Generation Gap

“Today’s adults in their mid-30s or younger—the prime time for career and family formation—benefited little from the doubling of the economy since the early 1980s and have accumulated no more  wealth than their counterparts 25 years ago.”

“Lost Generations? Wealth Building Among Young Americans”

 

The Great Recession hasn’t really been kind to any particular age cohort, but it’s highlighted how severely Generation X and Y have been left in the dust by the Baby Boomers. The Urban Institute recently released some research detailing the specifics:

Despite the recent recession, our economy in 2010 was about twice as rich both in terms of average incomes and net worth as it was 27 years earlier in 1983. But not everyone shared equally in that growth.

Younger generations have been particularly left behind. Roughly speaking, those under age 46 today, generally the Gen X and Gen Y cohorts, hadn’t accumulated any more wealth by the time they reached their 30s and 40s than their parents did over a quarter-century ago. By way of contrast, baby boomers and other older generations, or those over age 46, shared in the rising economy—they approximately doubled their net worth.

The younger cohort also faces severe disadvantages in comparison to the Boomers – severe inflation of college tuition, often leading to  high level of student loan debt and the increased cost of home ownership.  There’s an understandable wish for people to believe the economy is ‘getting better’, and it’s true that it’s not quite as awful as it was a few years ago. However, this is a far cry from the economy actually being good.  As Brad DeLong notes about the recent unemployment figures, the employment report was fairly decent but the labor market itself is a nightmare.

“the employment-to-population ratio today is exactly where it was three-and-a-half years ago, at the recession trough…There has been no closing of the output gap and no decline in the unemployment rate from putting a greater share of the adult population to work. All of the decline in the output gap and all of the decline in the unemployment rate is from the collapse in labor force participation. {…} one-tenth of our labor market shift relative to 2007 can be attributable to demography; nine-tenths are the result of the Lesser Depression.

The parry I get from the people in Washington is: “Britain, Japan, and Europe are doing much worse!” True. So?

I’m not entirely sure how a generation that has less wealth, more debt, and a highly unfavorable labor market that threatens to last a decade are supposed to surpass the Baby Boomers in attaining a higher standard of living. As most people have intuitively known for a while, they’re not.  The question that remains is – what are we going to do about that?

A Lost Decade?

The U.S. economy isn’t likely to regain full employment until 2022.

“If the United States keeps adding 181,000 jobs per month, then it will take nine years and three months to get back to full employment {…}

When the economy was running at full blast at the end of 2007, there were just 7.7 million unemployed — in transition or switching between jobs, say. But on top of that, the population also keeps growing, currently adding about 88,000 new people to the labor force each month.

Put all that together, and it will take about 9 years to close the “jobs gap” — to get back to the ratio of payrolls to working-age population that prevailed back in December 2007.”

We’re looking at over a decade of un-and under-employment. What’s the likelihood this impacts retirement among Boomers and the older cohort of Gen Xers?

“According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits.And that’s for people who actually have a retirement account of some kind. A third of households do not. For these people, their sole retirement income, aside from potential aid from friends and family, comes from Social Security, for which the current average monthly benefit is $1,230.”

We’re soon going to see how the decline in defined-benefit pensions will essentially force many older workers to indefinitely delay retirement. We also have a generation starting out their working lives in substantial educational debt and unable to fully fund their own retirement, let alone purchase a home. Briefly set aside for a moment the enormous problem of health care expenses for the elderly and child care expenses for young families- does it seem likely (or desirable)  that people are able to afford a mortgage exceeding thirty percent of their income? Rebecca Solnit in a recent essay:

“The whole of the US sometimes seems to be a checkerboard of these low-pressure zones with lots of time and space but no money, and the boomtowns with lots of money, a frenzied pace and chronic housing scarcity. Neither version is very liveable.”

The regions with a healthy, functioning economy (relatively speaking) have astronomical housing prices. Most regions with affordable housing often have a limited stagnant, economic climate.  Since no one has figured out how to completely revitalize entire regions, the policy solutions will likely need to focus on alleviating the housing affordability crisis in the regions with already strong employment growth. It’s pretty clear that most people are on their own when it comes to self-funding retirement. If housing in high-growth regions remain prohibitively expensive, then it’s likely that neither home ownership or a secure retirement are realistic expectations for most workers.

Things Are Different

There’s been some mainstream commentary suggesting that the housing market is close to a recovery and that household formation is set to surge. Derek Thompson at The Atlantic:

“Household formation is miserable now, but it’s projected to pick up for a simple reason: an improving economy is bound to encourage young people to get out, buy apartments, and get married, eventually. How fast they start gobbling up apartments and houses is unclear.”

