Odd Lots - The Millennial Generation Is Stagnant And Older People Are Part

Episode Date: August 22, 2016

In developed economies, younger generations have faced stagnant wages, mediocre employment prospects and dizzying costs of homeownership. One culprit: The generations that came before. Policies that helped older generations recieve strong pensions and affordable housing have made life more difficult for the young. In this week's Odd Lots podcast we talked to Laura Gardiner of the Resolution Foundation about her new report on "renewing the generational contract" between generations.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. So I'm Tracy Allaway, executive editor of Bloomberg Markets. And I'm Joe Wisenthal, managing editor of Bloomberg Markets. So, Joe, we talk about millennials quite a bit, what they like, what impact they're having on the economy. And you actually have a pretty good definition of millennials from what I remember. Share it with us. That's right. I do, because there's always these debates that go on to like, oh, if you're born in 1981 or 1980, whatever it is.

and I always kind of find that to be a little meaningless. The definition of millennial, in my view, is, did you have Facebook when you were in college? I didn't. But it feels to me that that's important, not just from a time perspective, but because that's really sort of defining a difference in how people live and how people interact

and how people find partners and how people find friends. And that's such a crucial distinction, the sort of pre-Facebook crowd afterwards, I think it's the perfect definition. Okay, so I actually did have Facebook in college more because we were one of the first colleges to get it than me being particularly younger than you. But I guess that makes me a millennial in some senses.

So, you know, as a card-carrying millennial, one of the things I've followed very closely is the idea of intergenerational conflict. So the idea that young people are angry with old people over certain trends happening in the economy. And you've been following this closely as well. Yeah, it's a huge topic. And you really love this topic, though. You love anything relating to intergenerational warfare or maybe warfare is too strong, but at least conflict, you get very excited about it. I do.

So I guess the thing that got me most excited about it was when I first first, wrote about it. Gosh, I think it was back in 2009. I actually did a post under the headline, Kill the Old. And it was kind of... How did that go over? Well, it was kind of tongue-in-cheek, but it made a serious point, which was that in the aftermath of the financial crisis, the younger generation had really been given a raw deal by the older generation. So we were kind of paying for a lot of their excesses. We had the housing boom, which made getting a mortgage, much tougher for younger people. We had pension schemes that were now underfunded, which young people have to pay for and they don't get to enjoy the benefits.

I could go on and on and on. But instead of doing that, let's bring in our guest for today. She is Laura Gardner. She's a senior research and policy analyst over at the Resolution Foundation, which is a think tank that looks into living standards, especially for poorer earners. And she actually wrote a really, really good report on this topic. It's called The Stagnation Generation, the case for renewing the intergenerational contract. So it's slightly more sedate title than Kill the Olds, but maybe there's some of that in there. Hi, Laura. Thanks for joining us today.

Hi, yeah. Hey, problem. So maybe to begin, you could walk us through why you decided to focus on intergenerational conflict or tension specifically, because the think tank doesn't, necessarily always look at this, right? You're looking usually at improving living standards for the lowest earners in the UK. That's absolutely right. And the reason why we've taken this new focus on intergenerational issues is because in the course of a lot of our analysis of different living standards outcomes in the UK, these kind of intergenerational concerns really started coming through. So, for example, we spend an awful lot of time looking at what's going on in the

labour market in the UK, as that's such a big determinant of household living standards. And if you look at the pay squeeze, really long and deep pay squeeze we've had since 2009 in the UK, you immediately find that young people, those in their 20s, had a much deeper pay squeeze than older workers. So they seem to bear the brunt of the payfalls and the downturn. And then if you look, say, at the housing market and you look at how much people are spending on private rent, and falling rates of home ownership. You see that very much hitting young people who are spending the highest proportions

of their incomes on their housing costs. And then it'd say you might look at pensions in the workplace and who's in receipt or who's set to get what we call kind of divine benefit or final salary pension schemes in the UK, which is when you've got a lifetime income promised. These kind of really gold-plated pensions are really a thing of the past.

I think only three of our FITC-100, which kind of our top 100 companies still offer them to new members. So those are kind of three examples of where you might look across public policy, across labour market, across the housing market, and see things looking to tip away from the young in favour of older generations. But those are very snapshot pictures. We're not comparing like with like. We're not comparing young people today with young people at the same age 30 years ago.

So we wanted to get underneath these apparent concerns and do a really rigorous assessment of intergenerational fairness over the life course, which led to this stagnation generation report and the long 18-month project we are doing off the back of it. So what did you learn when you took this deeper look as opposed to just comparing young people today versus the older generation today? What did you learn are some key differences in how the economy was structured today versus when the older generation were themselves young? If we go back to the labour market, for example,

and what's going on with pay, so we normally expect in the long march of history each generation to earn more than the one before it because usually earnings growth is faster than growth in prices, is faster than inflation. You'd expect each generation in a growing economy to do better than the one before. And that's what happened from the silent generation

to the baby boomers and the baby boomers to generation X, each generation earns more than the last. There's a big step up. And we're a bit different to, Joe, because we do decide to stick a year definition on the millennials. We look at the, we look at those born between 1981 and 2000 in the UK as a millennials. Well, good. I still don't qualify as a millennial.

