The Recession Generation
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.
By Rana Foroohar
Newsweek
January 9, 2010
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 others) will continue to emerge and become more powerful; the dollar will continue to weaken; American labor will continue to face more and more competition from abroad; and, thanks to a new era of big government, reregulation, and (possibly) protectionism, money flows will stay tight. Throw in the probable rise in inflation and you've got an inevitably slower-growth future in which Americans will also have to come to grips with average unemployment levels that will likely stay much higher than they've been in decades.
Unemployment and the specter of instability it creates will really shape the behavior of Generation Recession. A weaker dollar will make all Americans feel poorer by raising the cost of goods, but the young generation graduating and going to work now may actually end up poorer in real terms. Unemployment among 20- to 24-year-olds in the U.S. is more than 15 percent, compared with the nationwide average of 10 percent, and statistics show that for every percentage point in higher unemployment, new graduates take a 6 percent pay cut—an effect that lasts for decades. Skills loss could be a huge issue, too, especially because the average duration of unemployment has increased. Although wages in the U.S. have been relatively flat since the 1970s, Generation Recession may be the first in 30 years to see theirs actually fall.
The disconnect between these sorts of poll results and the recently improving economic data underscores another megatrend that Generation Recession will have to deal with: the growing divide between the fortunes of big American firms and the average American worker. Markets may be up, yet unemployment, while slightly down, is still at its highest level in decades, and even the most bullish economists believe it will stay higher than average for years to come. Large U.S. firms are well into the black, in part because of the labor-cost savings they've enjoyed from IT improvements and offshoring to cut expensive U.S. jobs, yet the small- and medium-size firms that generate the majority of new jobs at home have been hurt most by the financial crisis as their lines of credit have dried up. "We are in a very unique period, in which we're seeing the biggest disconnection between financial capitalism and the real economy since modern economies began in the 19th century," says Nobel laureate and Columbia economics professor Edmund Phelps, who runs the university's Center on Capitalism and Society. "That's not to say that banks don't fund some useful projects like wind farms or whatever, but increasingly they're existing in a virtual sphere in which they are more interested in funding each other, and developing complex securities, than in funding real businesses."
Read the full article at:
http://www.newsweek.com/id/229959
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