21st Century Economics

Baby Boomers - The Real Cause Of Our High Taxes 

If you tilt your head to one side and stand on one foot, you might see what some have seen - that Baby Boomers are the cause of our high and rising federal and State taxes.  More importantly, Vermont may be the harbinger of what is in store for the entire nation over the next two decades. 

Between 1946 and 1964, approximately 78 million babies were born and America would never be the same again.  Even before the boomers began paying taxes, the government was spending a lot of money on taking care of them.  More elementary schools were built in 1957 than any other year, before or since.  In 1967, more high schools were built than any other year, before or since.  From 1965 to 1975, 743 new colleges were opened and the college student population rose from 3.2 million to over 9 million.  During this same time, the average school enrollment for all schools rose by more than 500%.  All that cost a lot of money and started a trend that continued, as the boomers grew older. (1)

As the boomers moved into their peak earning years from age 24 to 55, the economy exploded and taxes poured into the State and federal governments.  Annual federal budgets rose from $478 billion in 1978 to an estimated $2.5 trillion for the budget now being developed for 2008. (2)

More money came into the government coffers from other sources.  In 1977, $39 billion excess dollars were paid into social security.  By 2006, when the median age of the boomers was 51, the annual excess payments rose to $1.99 trillion.  These excess payments are spent each year without regard for the future debt created to the soon-to-retire boomers – estimated to be $2.5 trillion per year by 2075. (3, 4)

Spending all that boomer paid tax revenue is what our government does best and they spent every last penny collected - $19 trillion between 1993 and 2003.  Then they spent all the excess social security contributions – $14 trillion between 1993 and 2006.  Then they continued to spend far more than was collected for 36 of the past 40 years - accumulating and additional $8.7 trillion in public debt. 

This massive influx of tax revenue paid for more and more welfare, healthcare and entitlement programs and infrastructure changes.  Today’s government paid (with tax revenue) healthcare has risen 700% from 1980 levels.  Total annual welfare rose from 6,400% from 1965 to FY2005 costing cost taxpayers $8.29 trillion (in 2000 dollars).   As the boomer tax revenue rose, the spending spree extended to hundreds of small programs.  Dairy Subsidies rose 673% and soybean subsidies are up 501% between 1998 and 2003. (5)

All this available money has established a pattern of massive spending that has pervaded our government and our cultural attitudes for more than five decades.  An entire generation has grown up with a lifetime of increasing benefits paid for by the government.  History has shown that such spending attitudes have a momentum of their own.  It is hard for our politicians to stop or even slow the spending.  It is harder for the aging boomers to reassume the responsibility for paying for what has been provided by the government for their entire lives.  So the spending continues.

The problem is that beginning now and for the next two decades, we will see the boomers moving out of their peak earning years and their peak tax paying years.  Tax revenues will decline but those persistent welfare, healthcare and entitlement programs and infrastructure changes will remain, costing us long term commitments of increased administration, maintenance and operating costs.  And soon the retiring boomers will compound the spending with demands for large increases for Medicare, Medicaid, Social Security, Veterans Assistance and other costs.

Vermont has one of the smallest and oldest populations in the entire US and will see more people retiring earlier than most states.  Our unique demographics magnify this pattern of spending and make us more sensitive to the effects of lowered tax revenue and higher medical costs from the retiring boomers.

For a large and growing population, the burden of our taxes outweighs the benefits of the government programs.  It will take a significant effort by our government to slow or reverse a generation of spending.  It will take a larger effort for the public to give up on the extravagant, noble and excessive benefits of that spending – but we have to try.

References

1              Digest of Education Statistics, 1998, National Center for Education Statistics

2              Data from the Office of Management and Budget

3                Congressional Budget Office, Long Range Fiscal Policy Brief #9 July 1, 2003

4.                Congressional Budget Office, Long Range Fiscal Policy Brief #2 July 3, 2002

5.                Backgrounder Report #1710, Heritage Foundation, Dec. 3, 2003 by Brian Riedl    

Future Customers, Employees and the Economy 

It is prudent for any business, large or small, to look ahead at what might change in the future so they can prepare today.  Not having a crystal ball, I tend to look at the mega-trends and intuitively obvious changes and their consequences.  Here are three that you might consider:

The predictable whiplash from the Bush-Oil-Big Business Axis of Corruption will undoubtedly result in a more “green” oriented federal government that will be more environmentally friendly, small business oriented and more protective of personal and privacy rights.  Combined with a greater awareness of the global warming issue, the sales of energy efficient appliances, energy reduction construction, alternate energy heating and cooling and other energy and environmentally friendly products and services will thrive in this new economy.  Solar panels, solar heating, home insulation, metal roofs, hybrid cars, thermal windows and other similar products will experience record sales over the next decade.  Big cars, luxury boats, huge houses and other big energy users could very well face tax penalties and fees to discourage their purchase.   The federal tax breaks and tax penalties will filter down to local governments and into commercial sales.  If you can wait, some major expenses may have better tax advantages in 2010 than now.

