By Ryan Graves on Nov 27, 2019

Boomers have been on the backs of us Millennials ever since we entered the workforce. Millennials have been called coddled, lazy, entitled, “The Boomerang Generation,” and “The Peter Pan Generation.” Some of this is true. Still, a lot of it is pretty unfair to say, especially as many previous generations have exhibited the same traits. However, Millennials were supposed to have it all. We came of age in the tech revolution and are the most educated generation the world has ever seen. The table was set for Millennials to be the next “Greatest Generation” in a sense. Still, things went wrong somewhere for Millennials. Millennials are struggling to hit their stride, saddled with student loans, unable to afford homes, and often need a side gig to make ends meet. Things were not always this problematic for young adults. After decades of failed policy and poor investments, Millennials have been left with a future less bright than what their parents inherited. 

Before going any further, let’s define a Millennial, as quite a few definitions are floating around. The most commonly accepted age range for millennials is 1981-1996 (23-38), Gen X is 1965-1980 (39-54), and Baby Boomers 1946-1964 (55-73). It means that millennials were entering the workforce just as the Global Financial Crisis of 2007-2008 and the subsequent Great Recession hit. Trying to find work in this period was difficult for everyone. Still, younger, less experienced typically bear the brunt of unemployment during a recession, and it was a lot worse for Millennials than during a typical recession.  

Jobless Recovery

Because Millennials had just entered the workforce, they did not have substantial savings or homes that lost value in the financial crisis.  However, millennials were still left out of the subsequent recovery, as they found it difficult to find work. During the recession, the overall unemployment rate went up to 10.6%, and it was much higher among Millennials. In fact, for working-age Millennials, the unemployment rate was 15.8% and did not fall back in-line with the overall unemployment rate until mid-2018. Keep in mind that the unemployment rate includes whether an individual has a job or not AND if he is also looking for one. If someone is working part-time, underemployed, or working a job outside of his field, he counts as employed. After looking deeper into the unemployment numbers, it is clear that the recession completely crushed millennials.  Worryingly, the labor force participation rate has decreased for young twenty-somethings since the Great Recession.      

Millennials continue to have a difficult time finding their place in the workforce. Sure, the unemployment rate is historically low, but looking deeper into the data reveals some startling information about the job market of the post-2008 world. Around 60% of the job losses from 2008-2010 were mid-income jobs, approximately $27,000 - $40,000 per year. There has been a great hallowing of the job market, where mid-level positions used to flourish. There is a lot of fear around technology replacing low-skilled jobs. Still, it is most often the case that technology replaces routine and task-oriented functions (more on why later). These are precisely the types of jobs and tasks that young workers need to start gaining valuable experience to climb that career ladder. Because technology replaced about 90% of these mid-level tasks, Millennials accounted for two-thirds of the job loss and “jobless recovery.” 

Additionally, older, more experienced workers have been pushed down the career ladder as firms have replaced routine functions with technology. Firms are now looking for experienced workers that can better handle the non-routine tasks. This trend will hamper Millennials for decades to come as they will have to take marginal jobs. Millennials will need to perform contract and temp work for years longer than any previous generation to log the experience necessary to climb the career ladder.

Boomers are the Cause of Millennials’ Job Woes

The problems go back to before the Boomers were born. The economy was set to cool off from the aftermath of WWII. There was a lot of investment going into the war effort and then rebuilding after the war, and it was not sustainable. The United States and Boomers went through a Golden Age after WWII as it helped supply and reconstruct the rest of the world. It could be argued that it was not “new growth.” You can pay workers to dig a hole and fill it back up, and it would technically be counted as growth, even if you are not better off afterward. Another global impact that helped Boomers was the fall of communism that led to a spur of free(er) trade. Also, Baby Boomers benefited from a large workforce. A large workforce means there are more people out there earning and spending paychecks, having a multiplicative effect on growth. All of these impacts would come to an end, and it would be clear that a generation of Americans did not learn how to save and invest. 

