Sunrise in America

The Great Reversal, part 3

A recent population report from the Census Bureau revealed the enormous increase in the elderly population coming our way.

Red, White and Blue. But wrinkled all over.

— By 2030 immigration is expected to be the biggest source of U.S. population growth, not births.

— The old will soon outnumber the young. The shift is projected to occur in 2034.

— Today there are 74 million people 18 years or younger and 56.1 million who are at least 65.

— But not long after 2030 the numbers will reverse so that we have 80.8 million seniors by 2040 but only 77.1 million youngsters.

— By 2060 the number of seniors (94.7 million) will exceed the number of youngsters (80.1 million) by a whopping 14.6 million.

— The very old will grow in number even more rapidly. Today, the number of people at least 85 years old is just over 6.7 million. It will nearly triple to 19 million by 2060.

The Century of Centenarians

— Similarly, the population of centenarians will grow from 100,000 to 600,000. Think about that. Gathered together, centenarians will be large enough in numbers to duplicate the population of Milwaukee, the 30^th largest city in America.

The consequence of aging is a major shift in what demographers call the “dependency ratio” – the number of people too young (under 18) or too old (65 and older) to work compared to the number of people of working age (18 to 64).  Equally important, many of the people of working age will be diverted to the task of taking care of the elderly.

While some of the shortage of workers will be solved by people who immigrate to the United States, it remains that this is not your father’s labor market. It’s the reverse of what millions of workers have experienced over the last 50 years.

The immigration solution

The question is whether we will be open to immigration. If we are, we’ll have less of a problem. If we aren’t, well, we’ll be like China and Japan — aging, inflexible and culturally isolated.

Finding the right path on immigration won’t be a slam dunk. In 1970 the population of foreign-born people in our country hit a historic low of 4.7 percent. It tripled to 14 percent by 2020.

It could be argued that immigration contributed the problem of poor wage gains over the last half century. The foreign-born percentage of people living in the U.S. is projected to continue to grow over the next forty years. But the rate of increase will be much slower than it was from 1970 to 2020.

To me, immigration is part of who we are. More important, it is part of what we have wished to be as a nation.

Demographic Diversity is Destiny

If I could, I’d have every member of the Texas Legislature attend a graduation ceremony for Texas A&M. Earlier this year, I watched my grandson Dylan graduate with a degree in physics. It’s a great multicultural event, with multiple ceremonies on different days because the number of graduates is so great.

It shows how the forward-looking Texas has harnessed immigration to benefit everyone in our state. It’s what a positive future is all about.

Better, higher wages. Starting Now

If you’ve been on a plane lately, you know. Air travel is back. We’re living with masks and flying. Recently, Delta announced that it was already at pre-Covid levels. Flights I’ve been on were 100 percent full. No empty middle seats.

But take a look around any airport and you’ll likely see restaurants that have yet to re-open because the owners can’t find workers to cook and serve food. It’s the same at restaurants everywhere. Crowds of diners, shortages of servers, epitomized by the now famous Burger King sign that read, “We all quit. Sorry for the Inconvenience.”

The same tension – and willingness to quit – extends far up the wage ladder. In May the Bureau of Labor Statistics reported that some 8.1 million jobs were unfilled at the end of March. The situation existed before Covid, but it’s worse now. So wages, at last, are rising nicely. Worker earnings rose 5.8 percent in 2020. They were increasing at a year-over-year rate of 4.3 percent in June, according to Economic Indicators.

The fact that inflation is running higher than 5 percent and that retirees are likely to get the largest cost-of-living adjustment in years – likely over 5 percent – is a strong indication that employers will have to step up their game.

For decades.

How to multiply money

In 1967 a New York money manager, under the pen name Adam Smith, saw his book “The Money Game” published. One of the best and most readable books about the stock market and investing ever written, George Goodman described stocks as super money, explaining that the market could turn $1 of earnings into a much larger number of dollars by its price-to-earnings multiple. That simple mechanism could turn $1 into $40 for a hot stock. It could be more for the stocks with the best stories and greatest promise.

Back then it was a Wall Street thing.

Today that game is being orchestrated by the Federal Reserve, not Wall Street. To survive the financial crisis of 2008 the Federal Reserve bought assets. They reduced interest rates. They engineered a recovery in the stock and bond markets. They supported the recovery of real estate values.

Some say it was necessary.

