Demographics, Long Waves, and Building Houses in Tidal Zones

I have a son and daughter-in-law living in South Korea expecting the birth of my first grandson in April, 2011.  Driving home from visiting my mother for Christmas, a thought hit me that connected the birth of my grandson with my father.

I was born in 1956, two years after my dad came home from the Korean war.  In 1961, we moved out of an apartment we were living in and into a brand new house my parents had built.  Like my folks, millions of other people did the same thing.

Never mind the fact that the top marginal tax rate in 1961 was 91 percent. Never mind that President Kennedy didn’t start seriously pushing for a tax cut until 1963, and that it was enacted after his assassination in November of that year.  Never mind the fact that the Great Society programs of the Johnson Administration led to an explosion in government spending, adding endless bureaucracy to the American economy that in today’s economic climate would have seriously reduced economic growth.  Never mind that we increased social spending while at the same time we expanded spending on the war in Viet Nam, which in 2010 would kill any hopes for domestic economic growth.

Forget all those things, because in the years from 1946 to 1963, there was a “baby boom” going on.  Those young families, just like my family, needed new houses, new appliances, new cars, and new clothes.  The point:  There was a demographic tidal wave taking place.  Government policies could either “ride the wave” to facilitate demand for new goods and services, which is what the Kennedy tax cuts did, or be brushed away like a mosquito, which is what happened with the dramatic increase in government spending.

In those days, the economy was doing great, people were optimistic and wanted to start families, and nothing was going to get in the way of that.  Today, the economy looks bleak, the baby boom generation is looking at retiring, people are not optimistic, and people are waiting to start families.

I believe that this observation holds an important insight for how we deal with the economy.  We need to look at economic trends the same way we look at ocean tides.  Tides come in, and they go out.  You go surfing when the tide comes in – you ride the wave.  You look for sea shells when the tide goes out.  In both cases, you work with, not against, the tide.

In the 1950s and 60s, it made sense to promote policies that made it easy to buy a home.  You went WITH the tide of demographics.  In the 1990s and 2000s, we came up with what’s been called the “Sub prime” home loan program to promote purchases of new homes – at a time when the tide of new-home purchases was going out, not coming in.  It DID NOT make sense to pursue this policy – it went AGAINST the tide.

As I thought about these things, I recalled something in economics called the “Long Wave Theory” of the business cycle.  It was first described by the Russian economist Nikolai Kondratieff in his 1925 book, The Major Economic Cycles.  As a young man, majoring in economics, I never gave it much thought.  Now, in my 50s, I see how much it makes sense!

Here’s the point I want to leave with you today.  Much of what we do in terms of economic policy is built on short run (i.e., short wave) goals based on what is called “Keynesian Economics” (named after an economist named John Maynard Keynes).  We ignore the tides of long term economic trends, and tend to build economic policy in the flood plane of the tides that come in and go out.

We need to stop building economic policy on sand, and start building on firmer foundations.  If what I’ve said in this blog post isn’t convincing enough, then I encourage you to check out the book, Baby Boomers, Generation X and Social Cylces: Volume 1, North American Long Waves, by Edward Cheung.  It’s 320 pages.  You can get a synopsis by going to http://www.google.com/webhp?hl=en&tab=nw

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