Well we now see how vague campaign promises from a young and inexperienced presidential candidate can transform rapidly into really, really bad policy concepts. Obama is trying to rally support across the political spectrum for his economic stimulus plan. It is rooted in the liberal erroneous concept Government can fix the economy.  Usually government inhibits the economy through excessive taxation, competition for investment funds and costly regulations designed to create legal exposure. Government does provide safety nets to individuals – which is the largest and fastest growing segment of the federal budget. It would be better to have the individuals succeed and wean them from public support systems which are inefficient.

The problem with trying to appease left and right and get a package through is that left and right use these efforts to join forces as opportunities to demand purity for their ideology brands. This waters down solutios and can lead to offsetting actions which make things worse. In addition, both the left and right are really out of ideas and don’t understand the forces crippling our economy.

The conservatives do have a better grasp and better solutions, but that is because they begin from the premise of minimal government and maximum private enterprise. This core principle has them more accidentally than accurately closer to the solution. Sadly, they have proven over their years of Congressional Control to mouth a lot of these principles as they resisted good economic solutions (e.g., private sector based prescription drug insurance plans under Medicaid/Medicare) and porked up on ear marked projects to keep winning elections. They have not shown any fiscal restraint or willingness to deal with problems piling up.

So to try and appease both sides with a mix of tired policy ideas is really not going to work. Mainly because government spending will not address the core problem. Tax breaks could to some extent, but mostly we need to work our way through the next few years and prepare for the retiring baby boomers and their impact on our economy. They also need to adjust their thinking as to how much the working people of this country will be willing or able to provide to the entitlement programs for the aged. We can only siphon so much out of the economy. The fact the boomers need to share this across more people is something they need to face. And those well off need to make some sacrifices.

I find it amazing that the current economic downturn was predicted with incredible accuracy 9 years ago. The theory is called Age Wave Theory (AWT from here out) and predicted many of the events happening now would happen. Interestingly very few people have realized how accurate this theory is, which means no one understands how impotent the current stimulus ideas are.

I am going to pull data from a few articles and intermix them. So as to not have to link at each interesting aspect I am collecting all the links here, here, and here. Charts and diagrams are linked to the source material.

To start with let’s scope the boomers and their impact on the our national economy:

There is a baby-boomer age-wave theory proposed by economist Harry Dent that views a peak in the US stock market at 2007 and 2009.  His prediction is based on observations that consumer spending peaks at or near age 50.  With many boomers starting to retire in the upcoming years the age-wave theory predicts a slow down in the economy.Generally speaking there are 76 million people that were born between 1946 and 1964.  With that said, 2011 will be the first year that the first baby boomers will hit the 65 year age mark and the beginning of a long-term trend that will become more reliant on entitlement programs.

What I think Dent and others did not fold into their equation was the fact that Boomers have been riding a 25 year economic boost, allowing them to accrue wealth and property and an accelerated rate, which means they can retire earlier and begin to dial down their consumption earlier. One of the areas Dent claimed would see an impact was – surprising to me – the housing market:

For the United States, a country that has 67 million baby-boomers, (those born between 1946-1964) this represents a problem not just as far as public programs like social security, but as far as our overall consumption-based economy is concerned.

    In 2005 the U.S. adult workforce stood at about 142,076,000. About half of these workers then are soon to retire between 1996 and 2024 with the median year being 2010. As retirees, with many with most of their wealth in the U.S. equities, begin to move to cash and pull out resources this creates strong downward pressure on the market. The same generation that had reaped the benefits from the post-war boom years and the acts of the Federal Housing Administration are going to be allocationing less resources to upgrading their houses, buying new cars, and shopping around for unessential goods.

Another view on the predictions:

Assuming that the theory’s predictions are accurate, some expect this to have wide-ranging implications. In addition, when baby boomers retire, this could cause spikes in unemployment and decreases in the housing market as aging baby boomers spend less. Others believe that the influx of immigration will help stave off these effects in the United States.

