Boomers: Supply Side or Demand Side?

Gary North

Dec. 25, 2012

Americans born from 1946 to 1964 are called the baby boomers. These were the years of high American birth rates, which peaked in 1958. This was a major demographic break from the Great Depression and World War II. The optimism shown by their parents regarding the future was reflected in these birth rates.

The first wave of these people began to go on Medicare in 2011. Millions had already begun to sign up for early retirement in 2008, at age 62.

We are about to test the dominant economic theory: Keynesianism. Keynesianism teaches demand-side economics. It teaches than consumer demand is the basis of economic growth. This has been taught ever since an immigrant to England, the dentist Bernard Mandeville, published his 1705 poem, The Grumbling Hive. He defended it in two fat volumes in 1714: The Fable of the Bees. Keynes quoted part of the poem in The General Theory of Employment, Interest, and Money (1936). Mandeville was his mentor, his ideal, his hope.

Mandeville argued that private vices contribute to public wealth. Fast-living, high-rolling bees make the beehive richer, because their demand stimulates productivity. Mandeville was the original demand-side economist.

He never asked this question: "Where did these high rollers get their money?" This is the supply-side question. Adam Smith answered it in 1776 in The Wealth of Nations: from the division of labor, which is funded by capital, which is funded by thrift.

Keynesians cling to the idea that demand is the basis of economic growth. So, they see the baby boomers as a great stimulus. These people will spend. They will make the American economy boom. A recent article promotes this view.

"It's only in Washington that 100 million people are viewed as an unaffordable cost and financial burden," said Jody Holtzman, a senior vice president at AARP. "In the private sector, 100 million people are called a market and an opportunity."

AARP is a lobbying organization for Social Security and Medicare. Its employees know who butters their bread: taxpayers in the work force who are compelled by law to subsidize retired oldsters. These taxpayers are expected to keep paying into a system that is presently in debt by $222 trillion (the present value of future net liabilities of the U.S. government).

So, the question is this: "When will workers stage a taxpayers' revolt and cut off seniors?" It will happen. The questions are these: "When? By how much? Which seniors?"

If Smith was right, these seniors are a drain on the economy. They absorb other people's money. They also sell resources. The retired seniors are no longer producing anything. They are no longer providers of capital.

How many will remain in the work force? So far, very few.

"We became the generation of consumption and personal gratification," Thornhill said. "Boomers are not going to spend at all like the prior generations did at 65. They're going to spend at boomer levels. And there's millions more of them."

Mr. Thornhill is a true Keynesian. He thinks that Boomers will spend in the same way that Keynesian academic economists think the government spends: with tooth-fairy money. They never ask: "Where does the money come from? What would it have been used for in the private, non-coercive sector?"

Jeet Singh, who helped develop e-commerce software used by online retailers such as Best Buy and J. Crew, said retirees hadn't been treated with respect in terms of offering them well-designed high-quality products that meet their needs without announcing their ages.

"You just can't fight the numbers," said Singh, a co-founder of Redstar Ventures and previously Art Technology Group. "All these people are out there. They have needs. Whether it's what they eat, what they buy, where they shop, how they vacation. And I'm not even talking about health care, which is in itself a massive market."

Mr. Singh says these people "have needs." So do we all. But mostly we have wants. The question for all of us is this: "How will we pay to satisfy our wants?" Satisfying our wants is a function of price at the margin.

The Boomers have an answer: "With money provided by others."

The article then launches into a description of Myrtle Beach, South Carolina. The newspaper is located in South Carolina. The city is booming with Boomers. In good Keynesian fashion, the reporter neglected to ask the obvious question: "What is happening to the economies of those communities from which Boomers are moving?"

Keynes was wrong. Smith was right. It is productivity, not consumption, which makes us rich. As people move into retirement homes, then hospitals, and then hospices, they get poorer. Those supporting them get poorer. Society gets poorer.

Retired Boomers are a drag on wealth. Until the Great Default comes, when the federal government can no longer extract enough wealth from workers to support retired workers, the drain on capital will continue.