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We may have to get used to scenes like these

August 10, 2011

 

 

 

 

 

 

 

As I and other Peers and MPs return to Parliament today, I cannot help but be struck by how extraordinary the events of the last week or so have been. Global financial meltdown on the one hand is mirrored by scenes of violence on our streets. Extraordinary as these scenes appear, I cannot help but also fear that we may have to get used to them.

Because while many of the reasons given for the meltdown and the violence which already have been and will be debated at length today, are no doubt in part true – the rising influence of social media, the unrest that austerity can bring, a sickening of morals, indecisive and remote leadership (particularly in the EU/US), trade imbalances and globalisation, unsustainable debt and over-regulation hampering growth – there is one driver of recent events which will not go away any time soon: demographics.

What we are witnessing in the Western world is the impact of the ageing of the baby boomer generation. Their entry into the workforce in their millions fueled a welfare state and borrowing binge which is now no longer sustainable as they spend less (once children fly the nest) and retire or work less (and hence pay less tax). Yet their power as voters remains dominant, which makes it hard to go all out politically to help the young, whose futures and prospect of employment now looks uncertain. As boomers naturally started to spend less, the finance industry to maintain its returns (remember the promise of annual stock market returns of 8 percent?) leveraged up investments and ‘innovated’ using borrowed money – debts which then got transferred to sovereign states when banks overreached and collapsed. And our sovereign deficits are no longer sustainable (compared to similar crises such as during the 1970s) because the markets know the boomers will not be replaced by enough workers (particularly in Europe) to generate the tax revenues to pay back what we owe and their future pension and healthcare costs – hence the credit rating problems in both the US and Europe. Alongside this, if you are a young person today, you will not likely enjoy the kind of life your boomer (grand) parents and those around you will have enjoyed, despite having been raised on a diet of consumerism and consumer brands which you will struggle in future to afford. This is not about excusing thugs for looting but does explain what may have motivated some of them. And the State can only do so much, partly because of a lack of funds, and partly because it is not particularly easy to favor the young over more populous and politically active older voters. China or India do not (yet) face this demographic problem, but the opposite, a relatively medium aged population going into spending mode as their families grow (hence inflation). The Middle East and Africa have teenage and youth dominated populations which historically tend to fuel revolutions, war, and mass unrest. America has a youngish population mainly from its migrant communities, and will bounce back as long as it reins in its spending. The Eurozone has little chance of recovering. Britain sits, as ever, somewhere in the middle.

So we are going to have to get used to scenes like these all over the world, and adapt. If we don’t we will face bankruptcy in our markets and anarchy on our streets. How might we adapt? To address future social unrest we will need to conserve what cash we have left for essential public services (good policing, hospital care, and education), for addressing chronic social problems (such as problem families, addiction, and youth unemployment), and for a more modest set of foreign policy aims (such as defending global cities). We will need to harness innovation and local initiative co-developed and co-delivered with citizens to maintain less essential but still worthwhile services particularly in more affluent areas for less (which allows us to target what cash we have left on poorer areas and essential services).

To address our economic problems beyond reducing spending we need to grow by implementing a contrarian and less centralising fiscal strategy whose economic assumptions were based on baby boomer behaviours which will no longer hold true (and which underpin both Keynesian and monetarist thinking). We will need to be much more nuanced – there will be no silver bullets – and harness the rising wealth of the East for both investment and new markets, create more citizen-led and peer to peer means of financing consumer and business activity (moving away from the broken banking model of the 20th century), promote more self-employment among the young and underemployed (particularly franchise models which tend to fail less and create more jobs than normal self-employment), focus on collaborative consumption versus consumerist models (e.g. car and land sharing) to lower the cost of living since rising incomes are no longer guaranteed, and focus on helping cities develop and form global partnerships (particularly with the East) since cities drive growth.

Above all we need demographic and intergenerational solutions: old and young brought together not dealt with in silos overseen by professionals only. We need focused help for youth to be mentored and gain employment based on what they are good at. And we need encouragement for families to have more children across every income level to smooth future generational peaks and troughs.

In summary whether in economics or sociology, demographics matters. And we ignore it at our peril.

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