There you go. Having been born in 1980. I think it fits quite well with the Facebook definition. you suggested actually when I think about it. Facebook hit universities in the UK slightly later, but I remember having it myself, so I think it just about works. So if you look at the millennials

and you compare them to Generation X, those born in the 15 years before them, in their first 10 years of their career so far, they've failed to earn more than Generation X. They've actually earned a bit less. We estimate about £8,000 less over the course of their 20s. So on this like-for-like comparison, we do indeed have suggestions that the millennials could be the first generation to not significantly exceed their predecessors in terms of earnings.

So that's one example. And then I'll just mention one more from the housing market, which is even starker. So we've looked at declining rates of home ownership across the generations. And the peak generation for home ownership in the UK was the baby boomers, those born between 1946 and 1955. the age of 30, about two-thirds of baby boomers own home. Now, that fell a bit for Generation X after them, but for the millennials, it's kind of fallen off a cliff. So by the age of 30, only about 35, 40 percent of millennials own their own home in the UK. So we've had this massive decline in home ownership, which on a like-for-like basis means millennials are much

more likely to be stuck in the private rented sector, unable to save up for those house deposits, and paying far more in private rent as a result, which has shot up in recent years. So those are kind of two examples of where this kind of generational conflict really comes through when you go into the kind of deep dive into the data and look at stuff like for like. So how much of those sorts of trends have to do with the financial crisis? And to what degree do we expect that they might get better as we get further and further away from 2008? Well, the financial crisis is definitely a big factor in. this, particularly on the pay side, the reason why millennials have had, or a large part of the reason why millennials have had such a bad time in their 20s is because they had the unfortunate experience of graduating into an enormous pay squeeze, into an enormous recession. But actually, we think there are signs that this isn't all about the financial crisis. So even if we look at those early millennials that were entering the labor market in the mid-2000s, so before the crisis, when things were actually looking pretty good, they were still failing to make earnings gains on the sort of,

cohorts five, 10, 15 years before them. So some of this kind of stagnation picture, it seems to predate the financial crisis. And so when we think about the future, obviously, we'd expect a lot of the effects of the financial crisis to unwind in coming years, although the UK economy looks like it might be about to experience a new wave of uncertainty in relation to the decision to leave the EU. So some of those effects might be prolonged. But because some of the stagnation, it appears to have predated the crisis, we're concerned that without kind of detailed policy attention, this isn't just going to be an early career blip. It could be something that blights the millennials throughout their working lives. And that's one of the reasons for kind of our elevation of this issue and our big project on it.

So let's get to the policy question. You mentioned that the economy may need detailed policy attention on these issues. what policies were put in place or what decisions were made that, in your view, contributed to this downturn in various financial and economic measures? There's definitely no one thing. And it should be said that some of the challenges around intergenerational fairness aren't, we don't necessarily point the bingeret policy. We might point it at demographics. So a lot of the challenges in our welfare states, our economies, our labor markets, our labor markets. It comes from the fact that some birth cohorts are just much bigger than others.

And the reason why the baby boomers are called the baby boomers is because there's a lot of them. There was this massive birth spike in the post-war years. And that drives a lot of the challenge. So it's very difficult for policy to deal with those uneven cohort sizes. So we do need to look at the role of demographics and how we can better kind of plan and plan for future welfare spending in light of that. But there are also other policy choices in the UK that have contributed to this picture. So in the labour market, we might point to our consistent failure in the UK, not just pointing the finger at one specific government, this is a decades-long thing, but our consistent failure to offer a solid, dependable career route for the 50% of young people who decide not to go to university. I think I've heard similar messages from the US as well. So skills for non-graduates is a huge failing.

house building. For years and years and decades, we've failed to build enough houses, which is one of the reasons why the generational housing crisis I've described exists. On pensions, decisions made to insufficiently fund these final salary pension schemes in the 1980s and 1990s have led to huge deficits now, which kind of current generations are working to pay off. And on the welfare state, in the austerity we've had in the UK in recent years, there's been a very clear decision to protect pensioner benefits and bring in quite big cuts to working age benefits. So there's all sorts of areas where public policy does seem to have exacerbated rather than ameliorated the hand dealt by demographics, if you like. Well, what's the appetite to introduce new policies that might tip the balance back in favor of a younger generation, particularly given that baby boomers in particular still form such a huge, huge part of the population? And it seems if we're talking about, we're talking about, talking about democracies, then they have the upper hand in terms of introducing new rules and

