
the families with children who need to spend never were formed in sufficient
numbers to sustain growth.
In emphasizing the demographics, I do not mean
to give Wall Street a free pass for prolonging the bubble. Without financial
engineering, the crisis would have come sooner and in a milder form. But we
would have been just as poor in consequence. The origin of the crisis is
demographic, and its solution can only be demographic.
America needs to find productive young people to
whom to lend. The world abounds in young people, of course, but not young
people who can productively use capital and are thus good credit risks. The
trouble is to locate young people who are reared to the skill sets, work ethic,
and social values required for a modern economy.
In theory, it is possible to match American
capital to the requirements of young people in venues capable of great
productivity growth. East Asia, for example, has almost 500 million people in
the 19-to-40-year-old bracket, 50 percent more than that of the entire
industrial world. The prospect of raising the productivity of Chinese, Indians,
and other Asians opens up an entirely different horizon for the American
economy. In theory, the opportunities for investment in Asia are limitless, but
political trust, capital markets, regulatory institutions, and other
preconditions for such investment have been inadequate. For aging Americans to trust
their savings to young Asians, a generation's worth of institutional reforms
would be required.
It is also possible to improve America's demographic
profile through immigration, as Reuven Brenncr of McGill University has
proposed. Some years ago Cardinal Baffi of Bologna suggested that Europe seek
Catholic immigrants from Lath America. In a maH way, something like this is
happening. Europe's alternative is to accept more immigrants from the Middle
East and Africa, with the attendant risks of cultural hollowing out and
eventual Islamicization. America's problem is more difficult, for what America
requires are highly skilled immigrants.
Even so; efforts to export capital and import
workers will at best mitigate America's economic problems in a small way. We
are going to be poorer for a generation and perhaps longer. We will drive
smaller cars and live in smaller homes, vacation in cabins by the lake rather
than at Disney World, and send our children to public universities rather than
private liberal-arts colleges. The baby boomers on average will work five or
ten years longer before retiring on less income than they had planned, and
young people will work for less money at duller jobs than they had hoped.
In traditional societies, each extended family
relied on its own children to care for its own elderly. The resources the
community devoted to the destitute--
gleaning the fields alter harvest, for
example--were quite limited. Modern society does not require every family to
fund its retirement by rearing children; we may contribute to a pension fund
and draw on the labor of the children of others. But if everyone were to retire
on the same day, the pension fund would go bankrupt instantly, and we all would
starve.
The distribution of rewards and penalties is
manifestly unfair. The current crisis is particularly unfair to those who
brought up children and contributed monthly to their pension fund, only to
watch the value of their savings evaporate in the crisis. Tax and social
insurance policy should reflect the effort and cost of rearing children and
require those who avoid such effort and cost to pay their fair share.
Numerous proposals for family-friendly tax
policy are in circulation, including recent suggestions by Ramesh Ponnuru, Ross
Douthat, and Reihan Salam. The core of a family-oriented economic program might
include the following measures:
¥ Cut
taxes on families. The personal exemption introduced with the Second World
War's Victory Tax was $624, reflecting the cost of "food and a little more."
In today's dollars that would be about $7,600, while the current personal
exemption stands at only $3,650. The personal exemption should be raised to
$8,000 simply to restore the real value of the deduction, and the full personal
exemption should apply to children.
* Shift part
of the burden of social insurance to the childless. For most taxpayers,
social-insurance deductions are almost as great a burden as income tax.
Families that bring up children contribute to the future tax base; families
that do not get a free tide. The base rate for social security and Medicare
deductions should rise, with a significant exemption for families with
children, so that a disproportionate share of the burden falls on the
childless.
¥ Make
child-related expenses tax deductible. Tuition and health care are the key
expenses here with which parents need help.
¥ Change
the immigration laws. The United States needs highly skilled, productive
individuals in their prime years for earning and family formation.
We delude ourselves when we imagine that a few
hundred dollars of tax incentives will persuade individuals to form families or
keep them together. A generation of Americans has grown up with the belief that
the traditional family is merely one lifestyle choice among many.
But it is among the young that such a
conservative message could reverberate the loudest. The young know that the
promise of sexual freedom has brought them nothing but emptiness and anomie.
They suffer more than anyone from the breakup of families. They know that
abortion has wrought psychic damage that never can be repaired. And they see
that their own future was compromised by the poor choices of their parents.
It was always morally wrong for conservatives to
attempt to segregate the emotionally charged issues of public morals from the
conservative growth agenda. We know now that it was also incompetent from a
purely economic point of view. Without life, there is no wealth; without
families, there is no economic future. The value of future income streams
traded in capital markets will fall in accordance with our impoverished
demography. We cannot pursue the acquisition of wealth and the provision of
upward mobility except through the reconquest of the American polity on behalf
of the American family.
The conservative movement today seems weaker
than at any time since Lyndon Johnson defeated Barry Goldwater. There are no
free-marketeers in the foxholes, and it is hard to find an economist of any
stripe who does not believe that the government must provide some kind of
economic stimulus and rescue the financial system.
But the present crisis also might present the
conservative movement with the greatest opportunity it has had since Ronald
Reagan took office. The Obama administration will certainly face backlash when
its promise to fix the economy through the antiquated tools of Keynesian
stimulus comes to nothing. And as a result, American voters may be more
disposed to consider fundamental problems than they have been for several
generations. The message that our children are our wealth, and that families
are its custodian, might resonate all the more strongly for the manifest failure
of the alternatives.
