Monday, February 23, 2015

Fundamentally Flawed - Chapter 4, Demographics Show Why The US Can't Outgrow Our Debt...and Immigration Won't Be the Savior

by Chris Hamilton, February 2015
In the coming decade, the US 25-64 year old total population will decline by 5.5%???  Immigration will fail to fill the hole of falling birthrates due to weak domestic job creation.  2015 is when the massive baby boom (specifically the group born ’45-’55) collectively turns 60-70 years old.  Half will be 65 or older and 80% at least eligible for reduced early SS benefits at age 62.  2014 or 2015 will be the peak total 25-64 total population for America…this is the portion of the population representing working America, the portion in accumulation mode and consumption mode…this sector will fall for a decade before leveling and likely beginning to stabilize.  The chart below shows the slowly rising 0-25 year old population, the rapidly rising 65+ population, and the falling heart of America’s economy, 25-64 year olds. 

Source; OECD, Main Economic Indicators, 2015-2024 is authors Estimate.
Below is a view of the boomers departing the prime years of their careers and moving entirely into the 55+ set.  The 25-54 year old population and total employed 25-54 year old population peaking is not coincidental with the economic meltdown of ’08-‘09.  This was the result of Boomers aging and switching from accumulation to distribution of assets…but Boomers also continued working to make ends meet…and the generation behind is simply incapable (qualitatively ($’s) or quantitatively (total #’s)) in a position to support the boomers.  The great recession and subsequent non-recovery is a battle with an unbeatable foe…the boomers transition to distribution, their exit from the work force, their drawdown of their assets, and their collection of underfunded pensions and unfunded social services.  But the boomer generation is working longer (primarily in part time positions) and nearly all job growth since ’07 has been 55+ and 65+ boomers attempting to augment savings and prolong work related benefits.  The 55+ set is far more experienced and far less concerned with maximum wages…and this is coming almost entirely at the expense of the 25-54 year old set.
Population Source; OECD, Main Economic Indicators, Employment Source, US BLS, Employment Situation
This is so very important (and this chart below is so busy) because it shows the collapsing job creation (quantity…not to mention quality of jobs decreasing) despite still rising population…and the explosion of federal debt to mask the true problems we face absent the rising tax collection to pay for social services, corporate welfare, wars, and so much more. 
The chart below shows US working age population of 25-54 yr/old employee’s peak in ’07 and the surging 65+ year old population…with no surge in the 0-25 year/old population (i.e., those meant to eventually pay the tax bills and buy the boomers assets).  Going forward, the 0-25 years old population is likely to remain flat’ish while numbers of boomers moving into 65+ retirement zone will ramp by 10 million’ish (exacerbating all their switch from accumulation to distribution, their claim on social services, and assets to be sold).  If you are starting to get the idea the Fed’s actions are to plug a demographic hole with monetary policy…good for you as you are 1 in a million in America who get it.
Population Source; OECD, Main Economic Indicators, Employment Source, US BLS, Employment Situation
The below chart is the US population by age segment and employees within each age segment.  The ramping 55+ year old population is clear to see.  Also noteworthy are the flat population of all groups 0 to 55 years old.  And all net employment growth in the 55+ year old segment.   And the idea that immigration will be the savior is fanciful.  The US, UK, EU, and Japan cannot create adequate jobs for their native borne and wages are flat.  Introducing large new populations of immigrants would only exacerbate the unemployment and depress wages further…not to mention inflame racial, religious, social service, and many other issues. 
Population Source; OECD, Main Economic Indicators, Employment Source, US BLS, Employment Situation
The chart below highlights total US population growth and job growth vs tax receipts and outstanding Treasury debt.  Federal tax receipts have grown very slowly while debt has surged.
Population Source; OECD, Main Economic Indicators, Employment Source, US BLS, Employment Situation; Tax Source, US BEA, GDP
The impact of the ’07 peak in 25-54 year old population and employment was very rough on the US economy.  The declines in this sections population and employment since have coincided with declining total oil usage, declining total miles driven, declining outstanding mortgages, and many more ominous indicators (see below chart).
Population Source; OECD, Main Economic Indicators; Oil Source; IEA; Mortgage Debt Source; Federal Reserve System; Federal Debt Source, Dept. of Treasury
2015 is a watershed year for the baby boomers.  This is the year the much discussed baby boom generation (I’m focusing on the decade born ’45-’55) is hitting an average age of 65 years old.  The baby boom was the largest 10 year period of child rearing resulting in population growth the US had never seen and still larger than any 10 year period since. The impact of such a large group now leaving the work force, hitting retirement, and drawing from Social Security, Medicare, and simultaneously beginning what will be a two decade long period of liquidation of assets is pretty well known.  But the question of who will be there to buy those assets and pay for those social services is much less discussed or understood. 