Neil Irwin at the Washington Post:

“In the first six months of 2012, the growth rate of the economy, excluding gains in housing, was about 1.35 percent. If everything else — consumer spending, business investment, exports and government spending — continued growing at the same pace it has in 2012, the gain in housing then would put overall growth in the coming year at about 3.25 percent.

{…}

That would mean an additional $262 billion in economic activity, which, if recent relationships between dollars of residential investment and housing starts hold up, would translate into an additional 517,000 homes being built every year — meaning that the 872,000 annual rate of housing starts that the Census reported Wednesday would rise by a cumulative 59 percent in the coming 12 months.

While all this may seem like an naively sunny scenario — and it would be great news for the economy if it materializes — keep in mind that it is hardly presenting an outlandish sort of boom for housing.

Rather, this is what would happen if housing returns to its average role in the economy of the pre-bubble 1990s and did so in the coming 12 months.

The dark clouds are these: We don’t know for sure whether the gains in September housing activity are a short-term blip, one of the kinds of ups and downs we have seen too often in this recovery, or something more. And this scenario assumes that the other sectors of the economy keep holding up their current growth rates.”

They both include some obvious qualifiers, but it seems to be an instance of hope rather than certainty. I hope the recovery plays out like they predict, but there’s plenty of worrying signs that remain. Underemployment and stagnant wages remain a very real problem.

Generation Y professionals entering the workforce are finding careers that once were gateways to high pay and upwardly mobile lives turning into detours and dead ends. Average incomes for individuals ages 25 to 34 have fallen 8 percent, double the adult population’s total drop, since the recession began in December 2007. Their unemployment rate remains stuck one-half to 1 percentage point above the national figure.

Three and a half years after the worst recession since the Great Depression, the earnings and employment gap between those in the under-35 population and their parents and grandparents threatens to unravel the American dream of each generation doing better than the last. The nation’s younger workers have benefited least from an economic recovery that has been the most uneven in recent history.

“This generation will be permanently depressed and will be on a lower path of income for probably all of their life — and at least the next 10 years,” says Rutgers professor Cliff Zukin, a senior research fellow at the university’s John J. Heldrich Center for Workforce Development. Professionals who start out in jobs other than their first choice tend to stay on the alternative path, earning less than they would have otherwise while becoming less likely to start over again later in preferred fields, Zukin says.

{…}

About 61 million people, one-fifth of the U.S. population, work at jobs where median earnings declined since 2007 even as the 1.2 million households whose incomes put them in the top 1 percent saw their pay rise 5.5 percent last year. Younger workers are experiencing the worst of the disparity in part because they’re being displaced by older workers. The number of employees ages 55 to 64 is expected to surpass the under-24 working population by 2020 for the first time since at least World War II, according to the BLS.”

Typically, household formation is primarily driven by young adults striking out on their own. They begin earning more money and eventually save enough for a down payment. Their careers are stable enough where a mortgage payment becomes a manageable responsibility. That’s how it’s supposed to happen. Does that sound like today’s situation? What else is different from the typical story?

Oh. That’s going to put a crimp in saving for a down payment. Stories about an imminent housing recovery will eventually have to incorporate student loan debt into their narrative. Loan underwriters certainly will.

Pessimism? You haven’t seen pessimism.

The overriding focus of this blog is admittedly fairly bleak – we are going to economically struggle more than typically acknowledged by mainstream commentary. I prefer trying to focus on how cities can help alleviate the financial strain for their citizens. I think it’s important to acknowledge while things aren’t going to be ok for many people, there are still policies and practices that can help mitigate downward mobility.

Robert Gordon of Northwestern has an article in the Wall Street Journal that ties together many of the reasons why some analysts believe that the standard of living for many American isn’t likely to dramatically improve. Gordon believes that we have already reaped most of the major quality of life benefits from technological innovation and that the remaining improvements will be marginal.

“The profound boost that these innovations gave to economic growth would be difficult to repeat. Only once could transport speed be increased from the horse (6 miles per hour) to the Boeing 707 (550 mph). Only once could outhouses be replaced by running water and indoor plumbing. Only once could indoor temperatures, thanks to central heating and air conditioning, be converted from cold in winter and hot in summer to a uniform year-round climate of 68 to 72 degrees Fahrenheit.

