By Chriss Street

The Great Recession was primarily caused by the collapse in economic demand as 70 million baby boomers born between 1946 and 1964 moved out of their peak spending years in their mid-30s to mid-50s and into retirement in their late 50s and early 60s.  The U.S. government over the last five years squandered $7.6 trillion on Keynesian demand-side stimulus programs, trying to resuscitate this demographically shrinking demand.

With only 23 million born between 1995 and 2012 in Generation Z, this population is just too small for demand-side stimulus to revive the economy.  America is now deep in debt, facing 23 million unemployed, and needs to fund the baby boomer’s retirement.  Consequently, politicians are being forced to abandon demand-side stimulae and re-embrace supply-side economics.

The Revolutionary War was sparked by Great Britain’s demand that the American Colonies pay increasingly higher taxes to support England’s expanding national debt.  Once independent, the new U.S. Constitution’s Commerce Clause established a free-trade zone among the states and passed the Sinking Fund Act of 1795 to require a significant amount of tax revenue be set aside each year to quickly pay off any outstanding national debt.  These policies created an economic boom that allowed the United States to be debt-free by the 1830s.

This concept of encouraging long-term economic growth by lowering taxes on income and reducing regulatory burdens that serve as barriers for people to produce goods and services is referred to as “supply-side economics.”  The Founding Fathers understood that a greater supply of goods and services produced increases demand by lowering prices for consumers.

But during the Great Depression, Washington politicians abandoned supply-side and imported Keynesian “demand-side” economics from Great Britain.  Demand-side economics argues that, in the “short-run,” productive activity is influenced by aggregate demand (total spending in the economy) and that aggregate demand may not always equal aggregate supply (the total productive capacity of the economy), because private-sector decisions often lead to “inefficient market outcomes.” Therefore, government should create demand through targeted spending.  Armed with this smoke screen, U.S. short-term spending has risen every year since 1948, as politicians always found some inadequate market demand that needed more spending.

California revival

California’s own President Ronald Reagan revived supply-side economics in the 1980s with Reaganomics.  The policy ended the oil windfall profits tax to stimulate oil production, passed the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 to cut taxes and eliminate deductions, and instituted a payroll tax to begin a “sinking fund” to reduce the accumulated liability of Social Security and Medicare.  Although Reagan was never able to reduce total spending, he did start a huge economic boom that lasted until 2001 and led to huge United States Treasury surpluses in the late 1990s.

Most Americans do not realize that Reagan’s biggest ally for his supply-side encouragement of economic growth was the demographics of the baby-boomers.  Studies demonstrate that 50 percent of all durable (cars and houses) and non-durable (food and clothing) expenditures are directly related to household demographics.  Spending tends to peak as families grow and people reach their mid-30s to mid-50s.  Then spending declines rapidly after the mid-50s.

When Reagan began Reaganomics in August 1981, the first baby-boomers born in 1946 were just turning 35 years old.  By the time those first baby-boomers hit 55 in 2001, the NASDAQ over-the-counter index of growth stocks had risen from 190 to more than 5000, a jump of 2,600 percent.  As the boomers hit 55 and begin to retire through 2019, only 30 percent as many Generation Z members will replace them in the work force.

Politicians love demand-side economics because they get to look busy spending lots of money creating “demand” for their crony capitalist friends.  On the other hand, a part-time Congress could manage a supply-side economic policy, because the policy is set once to encourage long-term economic growth.

But as we have been observing, the United States government will go bankrupt long before politicians can “create” enough demand to replace the shrinking consumption spending as the baby-boomers continue to rapidly retire.  Having tripled the national debt since 2001 and recently suffering a credit downgrade, Congress has no other viable option than supporting a return to supply-side economics to encourage growth.

I expect Congress to soon update President Reagan’s playbook for supply-side growth.  The United States has the world’s largest oil and gas reserves and last year those proven reserves rose by the highest amounts ever recorded.  Much of the un-tapped oil is on federal land and Congress will begin deregulating the energy market to capture huge royalty payments on higher energy production.

Congress will also deregulate the utility industry.  This will encourage up to $6 trillion in private-sector capital spending for new pipelines and refineries across the nation to connect and distribute new production.  Corporate taxes and crony tax deductions will be slashed and individual taxes and deductions will be reduced.

America is on the verge of a huge economic expansion.  Enjoy the ride!

Chriss Street appears on “THE AMERICAN EXCEPTIONALISM RADIO TALK SHOW”
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By Wayne Lusvardi

Everyone knows that California has water wars.  But it also has land wars. And one of the biggest battles is the state’s land war against zoning for the suburban single family home. And a war against single-family homes is a war against suburban families.

California’s shift in housing policy from stand-alone, single-family homes to multifamily units — apartments and condominiums — is an attempt to correct forecasted demographic imbalances between the old and the young. But is the demographic imbalance of too few young adults to support the entitlements of the elderly merely a problem for centralized planners?

CA’s Land War on the Family

Demographer Wendell Cox has recently compiled persuasive statistics that California has “declared war” on the single-family detached home.

California is planning to compel cities to zone land in the San Francisco Bay area so that more than two-thirds of all new housing construction would be for multi-family housing.  In Southern California, central planning agencies want to require more than one half of all new housing to be located in very high density “public transit villages” (30 units per acre).   The typical density for single-family homes is 4 per acre–the equivalent of a city lot of about 7,500 to 10,000 square feet.

The reason behind such a shift in housing policy is the decline in the proportion of intact, self-sufficient families to support the elderly.

