Seven reasons to hate your parents! - Reason #1

In order to maintain a high level of consumption, our parents chose fewer children

by Eugen von Böhm-Bawerk 

We will, over the course of the next several days, present seven different reasons for why we should hate our parents. While the headline may seem unduly provocative we believe the following arguments will be more than enough to substantiate such a harsh claim. Some may say our allegation is nothing more than an interesting intellectual exercise with no valid practical implications. What our parents did is water under the bridge; dwelling with bygones helps no one!

We beg to differ. We look at what is happening throughout the world and we see angry, frustrated young people without jobs, without prospects, without useful academic degrees, carrying unsustainable debt burdens protesting FOR status quo! One should think a generation facing so many headwinds of which they are of no responsibility themselves would demand a revolution and overthrow the power that is. Perversely, they rather ask for more of the same. They take to the streets and ask elected and non-elected leaders to continue the policies that brought them into their predicament in the first place.

We will present seven reasons for why today’s youth should protest AGAINST status quo by showing the reader how our parents made a complete mess of what they once inherited from our grandparents. Hopefully, our little contribution will make a small, but right step in taking today’s protesters in a new direction.

Reason number one: in order to maintain a high level of consumption, our parents chose fewer children

We often hear about the “baby-boom” problem created by our grandparent’s high fertility rate. Those children are now retiring, and thus strain the western world’s welfare system. Before we move on to explore this particular problem, let us just say that our parents have had a tendency to obfuscate our language and terms, making rational conversation much harder to achieve.

They somehow manage to call outright statists for liberal, they call war peacekeeping operations, and they call fascism right-wing extremism and so on. The same is true for the term “baby-boom” as if it is something novel that the new generation is larger the previous one. Our parents blame our grandparents for the dire straits we are heading into due to the baby-boom problem. It is not a baby-boom problem; it is a birth-deficit problem! It is not our grandparents that got a lot of children that causes the problem we now face; it is the fact that our parents got so few.

They did not want the extra responsibility of raising a lot of kids. It cost them money and it took away valuable time which they could rather use to satisfy their own narcissistic tendencies. This choice of course provided them with the best of two worlds with few elderly dependencies and simultaneously very few younger dependencies. Hence they could expand current consumption by imposing a demographic tax on the future. This is often referred to as a demographic dividend. Worryingly, for many troubled countries this dividend is now entering a phase of pay-back!

Let’s explore the demographics in more detail and see what’s going on in the western (and to some extent the emerging-) world. One of the best indicators in terms of economic impact from changing demographics is called dependency ratios. This is the ratio of cohorts in non-working age relative to cohorts in working age. This ratio gives an explicit number on how many dependents there are relative to breadwinners. Contrary to economics in general, demographic trends are relatively certain since generations already born will by law of nature age and develop in a highly predictable manner. As the next two chart clearly points out, dependency ratios will worsen inexorably in the decades that follow. Unfortunately, that is only half the story, because not all within their working age is actually working, but are dependents themselves. This is in itself a product of the welfare state that was built in the post-WWII area, but more on that later. In many countries participation rates, those within working age that is working or is looking for work, is depressingly low. Assuming participation rates will be maintained at their long-term averages, which today are a highly optimistic assumption, we can also get an idea of the real burden expected to be carried by our own generation as we move forward.

Now, what if we, as a generation, retired at an average age of 70 years? Let`s say we start working on average when we are 23 years and then work until we are 70; an active, full time working life of 47 years. Further, assume this change in retirement age is implemented from 2015, with one extra year for every third year until we reach 70. Even this draconian change will in many countries not be enough to maintain stable dependency ratios. In Germany for example, the dependency ratio will still deteriorate to levels far below today despite implementation of pension reforms that are political impossible. The reader should also observe the conservative assumptions we have made initially, with people today working on average from 23 years of age to 65. According to Eurostat, the average age at which a European worker starts to receive benefits is 58.1 years, with France at low of 54.5 years. In other words, just to reach the levels we show in our chart Europe need to increase the retirement age by 7 years and then start to increase by another 5!

Source: US Census Bureau, own calculations

Source: US Census Bureau, own calculations

The change in developed world demographics is truly staggering and the only argument left we hear our parents desperately cling to, besides blaming overly fertile grandparents, is that our generation will be so much richer than they ever were, so we can afford higher taxes to pay for their retirement. Well, due the fact that they also taxed away our productivity through consuming previously invested capital that is not necessarily true. As we explained in the previous blog post, the accumulation of consumptive debt is detrimental to future growth. Trend extrapolation may work well in natural science, but not in human science. It does not follow that economic growth in capitalistic societies the preceding 200 years will mean growth and prosperity the next 200 years. On the contrary, the period of high growth and increased standard of living is an anomaly both in time and space. Most people, most of the time does not enjoy the affluence our parents did.

Conclusion

Our generation should not expect to retire early and we should expect massive political pressure to raise our taxes to fund an obvious bankrupt pay-as-you-go system!