One thing the nativist cries from the right forget to factor into their thinking is we cannot afford a large drop off in the size of the work force. With our birth rate dropping (compared to the boomer years especially) we need to expand our work force through immigration. And this means successful integration of these immigrant workers into our society as well as our economy. The following chart illustrates the brith rate problem:

There is no way to tax/spend our way out of the massive wave of retiring top level managers, economic experts, spenders, etc. The Boomers will pull a lot out of our economy, but the next (albeit much smaller) generations will fill the gaps and be able to perform the work because of the massive increases in productivity that our technology as brought us. I see European high tech business do the same as their US counterparts with a fraction of the work force – we simply become leaner (and probably more profitable).

What we have to do is understand the changes in economic dynamics this shift is going to cause. We see it already happening. Let’s go back to housing. As we get older we purchase larger homes and invest in property. But as we finally send our children out into the world and we face retirement we stop purchasing the big new house and look for the smaller (less expensive) retirement palace.

Boomers (like all of us) drove the housing market for decades as we road the economic wave unleashed during the Reagan years. We bought are big houses early. And now there is a glut of large houses since there are not as many families coming up behind the Boomers who need them – dropping prices and cutting off investment. Some more interesting charts and prescient thinking from our sources:

For the past decade, much of our economic prosperity was intertwined with the fate of housing. In fact, there have been recent estimates that housing related industries accounted for 30 to 40 percent of job growth since 2000.The peak was reached in the second half of 2005. At this time homes were flying off of the shelves like the latest hit album and financing was ample to fuel this flame.

…

This pace was simply unrealistic since the growth in population was not keeping up.  In fact, demographic trends would have pointed to an otherwise conclusion.  That is, many baby boomers now with empty nests would be selling their homes and downsizing and organically there would be a natural jump in housing inventory on the market.

The risky lending practices the Dems promoted at Fannie Mae and Freddie Mac to low end consumers was a stupid attempt to avoid the obvious. They should have known that replacing top earning, responsible Boomer owners with young, low income and unprepared owners would be a recipe for disaster. Liberals did not think through the full impact of their Santa Claus delusions, they just wanted to feel like St Nick and be responsible for people getting homes. They did not think through how their egotistical motives would cripple an economy heading for unavoidable challenges. Hindsight is quite illuminating at the moment.

Bottom line: we have a housing surplus and we are going to have to work it off. And as Boomers continue to retire for the next 15 years or so not much is going to change. What we need is for our work force incomes to increase so they can purchase their houses at a higher level than rock bottom. What we need is tax breaks for those who can afford homes once their prices drop down to a reasonable market level.

This means Boomers are losing their real estate investment equity. And being the most vociferous generation they are mad about the reality of their situation. No amount of government spending can fix this. 2/3 of our nation’s economy is driven by consumer spending. Consumers need money in their pockets to spend. Governments need to roll back services and their own spending in order to free up money for consumers to keep.

This ain’t rocket science. Government needs to cut back on all sorts wasteful spending. It doesn’t need to stop producing its services and products, it needs to stop wasting time and money doing it. And all ear marks need to go away. Let local governments pay for local projects that do not benefit the nation. We need to tighten our belts. That means cutting back everywhere so there is enough money left to flow through our economy.

One area Obama has his sites on which is critical to our recovery is entitlements, especially Social Security. What we don’t need is zero-sum gotcha games from the right (or left) if the Dems try and address the entitlement fiascos building on the horizon. We cannot afford any more brinkmanship for one party’s benefit. It is time to be a nation with shared problems – something the right demanded for years. It is time to show how to move beyond partisanship and solve problems. Or else face the consequences at the voting booth.

BTW – there is no way to soak the rich to avoid the coming changes. There aren’t enough of them and they are the ones losing lots and lots of wealth as our economy revalues itself based on the departure of the boomers and the fact the next generations coming into their peak buying years have different priorities and are just not as big as the Boomers in numbers.

We cannot change the reality of the demographics of this nation through spending on bridges, etc. We have to face our challenges.

Tags: Age Wave Theory, Baby Boomers, Conservatives, Economic Crisis, Liberals, Obama