California Intact Families Have Declined   

Like the rest of the United States, the number of intact self-sufficient families in California has leveled off or declined over the past few decades.  The number of “Married Couple Families with Own Children” has declined by 121,260 families or 2.9 percent in California since 2000. (See Column F in the table below.)

Meanwhile, the percentage of single-family detached homes has declined in California by 0.3 percent relative to the population increase. (Column C in the table below.)

The proportion of the elderly has declined in California by 4.4 percent since 2000 (See Column E.)

But the number of young adults age 20 to 44 has also declined by 2.9 percent. (Column F.)

The ratio of all young adults to the elderly has declined from 4.1 young adults for every 1 elderly person in 2000 to 3.8 young adults foe every 1 senior in 2010 (Column I.)

The ratio of young intact families to the elderly has dropped from 2 to 1 in 2000 to 1.7 to 1 in 2010.  (Column H.)

However, the policy of emphasizing multifamily housing over single-family housing would run against the grain of historical housing preferences and open markets.

Most People Want to Live in Single Family Homes 

The National Association of Home Builders has tracked the historical ratio of newly built single-family and multi-family housing units.

In 1984 the trend in new housing construction was for about 2 single family detached homes to be built for every 1 apartment or condo unit. By 2010, that ratio rose to about 5 homes for every 1 apartment or condo unit.

This was long past the period when the Baby Boomers were making families.  So the boom in single-family home construction was not entirely driven by the Baby Boomers.  Thus, California’s shift to more multifamily housing is not all related to a decline in Baby Boomers buying houses.  It has more to do with Baby Boomers retiring.

But what would this shift from two-thirds single family housing to two-thirds multifamily housing construction do to California’s economy?

California’s Family Economy and Obamacare

As pointed out by many prominent economists, the U.S. economy is dependent on the relative proportion of young self-sufficient families to the elderly.  Intact, self-sufficient families produce young people who eventually take out mortgages and small business loans.  In doing so, they provide the elderly with an interest rate return on their savings and pension investments.  This intergenerational cycle of exchange of loans for interest rates is what makes the market economy work.

However, if there are not enough intact self-sufficient families to produce the next generation of homebuyers and small businesspersons then the economy stagnates.  This is what has happened since about 1970.   This is why jobs have declined in the United States and California (other than THE artificial jobs created during the Housing Bubble of the mid-2000s before it burst).

There is a demographic imbalance of too few two-parent/two-child self-sufficient households to pay the elderly a return on their savings.

Thus, Obamacare has surfaced as a way to compel young adults to buy health insurance so that the elderly can have their health care subsidized.  The average premium for individual health care insurance was $4,940 per year in 2010.  Obamacare is estimated to increase health insurance premiums by up to 30 percent, to $6,422.  Young adults could elect to pay a fine of up to $695 by 2016 instead of buying health insurance.  But then this would be nothing but a ruse for a new tax.

The elderly have six times the health care costs of the young.  Obamacare would put a cap on the amount of health care costs of the elderly at 3 times what insurers charge young adults.

This is why California says it is going to move ahead with its own version of Obamacare, even if this june the U.S. Supreme Court throws out the individual mandate to buy insurance.

And for California to bring this about, it also must shift housing policy from building single-family homes to building mostly multifamily homes for young adults.  It must build a demographic base of young people to support health care for the elderly, because there are not enough young intact families to do so anymore.

Obamacare Bakes Stagnation Into the Economic Cake

Let’s assume the U.S. Supreme Court validates the “individual mandate” of Obamacare, or declares it a matter for each state to decide. Obamacare would replace the existing intergenerational voluntary exchange system with a system of forced taxation of the young. What this will do is bake stagnation into the economic cake.

Young adults were never previously required to carry health insurance. To come up with about $6,000 per year for health insurance will mean fewer young adults will have money to buy cars or homes or start their own businesses.  The intergenerational cycle of the market economy would waffle out of balance even more.  Buying houses and cars and other big-ticket consumer items would decline. There would be less disposable income.

Home ownership historically has defined entry into the middle class.  By limiting homeownership opportunities, there may be less socio-economic mobility for the young.   The young would become nothing more than the modern equivalent of “tenant farmers” for taxes.

What centralized land planning offers is limited options of where to live. And it would freeze out Californians from the opportunity of home ownership.  Obamacare, coupled with California’s centralized land planning, will limit housing options for most people to apartments or condominiums.

With Obamacare will come an even greater decline of the bourgeoisie family that is essential to a market economy. What makes economically productive families is not government policies or planning but social capital.  Government central planners and regulatory czars can’t generate the kind of social capital needed to produce economically enterprising families.

Central Planning Has Failed

Should we leave housing and health care up to central planners, or devise more market-based solutions to address the problem?  As shown with the Housing Bubble, central planning often has eventual catastrophic unintended consequences.  Economist Guy Sorman notes that centralized planning hasn’t worked anywhere it has been tried.

The Housing Bubble policy of  “easy money” mortgages tried to create artificial jobs and put renters into ownership housing to correct this demographic imbalance.  This ruined the financial and banking systems, caused a bank panic in 2008, and diluted the value of the dollar.  It has also decimated government and school district budgets and pension plans.  Central planning has a bad track record.

What is behind the states’ new housing policies is California Senate Bill SB 375, the anti-urban sprawl bill signed into law by then-Gov. Arnold Schwarzenegger in 2008.  Together with California’s version of Obamacare, it would limit future housing and health care cost options, especially for younger families.  Californians need to know that state anti-urban sprawl legislation and likely state health care insurance mandates will limit their freedom of choice and resign California to nearly permanent economic stagnation.

California’s Family and Housing Economy 2000 and 2010