A lot of economics is about unintended consequences. A change or policy on one side of the economy, even a well-intended one, can often have disastrous effects on the other side. The concept is sort of like a financial Butterfly Effect in which small changes are magnified and cause a cascade of increasingly large problems. That’s the case with the recession’s effect on young adults.
A recent Pew study found that more than half of adults under the age of 30 are now living with one or both parents. This change is associated with the recession and the pandemic and mirrors a similar pattern from the 2008 recession.
The trend is closely related to rising unemployment among Millennials and is most pronounced among 18-to-24-year-olds. The 18 percent unemployment rate for that demographic is directly tied to the fact that 71 percent of the group has returned home to live with their parents per Yahoo Money.
While the first reaction might be that returning to the family would be a good thing for young adults, there is a hidden downside. The advantages of being able to save money on housing and other items are offset by hidden opportunity costs. A new report by Deutsche Bank details the emotional problems that can be caused by what Matthew McConaughey fans might term as a “failure to launch.”
“Young people perceive themselves as the losers on issues ranging from housing to climate change to student debt. In turn, this anger is manifesting itself into political outcomes, with elections around the world increasingly fought along generational lines,” wrote Deutsche Bank analyst Henry Allen in the report.
If the emotional health of Millennials is not a pressing concern for you, consider Allen’s statement that the situation could mean “serious consequences for asset markets.” The Butterfly Effect or the Law of Unintended Consequences, whichever you prefer, is in motion.
The most obvious factor at play is youth unemployment, which is at a 70-year high, but the problems don’t end there. The report notes that the effects of unemployment last “for years afterwards” as workers become “far less picky when it comes to accepting job offers.”
The formerly unemployed are “more likely to accept a lower-paying role than they might have done in a stronger labor market,” Allen wrote. This, in turn, can drive down wages.
Unemployment and lower wages lead to disparities in other areas, such as housing. Allen notes that Millennials are being priced out of the housing markets in two ways. First and most obvious, lower wages make it difficult to save and buy a house. Second, current homeowners, who are predominantly older, have incentives to resist new developments. This drives up the cost of new housing. As a result, the American Dream is out of reach for many young adults and resentment builds.
While home sales were up over the summer, there is evidence that young adults are being left behind. As home prices rise, first-time buyers are being priced out of the market.
“Aging populations are tilting the balance further against the young. Expensive house prices are continuing to create anger and resentment. And the Covid-19 pandemic – which has disproportionately hurt the young economically – risks inflaming this resentment further,” Allen wrote.
Why should older Americans care if young adults are unhappy? Allen draws a direct line from the disillusionment of young Americans to Bernie Sanders. Millennials are beginning to surpass Baby Boomers in both numbers and political power. An obvious risk is that, if Millennials don’t feel that they have a chance to better themselves under our current (relatively) free market system, they will vote to replace it with something else.
If Millennials don’t have the opportunity to build wealth through good jobs then the conservative message that hard work is the road to prosperity rings hollow. It’s no coincidence that Bernie Sanders and his leftist policies were propelled by disaffected Millennials.
“Investors can expect an abrupt, and significant upheaval in housing and asset markets, tax systems, climate policy, and many other areas,” Allen wrote. “This scenario becomes more likely towards the end of this decade as Millennial and younger voters start to exceed those in older generations.”
Political unrest often begins with economic unrest and a feeling that there are classes of “haves” and “have nots.” This has been true of both right-wing and left-wing revolutionary movements. The same dynamic could be seen in the streets of American cities this summer.
The danger is another example of the age-old definition of “democracy” as “two wolves and a lamb deciding what to have for lunch.” If a large segment of the population is disaffected and envious of the prosperous minority, there is a good chance that the envious majority will eventually vote to divvy up the wealth among themselves. At 79, Bernie Sanders may not be in a position to take advantage of that moment, but some other politician in his mold will be.
It’s a difficult situation but there is an answer. It’s the same answer that made America great so many years ago. The answer is to provide opportunity for all Americans, not just those of favored industries or who live in red or blue states (depending on which party is in power at the time). The answer is, as John Galt said, to get government out of the way so that businesses – and their employees – can grow and prosper. We need a rising tide that will lift all boats, but too many of our leaders focus on helping some segments of the population while hamstringing others.
Now more than ever, as we face a recession and a pandemic and existential angst, we need a president who can bring us together with a common purpose. We need honesty, competence, and a limited government ideology. that will first defeat the virus and then restore economic opportunity for all.
Where is such a person?
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