Byline: Rana Foroohar; With Jerry Guo in New York
Those entering the workforce now will likely make less and save more--not just in the short term but for the rest of their lives.
We all know the type of person who came of age in the Great Depression. They are the grandmothers and grandfathers who can't use a tea bag too many times, yet are enjoying comfortable retirements in warm climates. And we know what the children of the 1950s are all about. They are the optimistic boomers who embodied an age of continual upward mobility and possibility. They have often spent more than they earned, because for them it has been a truism that times can only get better. It's no accident that the psychology of entire generations is shaped by the milieu in which they grew up; economic research tells us that our lifelong behaviors are determined in large part by the seismic events--good or bad--of our youth. So, given that we have just experienced the worst economic period in 70 years, it's no surprise that people have begun to wonder what sort of consumers, investors, and citizens will be bred by the Great Recession. Will there be, in effect, a "Generation Recession" of young people whose behaviors will be permanently shaped by the downturn?
Some optimists--pointing to a recent spate of positive economic data, including increases in car sales, upticks in factory production, and a robust stock market, say no: the downturn simply hasn't been bad enough, for long enough, to create the next Depression generation. Yet there is powerful evidence that belies this argument; a National Bureau of Economic Research (NBER) paper released this past September looking at data from 1972 to 2006 shows that even one really tough year experienced in early adulthood is enough to fundamentally change people's core values and behaviors. Meanwhile, there's an entire body of research to show that recession babies not only invest more conservatively, they tend to make less money, choose safer jobs, and believe in wealth redistribution and more government intervention. Yet paradoxically, they are also more cynical about public institutions and, arguably, about life, embracing the European notion that success is more about luck than effort. To the extent that they grapple with unemployment, they are more likely to be more depressed and disconnected from their communities. Politically, they can skew either left or right, depending on the cultural zeitgeist and the leaders who seize the moment. Economic downturns, after all, not only created the New Deal, but also the Third Reich.
We have now technically emerged from recession. But there's a broad feeling that Americans' psyches and behaviors will be somehow permanently altered by the crisis. There's now a booming cottage industry among consultants and investment managers to describe and capitalize on "the New Normal," which will likely be the opposite of the hypercapitalist market culture of the past 25 years. That moment was perhaps most eloquently captured by former Clinton labor secretary Robert Reich in his 2007 book, Supercapitalism, and it's fitting that he is now working on a book titled Aftershock. "Every time we've had a major downturn, there have been predictions that Americans will permanently change their ways and embrace frugality," says Reich, now a professor at the University of California, Berkeley. "Since World War II, it hasn't happened." Yet Reich and many other respected academics, economists, and investors--from George Soros to Pimco's Bill Gross to Goldman Sachs's chief economist Jim O'Neill--say that it will happen this time, not only because of the megashock of the financial crisis, but also because the global landscape has simply shifted in such a way that the American consumer will no longer be the single dominant force in the world, even if the U.S. economy continues to recover. Rather, the key emerging markets (read: China, India, Brazil, and …