Behind the baby boom generation in the US and globally across advanced economies are declining “native” 25-54 and 15-64 year old populations.  The birth rates among these advanced economies has collapsed over the 50 years since the baby boom.  However, some nations (UK, America, France, Germany, etc.) have encouraged and assimilated immigrants (w/ varying success) to maintain overall growing populations.  Clearly others nations (Japan, Korea, others), for a multitude of reasons, have not encouraged immigration and have are now facing overall falling population (Japan) or rapid aging (Korea). 

According to the Pew Research center and US Census, almost all US population growth over the next 50 years will be due to immigration, up to 2 million annually, and immigrant’s descendants’ higher birth rates.  So, to make this really simple, the population of Americans currently in our borders is expected to flat-line or decline and the only savior for housing and consumerism, in general, is continual immigration.  And the assumption was that these immigrants and their offspring were anticipated to have high birthrates.  This generally rules out Asian or European immigrants which have even lower birth rates than the US…So, these were anticipated to be primarily the poor of the central and South America plus the Caribbean…primarily Catholic nations with relatively high birth rates.  The portion of Hispanic US population is expected to double from the current 15% to 30% by 2050.  These are generally lower educated and lower skilled entrants to the US.  To attract these folks, a strong differential of available and profitable employment must exist in advanced economies over their home nations. 

But a funny thing happened along the way…due to rising costs of labor in advanced nations, cheaper labor elsewhere, and massive innovations (computerization, automation, communication, logistics, etc.) and a major economic slowdown…suddenly the US couldn’t create enough jobs for those who were here, let alone the assumed 2 million new immigrants annually.  And this job slowdown wasn’t a one off but instead a structural change meaning businesses would very likely need fewer employees indefinitely.  Not simply because of falling demand (that could be corrected) but corporations and businesses tightening belts and consumers facing too much debt, unemployment, and flat wages.  Businesses rethought how they would reduce costs across the board and their #1 cost driver (labor) to maximize profits (this is a good thing…but implications abound).  But a very circular chicken and egg problem has dogged America and advanced economies since.  Without the growth and jobs creation, there would be no great economic draw for immigrants to come to the US.  Without the immigrants, there wouldn’t be a growing consumer base, a growing tax base, or a growing nation at all.

The dual collapse of manufacturing employment in America alongside the boom and bust of new housing construction has meant job growth, particularly for unskilled labor, has been falling…and the pay for these positions stagnant due to plentiful workers and insufficient work.  The primary growth areas now for these laborers is in service industries (restaurants, landscaping, retail, etc. etc.) with low pay and minimal or no benefits.  Unfortunately, due to minimal job creation across the economy, native high school dropouts to recent college grads to would be retirees (absent adequate nest eggs) are competing with these immigrants for these positions. 

So, without the draw of likely employment, the primary draw for immigrants would be general safety and social safety nets not available in home countries…but all without the income to be net benefits within their adopted new nations.  In the US the primary barriers are language but in Europe the incoming immigrants are also significantly different socially and religiously.  Greater advanced economy native population tensions and pushback on immigration is nearly inevitable.
The Fed & CB’s must have known the “native” populations would be declining and all growth depended on attracting immigrants…and immigrants are attracted by plentiful and (relative to their home nations) higher paying jobs…and this means an economy growing rapidly.  When the ’01 recession took hold, falling manufacturing employment was replaced by residential and commercial building booms driven by artificially low interest rates.  These jobs were ideal for hard working, low skilled immigrants.  The only problem was far too much was built and under dubious financing and absent rising wages to pay for it all.  So when the housing and the FIRE (finance, Insurance, real estate) economy went bust in ’08-‘09…so did jobs in general and particularly the low skill jobs…and without the immigrants there went the population growth and there went the economic growth that was needed to pay for all the assets, all the services, and ultimately all the debt. 

But the Fed isn’t willing to acknowledge that ever lower interest rates and massive debt hasn’t created the economic growth needed to create the jobs and attract the immigrants…it has only driven the stock market to the greatest bubble extremes and created massive oversupply of nearly every imaginable type …and made the asset owners very wealthy (generally the top 20% of our nation but particularly the top 5% or even 1%). 

Native “advanced economy” populations among the 60 year old and younger post baby boom population segments will continue flat or more likely declining for another decade.  Despite the working age population declines, jobs will not likely be adequate for this native population let alone anywhere near the number of immigrants that were anticipated.  The assumption that Fed policies of zero interest rates and quantitative easing would reinvigorate the economy, jobs, and population growth via immigration….well, all very wrong.  And the debt and interest rate prescriptions are clearly the wrong medicine.  Perhaps a discussion of reality rather than the theoretical would be appropriate about now?!?