policies that could change things. Well, I mean, that's a really important question to ask. And the thing that we often hear is, okay, we get your stats, your charts are excellent. We understand the problem you're describing. But there's nothing we can do about it because of exactly the reasons you suggest. The baby boomers, there's lots of them. And they're, they're quite good at turning out to the polling stations when we have elections. So it's kind of painted as a politically intractable issue. We don't think that's true. You sort of use the word war at the beginning of this piece. And actually, we don't think that that's how different generations really see each other in society. We think if you look at transfers within the family, you can see generations

with huge willingness to help each other out. And even if you look at really tough questions like attitudes to house building in the UK, we're seeing attitudes shifting. So traditionally, the baby boomers have been very anti-building houses in their local area, because it might affect the value of their own assets. But even in kind of a four-year period between 2010 and 2014, their appetite for local house building doubled. So it went from about a quarter of them saying they were up to it to over half. And that's just over four years. So I think as this crisis becomes more and more stark, public attitudes are definitely shifting towards a renewed look at the social contract

that deals a better hand to all generations in turn. So for the younger generation, that means a better chance to get on the housing ladder and a better chance a secure career. But there's also things we need to do for the older generation like fix our broken social care system. So we want to look kind of across generations in the round and we can see evidence that there's attitudes in society shifting

towards rectifying some of these balances. because at the end of the day, no granny wants to watch their grandchild struggle in the labor market, struggle to get on the housing ladder. And I think that metaphor stretches across society as a whole. I want to talk a little bit further about the housing situation because, I mean, it's also the case in the U.S. that homeownership rates are on the decline and that for a lot of young people and even young professionals, you know, talking here in New York City, the idea of homeownership just seems completely out of reach for people. It's also the case, and various economists have talked about it, that the unequal distribution of housing wealth is perhaps one of the biggest contributors to inequality overall, and that housing sort of tells the entire story. How did this happen? Like, when you sort of identify, like, when homeownership was this thing that sort of everybody could access if they had a job to this thing that really seemed out of reach for a lot of people?

Was there a turning point? or was there just sort of this slow trend of higher and higher house prices squeezing more and more people out? There were definitely some turning points, and I think it's certainly not the baby boomers' fault. They just happened to come along at just the right time on this kind of housing journey. So home ownership started taking off in the UK in the 1960s, accelerated in the 70s and 80s. The ownership took off, but prices didn't really take off. So the value of those assets that the baby boomers had got their hands on until the 90s and then particularly the early 2000s. So baby boomers got into the housing market through the 60s, 70s and 80s.

Lots of them got themselves houses. And then a few decades later, the value of those assets absolutely shot through the roof. So suddenly they're a lot wealthier. And then the reason why the value of those assets was shooting through the roof was because we weren't building enough homes. So the product was becoming more scarce. And then the kind of third phase. in that journey was what happened around the financial crisis in this country, which is that we, as reflecting on many of the causes of the financial crisis, we created much stricter criteria

for mortgage lending. So the deposit requirements to get on the housing ladder became much, much bigger, which meant that not only were houses a lot more expensive, but that young people looking to buy a house needed to get a much bigger proportion of that cost together in order to be able to get a mortgage and get into home ownership themselves. So those kind of phases of development in the housing market in the UK have all been kind of timed just right for the baby boomers and really timed quite badly for the millennials. It sort of speaks to the luck involved in accumulating wealth, right? If you're around at the right place, at the right time, you can find yourself

with, you know, a pretty normal blue-collar job, but owning two properties that eventually shoot up in wealth and then suddenly you've kind of got it made. but there don't seem to be obvious policy solutions to that sort of generational luck. There aren't, but there are very clear policy decisions kind of underlying that luck. So I would say the baby boomers were lucky in being part of a cohort that kind of experience all these things. But it wasn't an accident. There were policy decisions in this country to not continue the levels of house building we had in the 1950s and 60s, for example, which underpinned a lot of the subsequent trends I described.

So yes, it's messy. There's a lot of luck involved. The generations involved were not necessarily the masters of their own destiny and shouldn't be blamed for what's happened. But we should look very critically at the public policy choices that kind of led to these outcomes because it wasn't just an accident. There were some very clear decisions about what we do in the housing market, what our planning policy does, what we, how we control private rents and things like that that have kind of led to the housing situation young people face today. So, Laura, you mentioned Brexit briefly. Let's talk about the voting outcome there, because that seemed a really clear example of a generational divide. Was that with younger people usually voting to stay in the European Union and older people voting to get out? Was that a reflection of the different economic experiences between the generations? I think it's sort of understanding the reasons behind the Brexit.

