Baby Boomers Creating New Fiscal Formulas

It just may be that we could understand the economy better if we looked at population numbers instead of economic statistics.

The population numbers are encouraging. They show that for the next 10 to 20 years, the United States will have more people working and producing--and proportionately fewer people in retirement--than at any time in recent history. That’s because the 76 million Americans born between 1946 and 1964--the so-called baby boomers--have all entered the full-time work force and won’t be starting to retire until 2011 or so.

Moreover, says Deborah Allen, president of Claremont Economics Institute, a research and consulting firm, as the United States is shifting to having the most people working and the fewest retired, other nations--notably Japan--are shifting the other way, to more retirees and fewer workers.

What does that tell you? That with more people working and producing, it’s no wonder the U.S. economy is so strong.


But that baby-boom explanation is not a conventional way of looking at the economy. For most people, including the governors of the Federal Reserve, every sign that the economy is strong is cause for concern. When it was announced recently that unemployment had fallen to a 15-year low, the stock and bond markets fell because they feared the Fed would raise interest rates to slow the economy and curb rising inflation.

In contrast, on Thursday, when the government reported that new home building was down in February and the nation’s factories showed no growth in output, the stock market rose. So it seems bad news is bullish and good news is bearish.

Why are things so contrary? Because inflation really is rising-- as Friday’s wholesale price report indicated, says economist David Levine of Sanford C. Bernstein & Co., and the Fed really will be raising interest rates. Levine sees no recession this year or next but expects inflation to approach 7%, and long-term interest rates well into double digits.

The Productivity Factor


Worse, says economist David Hale of Kemper Financial Services, the United States will have stagflation--a stagnant economy and inflation. Because of lagging business investment in the 1980s, says Hale, we don’t have the capacity for a strong economy. So he predicts slow growth despite full employment, which means that people will get raises and prices will go up without anything more being produced.

But how frustrating. If more people are working, why can’t we produce more? Because, writes Hale, “the economy is constrained by sluggish productivity growth of under 1% per year.”

A big word, productivity. Technically it means output per unit of input, but socially it means a better life for all. Productivity is said to grow when a worker goes from subsistence farming to producing higher value goods in a factory. Growing productivity means increasing national income, making the pie bigger so there is more to go round.

The great scholar of productivity, Edward F. Denison of Brookings Institution, wrote in his landmark book “Accounting for U.S. Economic Growth 1929-1969" that productivity grows as knowledge of how to produce efficiently increases, or because of expansion in size of markets. Thus U.S. productivity grew rapidly, 3.9% a year, in the postwar period as the economy expanded from local to national markets.

But productivity growth slowed dramatically in 1973. And many experts blamed that on inexperienced baby-boom workers coming into the labor force and reducing efficiency. But Denison questioned such conclusions and the measuring sticks behind them. He found, for example, that developments such as pollution controls--which many would call social improvements--were counted by economists as reducing productivity.

And his newest book, “Estimates of Productivity Change by Industry,” continues to challenge conventional economics--such as the belief that productivity is rising in manufacturing but not in service industries. Most industries, notes Denison, are combinations of the two, as when transportation, a service, runs on fuel, which is manufactured. The 73-year old economist suspects that productivity increases may be occurring without being properly measured.

So, is he optimistic or pessimistic about future productivity growth? He’s disarming. “I’m agnostic,” he says. “As I don’t know why productivity slowed, so I can’t say what will change the current situation.”

But if conventional economists are wrong on productivity, could they be wrong on inflation? You bet they could, says Claremont’s Allen. “They’re afraid of the unknown,” she says. “We’re in new territory, the seventh year of expansion, growth is worldwide. This is literally a golden age.”


Her advice: Don’t look in the rear-view mirror. Look ahead to decades of the baby-boom generation working, spending, investing and saving--and setting the agenda just as it has from the 1960s to the present.

Say this, if the baby boomers bring off continued economic good times, it won’t be the first time that the generation of 76 million people has forced the experts to change their equations.