Here come the Boomers!  Age Power!  With 32% of the Vermont population being baby boomers (third highest in the nation), we will feel the effects of the boomers sooner and to a greater degree than most states.  This is good and bad.  Their vast numbers will dominate politics, marketing, sales, jobs, styles and design.  Their large numbers will also put a burden on public and welfare services and health care.  With an annual spending power of $2.1 trillion, the boomers will have a powerful impact on the economy but they will have very specific preferences for goods and services.  The good news for Vermont is that travel, resort services and vacation spending will rise significantly over the next two decades.  Financial and medical services will thrive.  However, new car sales will flatten or decline slightly.  Real estate sales will take a marked decline as large and second boomer homes are put on the market at a time when the quantity of buyers will decline even faster.  Many boomers will have to work to fund their longer-than-expected retirement and lack of savings in their working years.  The good news is that boomers will make good employees – mature, good work ethic, honest.  The bad news is that they may drive up employee medical expenses.  Vermont businesses would be prudent to examine how to best cope with this inevitable change by planning inventory changes, store access improvements, new marketing methods and employment. 

Technology is also a major force in shaping our world.  Robotics have replaced thousands of assembly-line workers in factories.  Automation and computers have eliminated thousands of other jobs in almost every industry and business.  The speed of computers and the improving ability and efficiency of the human-computer interface is making it more and more possible to replace humans in most “left-brain” jobs.  Any job that is based on a set of rules that is logical, sequential, rational, and analytical or objective can be performed by a software program.  When you think about it, that is a surprisingly long list.  Jobs like ATM bank transactions, telephone operators, self-service checkout at stores, GPS navigation, assembly-line workers have already been automated.  Designers are planning driverless cars, pilotless aircraft and banks and courthouses without people.   A great deal of accounting, sales, medical and financial services are already automated with more coming.  In the military, we now have UAV’s (unmanned aerial vehicles), autonomous weapons and robotic combat vehicles.  By contrast, right-brained jobs are in high demand and growing.  Jobs that involve imagination, synthesis of ideas, and subjective views will thrive in the future.  These are jobs that cannot easily be programmed.  These jobs include artistic design, music composition, writing, dance, theatre, architecture, design and marketing.  These are jobs that involve innovation of ideas and solutions and to the application of new concepts in a holistic, intuitive and sometimes random manner.  Lots of businesses are now creating job positions with titles like envisioneer, design strategist, marketing coordinator and creative engineer.  It might be time for your business to consider institutionalizing thinking outside the box.

Remember, “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”, Charles Darwin.

Housing Dimple

  Written Jan 29, 2007

We use the term “bubble” to describe a brief expansion in a select market, as in the recent “housing bubble”. What is the opposite of a bubble?  A Dimple?  Whatever it is, I believe we are heading for a doozy in about 8 or 10 years.  Here’s why.

Insurance companies and investors have actuary studies that show that people do predictable things at certain ages.  The 77 million baby boomers bought houses in the 80’s and early 90’s as they moved into their peak earning years.  As early as 1982, they were calling the rising sales a housing market bubble but by 1992, they were talking about a housing slump.  This eight year period marks the peak house buying ages (from age 27 to 37) of the boomers.

Those same actuary studies indicate that it is inevitable that those same boomers will sell their homes in record numbers as the owners age, moving out of their large primary homes for a smaller home - usually seeking a ranch style (one floor) or a condo (no yard maintenance).   The so-called “empty nesters” will most often sell the larger homes (4 or more bedrooms), second homes and those with high-maintenance property.  In Vermont, these are also the homes with high heating, electricity and tax costs that are likely to be sold.

There is another reason that the boomers will sell.  In their lifetime, most boomers have never seen a prolonged period of time when there was a major housing market crash with protracted losses in real estate investments.  In fact, under the motto of, “No one has ever lost money in real estate”, many boomers invested in their homes with the idea that it will gain in equity and, when sold, will provide a substantial boost to retirement savings, adding to the motivation to sell.  Thinking of taking advantage of large real estate appreciation of the past, a home bought in the 80’s would, by that logic, be reasonably priced in the seven figure range by the time they retired in the early to mid 2010’s.  This might have been true if there weren’t so many that had the same idea. 

Certainly some will keep their homes but it is a statistical certainty that more than the average quantity will sell.  As with the buying boom of the 80’s and early 90’s, this sell-off will occur over a relatively short period of about 10 years probably something like 2009 and 2019.  The laws of supply and demand dictate that prices will drop as the supply increases but unfortunately, the demand will be dropping at the same time.

