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CONVENTIONAL wisdom calls the 2012 presidential race the “demographic election,” attributing President Obama’s victory in large part to his commanding advantage among rapidly growing groups like Latinos and millennials.
But if demographics is destiny in politics, it is even more true for policy. Far from the headlines, the debate over the budget deficit, taxes and unemployment is being driven by large-scale changes in the American population — and in this case, it’s not the new demographics of the young that are important, but rather the old demographics of the baby boom.
For decades we have known that the retirement of the baby boomers would be a monumental event for the economy. But now that it’s happening, many fiscal policy makers are acting as if the boomers are eternal teenagers and are turning a blind eye to how the boomers’ aging changes how we should approach economic policy. And this affects two of the central issues of the negotiations: how much the government should spend and how we can cut unemployment.
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Consider the debate over spending. The Congressional Budget Office projects that if current policies continue, total federal spending will rise to 24 percent of gross domestic product in 2022.
Republicans and Washington deficit hawks argue that this means spending is out of control, since over the past 40 years government spending has averaged 21 percent.
Their proposed solution is a cap on government spending as a percentage of the economy. Mitt Romney wanted to cap spending at 20 percent of G.D.P. Senator Bob Corker, Republican of Tennessee, has proposed a cap of 20.6 percent with Senator Claire McCaskill, a Democrat from Missouri. Just this week, Gov. Bobby Jindal of Louisiana, a 2016 Republican presidential aspirant, suggested an 18 percent cap.
These plans ignore the simple fact that you cannot repeal the aging of the boomers. The main reason expenditures are rising this decade is that spending on Social Security, Medicare and Medicaid is increasing by a whopping 3.7 percent of G.D.P. as the baby boomers age and retire. This demographic fact also has been driving increases in disability insurance payments as more knees give way and backs give out.
These inexorable demographic changes mask the fact that over the past four years we have experienced historic levels of fiscal discipline. While there was a temporary and necessary spike in spending from the Recovery Act, annual appropriations actually declined by 1.4 percent a year between 2008 and 2012 in inflation-adjusted dollars — after growing by 6.1 percent a year during the George W. Bush administration. Under the caps agreed to last year, discretionary spending is scheduled to reach its lowest level, as a share of the economy, since the Eisenhower administration.
This discipline, however, is being overwhelmed by demographic reality. We need to accept the fact that we simply cannot revert to historical norms in government spending and keep faith with commitments made to millions of aging workers.
But that is no excuse for inaction: in addition to the existing caps on discretionary spending, we need higher revenues along with slower spending growth in our social insurance programs.
Ignoring the economics of boomer retirement also distorts debates about the unemployment rate.
Despite the fact that the unemployment rate has dropped faster in the past year than at any time since 1995, Republicans say there has been no recovery in the job market, since the 150,000 jobs being added monthly are simply keeping up with population growth. They note that the employment-to-population rate has not recovered significantly and claim that the only reason the unemployment rate is going down is that people are giving up looking for work.
If this were the 1960s, they might have a case. But the children of the 1960s are now in their 60s, and are simply not as likely to want to be in the labor force as younger workers. The employment-to-population ratio is on a steady downward trend, regardless of the economy. The fact that the rate is flat is evidence that the labor market is recovering (though not fast enough).
With more than 200,000 boomers exiting the labor force each month through retirement, the rule of thumb that the economy needs to add 140,000 jobs per month to keep up with population growth no longer holds. The new normal is 100,000, which is why 150,000 new jobs a month has brought the unemployment rate from 9.5 percent to 7.9 percent over the last two years.
Getting this right matters. If policy makers believe that the labor market has not improved over the past three years, they will reject the stimulus approach that the president took in 2009 and oppose further efforts to boost aggregate demand — just as John A. Boehner, the speaker of the House, did last week after the administration called for a $50 billion stimulus package.
Over the coming weeks, big fiscal policy choices will be made, and many will be looking backward for a guide on how to move forward. But just as the generation that once proclaimed “don’t trust anyone over 30” has had to face the reality of gray hair and grandkids, the new economics of the baby boom dictate that we must deal with the country and economy we have today — not the one in the history books.
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