AMERICA CAN AVOID JAPAN’S MISTAKE
Ageing societies prefer to sacrifice the young to a long period of slow growth rather than erode the savings of older voters; that is one reason why the Great Recession is dragging on. What?
The United States recovered from the Great Depression by instituting an economic policy of debt reduction by concurrently stimulating rapid growth with high inflation. Inflation reduces the real value of debt. People on fixed incomes and those with a large portion of their wealth in ordinary savings accounts realize a lower economic lifestyle when the economy heats up since their income does not rise nor their savings keep up with the rising cost of living. In effect the recovery from the Great Depression favored young people who were workers because it created jobs, and hurt older people who were on a fixed income. Eventually, however, even the older people benefited since a better economy improves the lives of all Americans.
Executing an inflation causing economic policy during the Great Depression was politically easier back than since there were fewer older people to vote against it. In America from 1945 to 2000 there were far more workers than non-workers. In the past five years, however, the opposite is true, the fraction of the population working has fallen from 63.1 per cent to 58.4 per cent. That ratio will continue to worsen over the next five years as Baby Boomers retire in historical numbers. The U.S. government must reduce debt even as it hurts a lot. There is no other choice if we are to avoid a lost decade.
What policy do you vote for when older people’s interests conflict with their kids and possibly grandkids? Who pays and who doesn’t? Pitting the interests of parents or grandparents against their children or grandchildren is short-sighted, because, current retirees on the average have paid payroll taxes that, in present value terms, equal or exceed the value of the pensions they will eventually receive, thus, they have given and they deserve to get back.
The solution to America’s current economic problems will require a sacrifice on the part of at least two generations: Boomers and X. The policy should favor generations Y and Z because, well, they are our kids and grandkids. Boomers will have to accept the fact that they will have a stagnating standard of living for a while as the economy heats up. Generation X will have to accept that they will never have it like their parents. Generations Y and Z will have to have hope.