Boomers’ failure to understand the new economy post-WWII and post-Soviet Union led them to double down on bad policies continuously. Those policies skewed the economy instead of setting it up for long-term, inclusive success. Historically, capital investment has gone together with labor productivity. Investing in technology and equipment has been a complement to labor, not a substitute. Boomer policy decisions made it more lucrative to financially engineer wealth than invest in capital and labor that grows the economy as a whole.
Since the 1980s, Boomers voted for politicians and policies (neither party has been kind to Millennials) that have consistently benefited the present at the expense of the future. The supply-side policies cut taxes drastically in the 1980s, bringing the top tax rate from 70% to 39%. Crucially, these policies also reduced taxes in a way that favored fixed capital investment, but specifically financial capital, and not the type of capital that would have complemented productivity. While cutting taxes in the 1980s did lead to gains in productivity, it also incentivized rampant financial engineering, all while blowing out the budget deficit.

Tax favorable financing and a relatively low-interest-rate environment led to a boom of financial engineering that started in the 1980s. Financial engineering occurs when a company or investor borrows at a low-interest rate against assets to buy another firm or buyback shares of its own company. Interest payments are now tax-deductible, and asset sales are taxed at a much lower capital gains rate. It was far more lucrative and easier for an executive to borrow money and gobble up firm shares or buy another company to increase shareholder value under these conditions. These policies fueled the wrong type of investment by buoying asset prices without real capital investment. Without investment in fixed capital assets (factories, equipment, and technology) that increase labor productivity, the economy was set for a dangerous course.

Everything looked great in the 90s: The economy was booming, Al Gore invented the Internet, and the PC revolution was underway. But it was more of the same bad policies. The Federal Reserve Bank maintained interest rates at a low level for a historically prolonged period as taxes on income increased. Policymakers have increasingly relied on the Fed to grow the economy through low interest rates. Still, with favorable tax rates on capital gains compared to taxes on income and profits, more financial engineering ensued. To make things even better, the 1997 Congress cut the top capital gains tax rate to 20% versus a high corporate tax rate of 35%, allowing for more distorting “investment” shenanigans. 

After the dot-com bubble, we got the Bush tax cuts and lower interest rates, adding about $1.5 trillion to the deficit over ten years. Low taxes and low interest rates led to more of the same activity. Fixed capital investment began to pick up again, but this time it was focused on housing. The problem is that housing is not a very productive part of the economy. After construction, a house produces very little economic output. Sorry, Karen, but Live, Laugh, Love does not add to gross domestic product. Investing in homes did nothing to increase worker productivity, keeping wages and living standards stagnant. Boomers began tapping into their home value to consume and raise their standard of living, which is ultimately unsustainable.

Then came the financial crisis and Great Recession. The Fed cut interest rates to zero and launched Quantitative Easing. Quantitative Easing involves printing money to purchase bonds in the open market to increase the money supply in hopes of increasing lending. The government also introduced new policies to make it easier to refinance and buy homes. The Fed launched another program that helped bring down mortgage rates. Next began a splurge of home refinancing and share buybacks by corporations, so more of the same. The Fed and government policy encouraged lending for refinancing, taking capital away from small businesses, and propping up an unproductive sector for the economy.  

The economy began to grow much more capital intensive after the recession, but not in the right way for workers this time. Low interest rates and the newly imposed costs of the Affordable Care Act (Obamacare) made it much cheaper to use technology to replace workers. Historically, technology has always helped workers become more productive as it augmented tasks. Whenever we think of technology replacing workers, we think of robots replacing a barista or a cashier, but that has not been the case. The purpose of technology investment post-2008 has been to automate the repetitive and monotonous tasks of many mid-level corporate jobs. Many of these repetitive tasks and functions were used to help train young workers.  These entry-level areas are the ones that Millennials would have been yearning for as they entered the workforce. So, we have seen a significant hollowing of the job market. Mid-level jobs have gone missing as more experienced workers have filled the gap where Millenials would be.  
As a generation, Boomers forgot how to save and invest. Boomers consistently passed policies that propped up the fruits of a robust and inclusive economy: housing, healthcare, financial markets, and student loans. By propping these sectors up, the capital shifted away from the things needed to increase labor productivity, and that has led to a jobless recovery and stagnant wage growth after the Great Recession.