{…}

Even if we assume that innovation produces a cornucopia of wonders beyond my expectations, the economy still faces formidable headwinds. The retirement of the baby boomers and the continuing exodus of prime-age males from the labor force, sometimes called the “missing fifth,” are reducing hours worked per member of the population. American educational attainment continues to slide ever-downward in the international league tables, due to cost inflation at our universities, $1 trillion in student loans, abysmal test scores and large numbers of high-school dropouts.

{…}

If future output grows, as I expect, at a rate of just 1% a year, that means the overwhelming majority of Americans will see their incomes grow just 0.5% annually.”

Gordon may be correct or he may be unduly pessimistic.  What I’m certain of is that dismissing his concerns as unrealistic would be foolish.  The jobs gap is very real – the economy needs 9 million new jobs just to return to pre-recession levels. At the current pace it’s going to take until 2020 to return to December 2007’s unemployment rate of 5% and if you’re inclined to believe Gordon there’s nothing on the horizon that is going to dramatically accelerate that growth.

People seem to intuitively understand this to a degree. Consider our population growth:

“The Census Bureau estimates there will be 315.1 million people living in the country on New Year’s Day, a 0.73 percent rise from last year’s estimate and 2.05 percent more than the most recent census count in April 2010. At the current pace, the nation’s population will grow by 7.3 percent during the decade, the lowest level since the 7.25 percent increase recorded between 1930 and 1940, according to data compiled by Bloomberg.

 

The slow rate of growth during the first part of the decade indicates the U.S. continues to emerge slowly from the worst economic downturn since the 1930s.”

It’s not a esoteric point – people are broke, economically insecure and scared for their future, which tends to put a damper on procreation. People in the 1930’s would eventually benefit from profound technological advances that would eventually boost their standard of living.  We’ll likely see more advances eventually, but it’s cold comfort to those struggling right now. If you had told a person in a food line in 1931 that things would be better in ten years, I imagine you wouldn’t get a very enthusiastic response.

“You’re going to love the interstate highway system.”

If one wants to argue that things aren’t nearly as bad as they were in the 1930’s, I’d readily agree. But “better than the Great Depression” isn’t something Americans should accept. We can do better.

Eds, Meds, and the Tax Base

From my summer visit to Providence, RI. A property owner expressing some doubts about the tax exempt status of Brown University.

Most people support some form of  Eds and Meds as an economic development strategy. As they should – hospitals and universities are generally very desirable employers that pay respectable wages.  Yet the strategy has its limits. I took this picture in Providence, RI this past summer – it was taken near the state capitol building, so the owner of that parcel of land was likely trying to make a pretty explicit point to policymakers. I don’t know the politics of the land owner or the nuances of Providence’s fiscal situation, but I thought the image does capture the tension that tax-exempt entities like universities can generate in cities with a narrow tax base. Most cities would love to have a Brown University.  Most cities would also want some needed tax revenue. Since health care and higher education are some of the few current growth industries, that is certain to pose some challenging policy decisions in coming years.

Apartments and austerity

Multi-unit construction is one of the few healthy aspects in the real estate sector lately. Which is some ways is positive in the sense that economic activity in general is positive. However, it’s also  a reflection of people’s inability to afford single-family homes. Yet people need to live somewhere and apartments are picking up the slack formerly occupied by detached housing.

“As residential building recovers from a near standstill after the housing crisis, much of the momentum is coming not from subdivisions with green lawns and two-car garages but from rental apartments. Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.

m{…}

Still, vacancies remain extremely low and the pace of building in recent years has not been quick enough to replace obsolete, decrepit or demolished units, said Mr. Crowe of the homebuilders group. He projected that it would be several years before supply was back to normal.”

Rents rose between 4.2 percent in 2011 and 3.6 percent this year. The median income has fallen from $72,956 to $69,487 between 2000 to the present.  Apartments have their advantages (flexibility, no maintenance, etc) but oftentimes, they’re not particularly cheap. Eventually, American cities will have to more fully come to terms with Accessory Dwelling Units and loosen some of the regulatory barriers that prevent their construction. ADUs are a sweet spot between multi-unit apartments and single family housing – they’re also going to be a major policy tool that helps keep downwardly mobile Americans out of severe poverty.

 

 

 

Happy to be Proven Wrong

By most accounts, the economy is technically improving. Unemployment is slowing creeping downward and there are signs of increased confidence. However, I’m not entirely sure that Improvement = Good. Catherine Rampell at the NYTimes Economix blog (citing research from Mark Zandi at Moody’s Analytics) points to an increase in household formation as a potential reason for optimism regarding the economy.

