The Times Are a Changing

Some changes unfold over time and it’s possible to see them coming. There are demographic changes coming in the next decade that will change the direction of the U.S., since the Silent generation and the Baby Boomers hold a different view of government than Gen Z’s and Millennials. According to a poll by Pew Research two years ago, those in the Gen Z and Millennial generation believe by a wide margin that government should do more in addressing societal problems, when compared to Baby Boomers and especially members of the Silent generation. In the 2024 election the number of eligible Gen Z and Millennial voters will equal the number of Baby Boomer and older voters, and in the 2028 election outnumber them handily. As more Millennials are voted into power in local, state, and national elections, they will shape the legislative agenda, direction, and role government will play in managing the economy and solving many of the problems that have become so divisive.

The financial crisis disrupted the lives of Millennials significantly as many found it difficult to get a good job after graduating from college burdened with more student loans ($497 billion in 2019) than any prior generation. The impact is that Millennials have purchased their first car, gotten married, and welcomed their first child later than previous generations. They question the value of capitalism since it hasn’t helped them as much as their parents. They are too young to grasp the Fall of the Berlin Wall in 1989’s meaning, or the short comings of socialism. When they tune into the news on social media all they see is dysfunction and disorder, with many accepting the narrative that too many working people are receiving too little of the economic pie, since that has been their experience. The influence of the progressive movement within the Democratic Party was small in the 2020 election, but it will gain traction in coming years and exert a greater influence. Demographics suggest that the U.S. will move to the left politically in the next decade. Some may not like that outcome, but it’s better to see this shift coming since it will have an impact on the economy and financial markets. Some of the coming changes will be good and some of the changes will have negative unintended consequences, just like every demographic shift that has developed since 1776.

Millennials and GEN Z’s will vote for candidates in coming elections that promise to do more to address many of the problems that have built up in recent decades. The solutions will require more federal spending and ongoing deficits, and Congress is likely to turn to the Federal Reserve to use its balance sheet to fund initiatives as discussed in the October Macro Tides. “The concept of Modern Monetary Theory (MMT) is discussed as if it is something that may happen in the future. The evolution of monetary policy since 2002 and how the Fed has used its balance sheet during the Pandemic indicates that MMT is already in place. The Federal government can run huge deficits knowing the Federal Reserve will be the buyer of first resort. And after remitting the interest income the Fed has received back to the Treasury, keep the government’s borrowing costs extremely low. Politicians won’t be able to resist spending more to address all of the U.S.’s special needs. So funding $1 trillion for an infrastructure program or funding a modest $3 trillion Universal Basic Income program to narrow the income inequality gap could easily be on the table. According to the Congressional Budget Office (CBO), funding for the Highway Trust Fund will be depleted in 2021, the Medicare Hospital Insurance Trust Fund Part A will run out of money in fiscal 2024, the Social Security Disability Trust fund in fiscal 2026, and Social Security could run dry in 2032 or sooner. It is unlikely politicians will vote to lower disbursements for these trust funds, especially for Medicare and Social Security, nor will tax increases prove sufficient since they would be too steep for the economy to bear. Politicians are likely to turn to the Federal Reserve to keep funding these programs. The Fed will learn that sometime around 2002 the Fed checked into the Hotel California of extreme monetary accommodation will never be able to leave.” Congress will need the Feds assistance since no matter how high Congress increases taxes for the top 1% or even the top 5%, it won’t generate enough revenue to equal the coming increases in government spending.

In 2021 there will be Republican members in the Senate and House who will express their deep concerns about budget deficits and the rising tide of debt that promises to be an albatross around the neck of coming generations. If Republicans manage to hold onto the Senate, after gaining 12 seats in the House in the 2020 election, they may have enough leverage to shave a few billion off spending bills. The Republican leadership will have their eyes focused on the midterm elections in 2022 and fiscal austerity is not likely to be a winning message, if Republicans realistically expect to regain a majority in the House and Senate. Republicans will run on how they reined in spendthrift Democrats from spending too much, and then agree to smaller increases in spending. Republican spending discipline will look like a 1 foot wall of sandbags protecting us from the coming mandatory spending tsunami.