Owning a Home Is Not What It Used to Be

Boomers absolutely love their houses, but why wouldn’t they? Homes have been the primary source of wealth accumulation for Boomers. After the Great Depression (going back a bit, but hang in there), the government decided it wanted to subsidize the housing market by amortizing mortgages insuring mortgages. Amortizing mortgages split the interest and principal into the payment, so homebuyers build their ownership over time. Fannie Mae was then created to buy up these mortgages from banks so that the banks would have more money to lend out to homebuyers. To further sweeten the deal, mortgage interest became tax-deductible. The government-sponsored homeownership, creating a swell in the middle class that was 16% in 1930 to 35% by 1980. Homeownership and pensions were the most significant drivers in the creation of middle-class America.  

From there, Boomers thought they could bring the low-income households into the middle class as well. Through the 1990s and early 2000s, bi-partisan policies came into place instituting and expanding credit for home purchases and reducing the necessary down payment to purchase a home. In 1989, only 1-in-230 buyers made a down payment of 3% or less, 2003 1-in-7, and by 2006, 1-in-3. The government was essentially goading low-income Americans into homes they could not afford.

The pro-mortgage for everybody policy played a role in the financial crisis, but so did the Federal Reserve Bank. The Fed has been trying to make up for the economy distorting policies that come from Boomer politicians. The Fed was hoping to overcome the lackluster Washington policies to stimulate business investment with the only tool it really has: interest rates. However, keeping interest rates so low for so long just led to more financial engineering, and this time the homeowners were in on it. Boomers were betting on home prices going up forever and facilitated an environment where home loans were made available to marginal borrowers. These were created to increase homeownership and lift low-income Americans into the middle class. The idea of putting low-income Americans into homes that they could never afford seems almost cruel.  So, of course, a financial crisis happened.

Don’t worry; the Boomers were sure to bail themselves out. Throughout two political regimes, trillions of dollars pumped into the economy, and the Troubled Asset Relief Program, the Boomers managed to save Wall Street and the housing market. The government went out of its way to convert loans to fixed-rate mortgages to help keep people in homes that they never could afford, propping up the housing market. Eventually, the thirty-year-fixed-rate fell to below 4%, allowing many Boomers to refinance and add some spending power back to the economy. Still, it would have been more efficient to incentivize businesses to hire.  

Boomers bailed themselves out, and things got harder for Millennials. Because younger workers typically do not have homes, they tend to be more mobile during recessions and can move to find jobs. Still, Millennials were not so fortunate this time around. Most of the bailout/refinancing activity took place in areas that were already doing relatively well and had the best job markets. Mortgage originators like stable and verifiable income when making a loan to an applicant. However, because many Millennials are working contract jobs and side gigs, earning the harder to verify income, it is more difficult for them to get a loan. Politicians want to keep housing prices high by any means necessary, and that may mean that Millennials will never be able to put down 20% for a 30-year fixed-rate mortgage. Rent has gone up significantly, too.  On an inflation-adjusted basis, Boomers paid about one-third of their income on rent; in contrast, Millenials are spending about half. The same tactics that helped launch Boomers into the middle class are keeping Millennials out, creating a generational inequality.    

Taxing, Spending, and Borrowing

It used to be the case that the government would only deficit spend in times of emergency or war and that spending would be offset by tax increases later. Nowadays, Washington spends a casual $4.0 trillion a year and collects $3.3 trillion, transforming the government from a borrower in times of crisis to one that borrows from its future workers. Nowhere is it more evident than in entitlement spending on social security and medicare. Technically speaking, Boomers inherited these structural deficits, but they made them a lot worse, not better. Boomers have upped the benefits and delayed the costs, further increasing the generational inequality. 

