Magazine article Government Finance Review

Are Demographics Destiny?

Magazine article Government Finance Review

Are Demographics Destiny?

Article excerpt

Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

By Douglas C. Robinson and Charles L. Sizemore

iUniverse

2009, 203 pages, $18.95

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Boom or Bust builds on the groundbreaking work of financial writer Harry S. Dent Jr., the first mainstream thinker to use demographics as an economic forecasting tool. The authors apply demographic analysis to a myriad of economic questions, many of which directly relate to state and local government--including economic growth, inflationary pressures, the strength of the dollar, health care costs, and housing.

Key to the book's analysis is the proposition that population characteristics drive economic performance in a modern consumer economy. While the changing size of the population is obviously important, Robinson and Sizemore highlight the special and often underappreciated importance of consumers' age and stage of life--the composition of the population. For example, a person's consumer spending levels off around age 46 and then declines after age 50. Hence, adjusting the birth index forward 48 years (between 46 and 50) provides a good projection of consumer demand. This model, called the "HS Dent Spending Wave," provides a big-picture forecast of consumer spending and the economy (see Exhibit 1).

This basic idea--that income and consumption both increase as people reach middle age and then decline afterward--is essential to understanding the future performance of consumer-based economies like those found in the United States, Canada, and the rest of the developed world. Hence, the imminent retirement of the Baby Boomer generation means that the age cohort with the largest relative propensity for spending (those aged 46 to 50) will soon be decreasing in relative size. This, in turn, means that the United States will find itself on the downside of the spending wave and experiencing a sustained period of low economic growth or perhaps even mild decline.

Boom or Bust applies similar demographic insights to inflation. Inflation has traditionally been a major concern of the Federal Reserve (as well local governments and businesses) because of its negative impact on price and wage stability and long-term investment decisions. Boom or Bust (and the Harry Dent school of thought) correlates inflation and workforce growth rates under the proposition that children and young people are inherently inflationary because they consume much more than they produce. They increase demand without contributing to supply, driving up prices. The elderly also consume more than they produce, but the imbalance is less extreme. Hence, as the population becomes relatively less youthful, inflationary pressures will decrease to the point where Robinson and Sizemore expect the United States to experience deflationary pressures. To further support their claim, they cite the example of Japan--a county whose demographics, in many ways, foreshadow those of the United States. Twenty-five percent of the Japanese population is currently over the age of 60. The Japanese economy has experienced a prolonged period of economic stagnation and virtually no inflation--and, in fact, mild deflation--despite massive public policy efforts to counteract these patterns.

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The authors also explore the implications of its demographics-based economic analysis for other issues, including the problem of state and local governments' other post-employment benefit (OPEB) liabilities. …

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