vote is like the million dollar question in the UK at the moment. But you're right to highlight the very, very clear differences by age. And I think actually the differences between different age groups are bigger than the differences between different geographies, kind of different political affiliations. It's one of the clearest divides you can see when, when analyzing the Brexit vote. I think to some extent, it reflects the fact that older generations are what we might say, excluded and insulated from the consequences of Brexit. So if they're out of the labour market, if they own their own homes already, then even if there is some economic turmoil to come, it's kind of unlikely to affect them because they're not as actively engaged in the

economy as younger people. But there's also a lot of non-economic reasons, which others have talked about much more eloquently than me that have driven this. But our kind of position on on the Brexit vote is that it's happened now, and the UK is in the process of charting its course through leaving the EU, and we need to make the best job of that we can. But we also need to reflect on the concerns of those who might feel that their voices haven't been heard,

largely the younger generations, and look at what we can do to reunite the country, if you like, reunite our divided nation. And I think addressing some of the intergenerational challenges I've highlighted is a crucial challenge for the new government and the new prime minister if she wants to heal some of the divides that the whole process of going through the referendum has opened up. And it was really, really welcome in our new prime minister, Theresa May's first couple of speeches as prime minister, or just before she won the contest, she highlighted

the intergenerational challenges I've been talking about more than once. So I think I've talked about, you know, maybe attitude softening and maybe there being the possibility for policy change in this area. And the fact that the new government has put the issue front and center is a signal that we think that the time for addressing these intergenerational challenges in the UK has come. So the Brexit vote creates a challenge, but also an opportunity to think about how we can bring the generations back together. Yeah, it does seem as though there's been a little bit of a shift on all sides of, or many, many spots on the political spectrum, just sort of questioning the sort of particular strand of sort of free market financial capitalism that

we've seen in recent years. Obviously, everyone has different critiques, but it feels, you know, listening to Theresa May that people are questioning some of the orthodoxies for the last several years. That's absolutely right. I think having at the point at which we're going through such a huge political change as leaving the EU is, it's absolutely right to think critically about the model we have, the economic model, the political model, and who that might be working for and who it might not be. So a lot of that comes through in the generational debate, but we've also heard Theresa May talk a lot in this first month or so about looking at industrial strategy,

being a real big pillar of her economic policy. Now, what that actually means, it could be a number of different things, but it's not something that we've been talking about in this country for years or even decades, and it was an idea that was very much out of vogue. So this kind of interventionist approach to the economy that industrial strategy might signify,

a real appetite to do something in the housing market that serves the needs of younger generations to kind of actively intervene as a government rather than letting market forces play out is definitely coming through in the retort of, in the rhetoric of the new government at least. And we're waiting to see kind of what follows that in terms of concrete policy decisions. Laura, thanks so much for joining us today.

My pleasure. Well, Tracy, did that satisfy your hunger for intergenerational warfare and conflict? Not really, to be honest. So I think I take issue with the notion that generations are softening in terms of their dislike for each other or dislike for policies that would help the next generation down. So, I mean, having lived in London and having rented from a baby boomer landlord with multiple properties, I just don't see any massive change in attitude coming where suddenly the baby boomer generation says, oh, wait, you know, we've really kind of cost you guys a lot and now we're

going to change everything up. But I don't know. I don't have kids. Maybe people. people feel differently about it once they have children. But I think when it just comes to their own self-interest, it's really difficult to surmount that for something intangible like the future, the benefits of the future generation. So you're condemning an entire generation because of one landlord you didn't like? Yeah. Is that what I'm taking away from here? It's evidence-based. But in all seriousness, I think this report is really important. And I feel like it's going to be a major topic for a long time to come. I think, you know, obviously Laura expressed some optimism about change, but these issues with who is owed what when it comes to pensions and just how expensive

housing has gotten for a lot of people, they strike me as gigantic problems, whether it's the direct result of conflict or just accumulative policy decisions overall. These seem to be enormous issues. Right. And there's an intractable human problem to this as well, which is that everyone wants to get more out of the system than they put in, right? That's just kind of human nature. So it seems like it's going to be a really, really tough problem to solve. And I have a feeling economists are going to be looking at this as sort of evidence of self-interest and various other things for years to come. And it's not just that people want more because to me it's that A, people want more, but B, they're always measuring themselves against other people at the same time. So even if they get more, but someone else gets even more, that might be unsatisfying. And people are always measuring themselves against what they expected in life. So if you expected a certain pension or if you expected to be able to make a certain amount, even if you get more, but it wasn't as much as you expected, you might be unhappy. So there's all kinds of sort of behavioral elements taking place, I think.

terms of how our minds work that make these problems harder to solve as well. Right. It's all relative. On that very cheerful note. Yeah, very great. That was fun, fun conversation. All right. Thanks, everyone for listening. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allo. And I'm Joseph Wisenthal. You can follow me on Twitter at the stalwart. Until next time. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gura.

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