The real root of the problem is that Social Security and Medicare are not retirement and insurance programs. Also, the benefits paid are only very loosely based on what participants paid into the programs. In private insurance and retirement programs, money collected is then invested to earn a return before the participant needs it. With Social Security and Medicare, the money raised is sent right back out to the elderly. So current workers support the elderly, and it is not the elderly collecting what they paid into the system.  

Entitlements are pretty unfair to Millennials as there is not a mechanism to prevent the elderly from collecting more than what they paid into the system. For couples born in 1950, Social Security and Medicare collect  $1,053,000 after paying in $701,000, a deficit of $352,000. For couples born in 1965, benefits of $1,372,000 and paying taxes of $851,000, a deficit of $521,000. Social Security and Medicare deficits are getting worse as people are living longer and in poorer health. Sadly, 45% of Baby Boomers have no savings in retirement, implying that they will have to tap into home equity to cover living and medical expenses. It is also becoming more and more likely that Boomers will be relying on their children to help out with these expenses, too. If Millennials are struggling to find good jobs, homes, and pay off student loans, how are they supposed to help the Boomers out in retirement? Millennials have been robbed of any fiscal choice as Boomers have written checks on the Millennials’ economic future. Remember the above numbers the next time a Baby Boomer calls you entitled.

Sadly, this problem cannot be solved by “just raising taxes.” If we add up all the taxes that one is likely to pay in his lifetime and offset that against the benefits he is likely to receive under current laws, programs, tax policies, and life expectancies, we can do some generational accounting and policy analysis. If expected payouts are higher than the expected benefits, it is called a “fiscal gap.” In 2001, the generation about to be born was supposed to pay a net lifetime tax twice as much as the generation before it. That is a massive burden. Put differently, to restore the balance between generations, meaning that they pay for what they owe, the government would need to increase revenue by 64%, permanently, or cut all spending by 40%. If we wait for Millennials to hit 50, we would need a revenue increase of 72% or cuts to all expenditures by 46%.

Boomers have been horrendous about saving and managing the economy, passing along an astronomical burden to the youth.  Boomers often admit that they will have to raise taxes, but as more and more of them are retiring, it will be Millennials picking up the tab. To make social security solvent, we would need to increase the payroll tax 2%-3% and subject all income above the $133,000 limit to the payroll tax to get the program back into balance. A payroll tax of 4.5% could make the social security program solvent. The real problem with these solutions is that Millennials would have to pay for almost all of it. So, raising taxes does nothing to address the issue of generational fairness and the fiscal gap created by Boomers. 

The Future

Some articles have cited that Boomers will transfer anywhere from $30-$36 trillion in assets over the next thirty years. They are implying that this transfer (some going to Gen X) will balance out the inequality. It’s not going to happen. As stated earlier, Boomers are living longer in poorer health, so a lot of that money will be spent on healthcare. Whatever wealth is leftover will not be passed on to Millennials until they are approaching 60, well past when such an inheritance would help them pay off student loans, start a family, or purchase a house.  

The fiscal gap has already begun to harm Millennials and future generations. It is no secret that Millennials are delaying marriage, buying a home, and starting families. The implications are that future generations may delay starting a family even longer or may not have one at all. It is already a severe issue in advanced economies, such as Germany and Japan, who face rapidly aging populations and massive social welfare obligations. Young workers in Japan suffer such bleak prospects that many of them cannot even fathom having a family. Without a concentrated effort to fix the fiscal gap, Millennials and future generations will have no choice but to pay devastatingly higher taxes. The next time a Baby Boomer calls you lazy or entitled, simply remind him that you are unwillingly supporting his life instead of yours. Ok Boomer.



The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future by Joesph Sternberg

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian


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