Gen F — Young Americans are being fleeced of their future

Young Americans today are part of the most highly educated generation in history. Despite this, data from Pew Research Center find that they are less likely to own their own homes, be married or have children than were older generations at the same age. The issue is not what the young generation has done wrong, but rather the wrong that has been done to them largely through shortsighted federal government policies.

It is both well-known and widely ignored that America’s cornerstone federal social programs are inadequately funded, facing near term insolvency — Medicare in just seven years and Social Security in 2035. These programs cannot survive in their present form, and looming budget deficits will force higher future taxes and lower future spending. But young Americans face more pressing concerns. Opportunity for young generations is being sharply and unfairly constricted.

The overwhelmingly dominant economic trend since World War II has been the growth of government social spending, which has risen steadily, from 7.6 percent of Gross Domestic Product in 1946 to 26.5 percent in 2018, a quarter of a percentage point of GDP per year.

Old-fashioned Keynesian economics textbooks assert that this growth in government spending is good for the economy, stimulating demand and investment and contributing to growth. But in the last few decades, reality has run opposite to those old textbooks. Since 1972, there has been a strong and consistent negative relationship between the size of government and the level of investment.

Advocates of old Keynesian economics may protest that economic cycles explain this negative relationship, and, to a limited degree, they are correct. When the economy is weak, government spending increases while investment decreases, and vice versa. But this cyclical effect is a small part of the total variation. When government spending increases its long-term share of the economy, the share of investment for the future shrinks. Sadly, this is true even for government’s own investment in infrastructure; such investment has shrunk 30 percent, from 1.0 percent to 0.7 percent of GDP under pressure from rising social spending.

Looking at long-term averages illustrates the secular trend. Despite declines in defense spending’s GDP share, total government spending rose from an average of 33.3 percent of GDP between 1972 and 2000 to 35.3 percent in the 2010-2018 recovery from the financial crisis. Investment has shrunk correspondingly by 2.5 percent of GDP.  According to data from the Penn World Table, on average, investment generates a 33.7 percent return of GDP output, so current reduced investment levels account for 0.8 percent of the decline in GDP growth from 3.3 percent in 1972-2000 to 2.3 percent for 2010-2018.

The outlook worsens looking ahead. According to the Congressional Budget Office, federal spending will be rising by another 2.5 percent of GDP through 2029 and by a further 4.5 percent of GDP through 2049 when today’s young Americans will be at the peak of their careers. If government investment remains at current levels and private investment continues at the long-term average of 26.2 percent of the private sector, economic growth will decline further to 1.7 percent, a European level of stagnation.

How can we provide a better future for young Americans if we have less investment devoted to it?

Dry statistics like GDP translate to real world outcomes for individuals and families. Employment compensation, measured by the Employment Cost Index adjusted for inflation, closely parallels lagged GDP growth.

As may be expected from headlines of income distribution, the greatest burden of stagnant incomes falls upon Americans lacking a college degree. According to Pew Research Center, households with people age 25 to 37 holding college degrees have seen their incomes grow 31 percent to $105,000 from the $81,000 level for baby boomers in 1982. But income for these college households is down 4 percent, from $110,000 in 2001. 

In contrast, similarly-aged households of people with high school degrees have household incomes of $49,000, 4 percent lower than 1982’s $51,000 and 11 percent lower than $55,000 in 2001.

This disastrous and unfair stagnation from declines of investment and growth will only worsen with continued increases of the government share of our economy. No matter how well-intentioned or effective it may be, government spending has the unfortunate side effect of crowding out investment for the future, thus suppressing growth and throttling young Americans’ future.

Douglas Carr is president of Carr Capital Co., a financial and economic advisory firm.  He formerly taught finance at Quinnipiac University.