But think about it another way. If you are an investor earning 4 percent on a stock, it will take you 25 years to recover the money you have invested. But if interest rates decline and investors will pay more for your super money, doubling its value, what happens?

You get 25 years of value in the time it took your investment to double. Way less than 25 years.

The inflation no one talks about: Asset Inflation

That’s why the Money People – the folks who own stocks, bonds and real estate well beyond their primary home – have become so much richer. While the Federal Reserve calls price inflation mild, it has ravaged our society with another kind of inflation, asset inflation.

The results, which you can read about every day, are cruel. Rising rents, homelessness, young adults moving back with their parents. It’s a long list.

The benign effect of higher wages

Talk about higher wages with the Money People and you’ll see a lot of raised eyebrows.

“It will bring inflation,” they’ll say.

“Higher wages will just mean more pressure on employee head counts and payrolls,” they’ll add.

But while only a small portion of all Americans benefit from the asset inflation we’ve seen in the last decade, a majority of all Americans would benefit from higher wages, even if it brings some inflation in the price of the goods and services needed for daily living.

Suppose, for instance, that increasing basic wages enough to provide a “living wage” would require a 10 percent increase in payroll costs and that payroll accounts for the relatively typical 40 percent of sales. That means price increases of 4 percent, perhaps less if the owners accept somewhat lower profits.

Now ask yourself a question. Which change produces a higher social good, the asset inflation we’ve had or the price inflation we might get from broadly higher wages?

The benefit for Uncle Sam

Higher wages won’t just benefit struggling workers. They will also benefit the finances of our government.  Here’s why. Over the last few decades profits have become a larger share of our national income. Labor income has gone in the opposite direction. But as a larger share of national income goes to profits, government revenue suffers.

How can that be?

Simple. Just as Warren Buffett famously pointed out that he pays taxes at a lower rate than his secretary, the higher a person is on the Money People Pyramid, the greater the amount of income that is taxed at low capital gains rates. It’s a consequence of the well-funded synergy between lawyers, lobbyists and Congress.

Worse, very few of those high-income dollars go to pay employment taxes.

Funding the future starts with higher wages

That’s important. While the current federal deficit is a real problem, inadequate funding of Social Security is at least as great an issue. Social Security is sustained by the employment tax, not the income tax.

Increase wages for the 94 percent of all workers whose earnings are less than the Social Security wage base maximum, currently $142,800 a year, and the U.S. Treasury will collect two taxes, not one.

The Treasury will collect more of the employment tax that supports Social Security and Medicare.

And it will also collect more in federal income taxes as workers move from paying no income tax to paying at a 10 percent rate, a 12 percent rate or make the big jump to a 24 percent rate.

Is that pie in the sky?

Not a chance. All of that happens in a range of taxable incomes from $9,950 to $40,525 for single taxpayers. It’s twice that for married couples filing jointly. Either way, we’re not talking about Fat Cats.

We’re talking about ordinary people, the people who’ve been taking it on the chin for decades. To paraphrase an old saying, “What’s good for general workers is good for America.”

Following the daring of Henry Ford, Capitalist

Higher wages aren’t socialism. Indeed, when Henry Ford bet his company by doubling workers’ wages, he proved it.

Workers prospered. Ford sold more cars. He became a rich man.

And he helped make America great.

Read earlier columns in this series:

Part 1: https://scottburns.com/the-great-reversal/

Part 2: https://scottburns.com/so-much-money-so-few-workers/

Related columns:

Scott Burns, “Changing the terms of trade for work,” 5/22/2016  https://scottburns.com/changing-the-terms-of-trade-for-work/

Sources and References:

PRODUCTIVITY VS WAGES

The Productivity-Pay Gap (Updated May 2021)

https://www.epi.org/productivity-pay-gap/

Josh Bivens and Lawrence Mishel, “Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real,” 9/2/2015,  https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/

Walker, “Is the EPI Correct About Wages and Productivity?” 4/15/2017 https://difficultrun.nathanielgivens.com/2017/04/15/is-the-epi-correct-about-wages-and-productivity/

James Joyner, “What Happened to the Wage and Productivity Link?,” 7/22/2012  https://www.outsidethebeltway.com/what-happened-to-the-wage-and-productivity-link/

FRED economic data, Share of Labour Compensation in GDP at Current National Prices for United States, 1970-2019   https://fred.stlouisfed.org/series/LABSHPUSA156NRUG

