They sometimes have been called the most self-important generation in
American history. Now, as their leading edge begins to enter retirement, we may
start to find out whether the baby boomers’ role in the economy is as outsized
as their ranks.
If a new Federal Reserve report is correct, the lost labor of the 77 million
boomers will be so hard to replace that over the next decade the national
economy will grow at a significantly slower pace than it has in the past 10
years.
How much slower? The lost growth, by one estimate, will come to $1,322 per
person by 2015 — or $13 billion, equal to nearly double the value of all goods
and services produced in Minnesota in 2004.
That’s a lot of money for what sounds like a small change: an average growth
rate in the next 10 years that’s 0.3 percent slower than it would be without the
boomer exodus.
The new report predicting that outcome was compiled by five economists at the
Federal Reserve Board of Governors. Their preliminary draft (the final version
is expected in July) has been called "revolutionary" by one Wall Street
economist.
Experts already poring over its findings predict sweeping implications if the
report proves true, affecting the course of interest rates and the level of
wages. The interaction of demographics, economic choices and individual behavior
raised in the report is so complex that forecasters may be studying the
conclusions for some time to come.
"If it is true, it changes everything," said Ian Morris, chief U.S. economist at
HSBC Securities USA in New York.
The impact of the report may have more to do with who is writing it — economic
advisers to the Fed Board of Governors — than what they have to say.
The Fed economists presented their findings a few weeks ago at a venue where
their conclusions would be sure to draw widespread attention — the Brookings
Institution, a prestigious Washington think tank. The Fed did not make the
economists available for an interview.
Alan Blinder, a Princeton economist and former vice chairman of the Federal
Reserve, said that most likely Fed officials already have begun to take into
account the report’s forecast of tighter labor markets ahead.
"All other things being equal, it leads to higher interest rates," Blinder said
of the gradual passing of the boomer generation from the workforce. The prospect
of tight labor markets ahead may be "one of the reasons Fed will top out at 5 or
5.25 (percent) and not, say, 4.5 or 4.75 (percent)" on short-term interest
rates, Blinder said.
Fed officials, he said, will have more reason to worry about wage inflation if
labor gains more bargaining power as boomers retire.
Some boomers already are out the door, having gained enough wealth to make-work
unnecessary, or lost enough health to make it impossible; the first major wave
of boomer retirements will come in the next five years, as today’s newborns
enter elementary school.
In 1990, there were five workers for every retiree. By 2030, forecasters expect
2.5 workers for every retiree.
For a half-century, worker participation rates rose until they peaked at 67.3
percent in early 2000. Since then, the participation rate has fallen. At last
count, 66 percent of the working-age population had jobs or were looking for
work. By 2015, the Fed economists project, it could be less than 64 percent.
While a 3 percentage point decline seems tame, that much of a decline in labor
force participation "is nearly unprecedented in the post-war economic experience,"
the Fed study noted.
"This continued downtrend, coupled with slower projected population growth and
an apparent downtrend in the average workweek, suggests that trend growth of
aggregate hours will slow further in coming years," the report concludes.
In most of the past 30 years, women streamed into the workforce in increasing
numbers — a trend that appears to have flattened. Meanwhile, teenagers and
20-somethings are staying in school longer before pounding the pavement.
Older workers may offset those forces only if they linger in their jobs longer
than expected or start new careers after retiring. However, the Fed economists
don’t expect retirement-age boomers to remain on payrolls in large-enough
numbers to counterbalance a labor force growing no faster than the nation’s
population.
Slower labor-market growth will make economic growth rates falter unless
productivity unexpectedly soars, said Allen Sinai, a leading economic forecaster.
Add to that a related problem: The workers left behind will be taxed to support
an unprecedented number of retirees just as economic growth rates are receding.
"When the growth rate is high, the pie is bigger and everybody gains," said
Sinai, chief global economist at Decision Economics in Boston. "If the pie grows
more slowly, everybody loses."
Corporate profits also could suffer from slower economic growth, suggesting that
stock prices may not rise as fast in the future as they have in the past, he
said.
Sinai called the study by the Fed economists "terrific research with gloomy
implications for the future of the U.S. economy."
Not everyone is so sure, however, that the graying of the boomers will prove so
decisive.
Richard Rogerson, an Arizona State University labor economist, maintains that
rising worker participation rates aren’t a reliable bellwether of economic
fortunes. A greater share of the population entered the workforce in the 1970s
than in other recent decades, but the ’70s brought high inflation and low gross
domestic product growth, not prosperity.
Another cautionary opinion seems particularly timely, given the recent
demonstrations in many U.S. cities in favor of more liberal immigration laws.
Economist Roger Brinner argues that the Fed economists rely on an economic model
that fails to fully account for the wealth produced by immigrants — a group
whose labor could offset some of the anticipated fallout of the retirement of
baby boomers.
What’s more, if the nation finds a way to keep more teenagers in school, the
long-run economic payoff from a better-educated workforce could be far greater
than the short-term gains from kids taking low-skills jobs, said Brinner, chief
economist at the Pantheon Group in Boston.
Distributed by Scripps Howard News Service, www.shns.com
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