 Following the baby boom of the late 40’s and 1950’s, we experienced a precipitous drop in birth rate.  This was due to the rebound from the baby boom combined with the introduction of “the pill” in 1960.  The result was a fifteen year drop in birth rates. However, many boomers decided to put career ahead of family or to have children later in life, resulting in an echo boom that diffused over a longer period of time - more than 30 years.  The end result is that anything of enduring quantity created to accommodate the volume of baby boomers will be in excess supply for more than three decades before the population will again rise to the levels to create a similar demand.  

One possible scenario – The Housing Dimple – the economic reverse of the buying boom of the 80’s:            The boomers sell-off will increase normal annual large home sales by as much as 400%.  The expected buyer population will be much less than the volume needed to maintain a modest market demand.  As a result, there will be a glut of unsold large homes on the market.  Desperate sellers will lower prices and new construction of large homes will virtually stop.  The excess supply will drive the sale price of large homes down and home values will fall dramatically.  A home that could sell for $650,000 in 2005 might sell for $250,000 or less in 2015. 

There are, of course, lots of factors that might mitigate this kind of scenario.  There are also lots of factors that might exacerbate this scenario.  It gains credibility when you consider that this has already happened in some high value markets.  Actuary studies predict a high statistical probability that there will be implications and ramifications in real estate and in other markets and investments.  Large losses as well as gains are possible.  A prudent choice might be to plan ahead. 

References:

 http://www.realestatejournal.com/buysell/markettrends/20060619-fletcher.html?refresh=on

It has begun!

It has begun!

The January Effect is a well known and fairly consistent trend in stock market swings. In the 4th quarter, each year, large institutional investors dump losing stocks to take losses that will offset their wins over the previous year. This puts a lot of supply of poor stocks on the market and puts a lot of cash into the hands of the investors. The fact that these are stocks that normally are not swept up by others and the holiday spending spree of the consumers, usually absorbs most of this sell-off so we normally do not see a large drop in the market nor a rush to sell off winners. However, after the New Year starts, these same investors, now flush with cash, want to invest and most do so in January.

With all this pressure to increase the market, in fact, quite the opposite is happening. It is taking a dive. This means that the market drop is actually much worse than it appears. It is diving despite all this upward pressure - or more precisely, investors have lots of reasons to buy but instead they are selling in large numbers.This is not a new trend. The NASDAQ and Dow hit highs in October and have mostly been going down since. This has a lot to do with the Bush administration’s policies of trade, tax and politics but it also has to do with the normal cycles of regression to the mean of normal and typical stock performance. We have been due for a recession for some time.

I may have been wrong about that date. It might have already started. This is not that unusual since it is common for investors to buy on rumor and sell on history (news) – making them always over reactive to even the hint of good or bad news. In this case, they are perhaps acting sooner than I had expected or maybe just reacting to a shorter term crisis that will coincidentally run into the large crisis looming just ahead.As one of the more informed generations of investors, they may well be aware of the coming problems created by the boomers and may well be also reacting to that crisis a few years in advance. This can happen if the institutional fund managers are of the mind to be cautious about what they know will happen eventually.

Bottom line is that a major financial downturn has started and will continue for the next two decades or it will take a short spurt upward for a year or two before taking the plunge for two more decades. Either way, prepare now or suffer later. 

Rich-Poor Gap = Trouble

Rich - Poor Gap
Trouble Ahead

We are becoming a nation of nations, a global economy and a more closely interrelated world society. What happens in one place, often affects other societies, economies and politics. If we are to take lessons from history, then consider the following:

Don’t take my word for it. Read and watch over the next 4-5 years and see if the pointers and indicators are saying that we are headed for trouble. If they are, then ask yourself, when are you going to react to what you see? When you hear the thunder and see the dust cloud, will you wait until you can see the angry red eyes of the charging heard of elephants before you run for cover?  

Demographic Economics
Demonomics
To build a case of the importance of being aware of the economics of demographics, let’s first look at a few facts that we can all agree upon:
The basis of the capitalist economy is buying and selling of goods and services. An implied and accepted aspect of this is that there is a market demand for what is being sold and that it can be sold for a price that recovers the cost plus a profit.

If you want to make money off the demographic economy, 21st Century Economics is the place to start.  

Profit From Global Warming

GreenHouse Emissions

You can keep yourself informed and aware of these events and trends so that when someone offers you a deal to invest in recovered coastal land, farm real estate, long term commodity investments or other sectors of the economy that will be affected by the weather and water changes that are coming, then you will be better informed to make a decision that will possibly save you money.