“Over the last year, though, household formation has been picking up. {…} household growth is still volatile, but it has been trending upward. The pickup is probably related to job growth, which has enabled multigenerational households to spin off into multiple new homes.”

Zandi in particular seems optimistic:

““Years’ worth of households that have been pent up will be unleashed in the next few years,” he predicted. “That’s one reason why I’m more optimistic than some other people about G.D.P. growth in the next few years. As we move to the mid-part of the decade, I think those households will get formed and that will power a lot of housing construction and consumption.””

 

The economy generally has been seemingly improving and companies seem unlikely to sit on their piles of cash forever. Yet… I don’t entirely see household formation massively increasing. Stagnant wages haven’t increased, underemployment is still a massive problem and student loan debt for many young people simply isn’t disappearing anytime soon. Combine this with stricter mortgage underwriting standards and I’m finding it difficult to imagine a sustained boom in household formation in the near future.

A recent study from the Congressional Budget Office offers another data point for those skeptical of an imminent recovery.

 

“A key underlying reason why the overall demand for goods and services by governments, businesses, and households has increased more slowly than usual in this recovery—and thus why real GDP has increased more  slowly relative to potential GDP—has been the limitations faced by the Federal Reserve in providing support to the economy. Most important, because the interest rate that the Federal Reserve generally uses to conduct monetary policy (the federal funds rate) was already low at the start of the recovery, the central bank could not lower it  much further even as the gap between real GDP and potential GDP failed to close quickly. Moreover, the economy has been less responsive than usual to low interest rates because of the oversupply of homes, the desire of households to reduce their indebtedness, and credit restraints imposed by lenders, among other reasons.”

 

Interest rates are about as low as possible and it hasn’t been enough to goose the economy. People are in debt and lack the means to pay back that debt. Until substantial middle-class job and wage growth return, the economy is likely to be anemic for some time. Maybe there’s some untapped demand in household formation that will somehow unleash dormant sectors of the economy, but that seems unlikely absent employment growth. I’d be happy to be wrong.

Housing Prices: An impediment to income mobility?

 

Binyamin Appelbaum at the the New York Time’s Economix blog highlights some research indicating that the high prices in many major metro areas are a significant impediment for low-wage/low-skill worker who might otherwise be inclined to locate there for economic opportunities.

““The best places for low- and high-skilled workers used to be the same places: California, Maryland, New York,” said Peter Ganong, a doctoral student in economics, who wrote the paper with Daniel Shoag, a professor of public policy. “Now low-skilled workers can no longer afford to move to the high-wage places.”

In this account, people aren’t moving to the Sun Belt because they want to live there. They are moving because they can’t afford to live in Boston. And the result isn’t just second-best for them; it also slows the pace of economic growth.”

On one hand this is fairly obvious to anyone who has considered moving to somewhere like New York City or San Francisco – “it’s so expensive!” It’s a serious career obstacle for many low and medium skilled wage earners – there are clearly more lucrative opportunities in larger cities, but it’s not always clear that the extra compensation would make up for the astounding difference in housing costs. A service worker earning $12/hr would clearly have more disposable income living in Hartford or Waterbury than New York City. This would probably even apply to an average white collar middle skilled worker – it’s not particularly clear that earning 50k in Boston is a step up from earning 42k in say, Greensboro.

 

On the other hand, it’s useful to have solid empirical evidence suggesting that housing prices have a clear impact on the economic opportunities facing non-superstar workers. It’s another example of how you can’t entirely separate affordable housing policy decisions from large economic trends – they’re closely related. Creating more affordable housing in the cities with the best economic opportunities is one small way to help alleviate unemployment.

An interesting juxtaposition

Two recent articles in the LA Times caught my eye. First (and unsurprisingly) San Francisco and San Jose are the richest metropolitan areas in the country:

“The denizens of San Jose, that Silicon Valley gem, haul in a median household income of $76,593, making the city the wealthiest in the country.

That’s compared with the national figure of $50,502, according to new data from the U.S. Census Bureau.

{…}

Homes cost more in the city — $540,800 for an owner-occupied property, compared with $173,600 nationwide. The population is more eclectic, with 39.2% foreign-born compared with 13% around the country.

San Francisco, with a median income of $69,894, was the second-richest American metropolitan area. San Diego was fourth with $60,797; Los Angeles fell just shy of the top 10 at $46,148.”

The second article addressed San Francisco’s attempt to partially address the city’s  housing costs, a proposal to allow “micro-apartments”, that would reduce the minimum size for a residence from 290 square feet to 220.