FRED economic data, “Capital’s gain is lately labour’s loss, 8/8/2019  https://fredblog.stlouisfed.org/2019/08/capitals-gain-is-lately-labours-loss/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

Kristin Toussaint, “The federal minimum wage hasn’t increased in a decade, but the prices of everything else has,” 12/31/2019 https://livingwage.mit.edu/articles/53-the-federal-minimum-wage-hasn-t-increased-in-a-decade-but-the-prices-of-everything-else-has

Economic Indicators, June 2021: Average Weekly Hours, Hourly Earnings, and Weekly Earnings –Private Nonagricultural Industries     https://www.govinfo.gov/content/pkg/ECONI-2021-06/pdf/ECONI-2021-06-Pg15.pdf

POPULATION: BIRTHS

The World Bank, “Fertility rate, total (births per woman)”, 2019  https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?type=shaded&view=map

Zhang Hui and Liu Xin, “Is China’s birth rate low enough to cause population crisis?” 5/13/2021  https://www.globaltimes.cn/page/202105/1223326.shtml

Damien Cave, Emma Bubola and Choe Sang-Hun, “Long Slide Looms for World Population, With Sweeping Ramifications,” 5/22/2021  https://www.nytimes.com/2021/05/22/world/global-population-shrinking.html

Vizhub, population forecasting tool: https://vizhub.healthdata.org/population-forecast/

Our World in Data, “Children per woman vs population growth, 2020  https://ourworldindata.org/grapher/children-per-woman-vs-population-growth

Institut National D’Etudes Demographiques, Population Simulator:  https://www.ined.fr/en/everything_about_population/population-games/tomorrow-population/

POPULATION: LIFE EXPECTANCY

Tutorial INED: https://www.ined.fr/en/everything_about_population/population-games/life-expectancy/

Atheendar S. Venkataramani, MD, others “Declining Life Expectancy in the United States: The Need for Social Policy as Health Policy,” 2/16/2021 (JAMA Network)  https://jamanetwork.com/journals/jama/article-abstract/2776338

Laurel Wamsley, “American Life Expectancy Dropped By A Full Year in 1^st Half of 2020,” 2/18/2021 https://www.npr.org/2021/02/18/968791431/american-life-expectancy-dropped-by-a-full-year-in-the-first-half-of-2020

Elizabeth Arias and others, “Provisional Life Expectancy Estimates for January through June 2020, 2/2021,  https://www.cdc.gov/nchs/data/vsrr/VSRR10-508.pdf

Life Expectancy by country: https://www.worldometers.info/demographics/life-expectancy/#countries-ranked-by-life-expectancy

OTHER REFERENCES

1967:  The New Industrial State publication: https://www.goodreads.com/book/show/244904.The_New_Industrial_State

1968:

Carterphone decision:  https://www.usnews.com/opinion/blogs/economic-intelligence/2012/06/28/carterfone-case-showed-how-regulations-promote-competition

1970:  First commercial Dynamic Random-Access Memory:  https://en.wikipedia.org/wiki/Random-access_memory

1971: First computer on a chip:  https://spectrum.ieee.org/tech-history/silicon-revolution/chip-hall-of-fame-intel-4004-microprocessor

Money market mutual funds and Regulation Q:  https://www.nelsoncapitalmgmt.com/2018/06/12/brief-history-money-market-funds/

Nixon opens China:  https://www.nixonfoundation.org/exhibit/the-opening-of-china/

Nixon closes the gold window:  http://journals.sagepub.com/doi/full/10.1177/0032329218823648

Nixon declares wage and price controls:  https://www.cato.org/commentary/remembering-nixons-wage-price-controls

1973

OAPEC (the Organization of Arab Oil Exporting Countries) began an embargo on oil exports to the United States. https://www.federalreservehistory.org/essays/oil-shock-of-1973-74

1975   End of Vietnam war:  https://history.state.gov/milestones/1969-1976/ending-vietnam

1981  Reagan fires air traffic controllers  https://www.politico.com/story/2017/08/05/reagan-fires-11-000-striking-air-traffic-controllers-aug-5-1981-241252

Ray Wylie Hubbard sings “Mother Blue’s,”  Ray Wylie Hubbard “Mother Blue’s”

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(c) Scott Burns, 2021