” here in San Francisco, where a growing number of residents are being priced out of the housing market by a revived tech economy, city leaders are considering the smallest micro-units of all.

At a minimum 150 square feet of living space — 220 when you add the bathroom, kitchen and closet — the proposed residences are being hailed as a pivotal option for singles. Opponents fear that a wave of “shoe box homes” would further marginalize families of modest means who are desperate for larger accommodations.”

There’s an interesting debate to be had regarding proposals like this. Proponents see this as a way to open an extrememlely expensive real estate market to people with limited means. They visualize single people in places like this:

Opponents most likely picture something like this:

Cheekiness aside, in all likelihood San Francisco will eventually come to resemble Hong Kong in terms of density, although the degree will differ. The  topographical limitations of the Bay Area pretty much ensure that the only way to reasonably accomodate demand is to build smaller units more vertically.  It’s certainly not for everyone, but demand is high in San Francisco for a very simple reason – it’s a great city with a robust economy. Lots of cities would envy having the problem of high real estate demand.

DC: One region that isn’t experiencing austerity

On the occasions I’ve been to the DC/Northern Virginia region, it seems like another world, where the recession is a purely abstract topic. New construction, numerous openings for high-paying jobs, and the stability provided by presence of the federal government seem to generate a general sense of optimism throughout the area. The DC region is doing massively better than the rest of the nation, particularly post-recession.

“In 1969, the first year for which the Bureau of Economic Analysis has figures, wages in the D.C. area were 12 percent higher than the national average. In 2010, they were 36.1 percent higher.” – Dylan Matthews

As of July 2012, the unemployment rate for the DC Metropolitan Statistical Area was 5.6, a full 3 percentage points lower than the national average of 8.6. It’s easy to see how policy makers in DC determined to avoid contemplating a grim economic situation could convince themselves that things aren’t that bad – when they look around their immediate surroundings, things aren’t that bad. DC is booming.

However, it’s worth considering whether DC’s massive wealth is good for the rest of the country. Setting aside the consequences of an insulated and oblivious  political class, (obvious to observers of any partisan persuasion),  there are other considerations. Citizens of struggling Rust Belt cities might rightfully wonder why say, the National Institutes of Health has to to be located in Bethesda, which in additional to the boon from hosting an employment center for several thousand high paid professionals, then gets to further benefit from agglomeration effects from the research as the area becomes a biomedical hub. Ryan Avent in The Economist argues that this is precisely what happened in the DC region:

“From the 1930s to the 1950s, government (primarily military) spending and research in the Bay Area helped seed a cluster of technology firms that became Silicon Valley. Not coincidentally, that same era was a period of enormous growth in Washington and its suburbs, which attracted highly skilled scientists and engineers to the area by the thousands. Such clusters, once in place, stick around thanks to economies of scale. There are positive spillovers to locating in the cluster—productivity is higher, labour markets are deep and liquid, ideas are communicated more effectively—which mean that as the cluster grows larger it becomes more attractive to workers and businesses. That makes it difficult for upstart clusters to dislodge and replace the older centres.

Some of the growth and wealth in Washington, in other words, is a residue from earlier eras of government-driven agglomeration; the cluster, built decades ago, now generates more wealth as the return to skilled clusters rises for reasons of technology or globalisation.”

Imagine a different history, where NIH is located in Cleveland. Case Western Reserve and other regional universities develop as a major feeder programs for the biomedical profession and the region weathers the post-industrial economic shock waves far more adroitly as Cleveland becomes a major biomedical hub.

Matt Steinglass suggests something a bit more drastic:

“One strategy for escaping this dynamic that has traditionally been employed by national rulers is to move the capital to a new location, usually one built from scratch. That seems implausible and expensive in the modern economy, but maybe we could try putting Congress on the road and just sending them to a new convention centre in a different state every two years, on sort of a Mongol Golden Horde or Dothraki model. It might not actually decrease the amount corporations spend on lobbying; the lobbyists would probably just follow them around. But it might be easier for less wealthy businesses and civil-society groups to rent office space in Boise than in Washington, and could help keep property values reasonable in the Washington metropolitan area, if that’s the problem we’re trying to solve here.”

I’m not sure about uprooting the entire federal government, but it’s worth discussing whether some federal agencies should be dispersed throughout the country. Locate the EPA in Denver, Agriculture in St. Louis,  Labor in Pittsburgh, etc.  I know it’s not likely to happen anytime soon, but it’s worth considering. Concentrating wealth and power in DC any further doesn’t seem especially necessary.