A New Intergenerational Contract for the Pandemic Age

some muntiple. Mom and dad would beat us around the end and neck with a broken bottle if we were lucky. Are you Try and tell the young people of today that and they won't believe you. Hello, and welcome to Stephanomics, the podcast that brings the global economy and a bit of Monty Python. You don't know how lucky you are. People said that to their children and grandchildren all time

when I was growing up. Not anymore. Whether it's climate change, the economic impact of COVID, or the aging of the popular nation, collectively, the world's running up some pretty big bills right now. Young people feel they're already paying more than their fair share. In a few minutes, the economist Charles Goodheart and managed prad and tell us what they think the future is going to look like as the population gets older. Spoiler alert, inflation makes a comeback and

that's the easy part. We also have one more snippet from the Bloomberg New Economy Forum, former Bank of England Governor Mark Carney talking about how the world of finance is going to help all of us get to zero carbon But first, an up close and personal look at that generational divide we're seeing across the economy. From our

twenty something reporter apprentice, Eileen Bank. That's the sound of young people in the center of the northern English city of Liverpool last month, as the bars of the COVID hit city closed for the final time before a new round of restrictions. Large groups of revelers crowded onto the streets, hugging and chanting in process as police tried to enforce

social distancing. Such scenes when Liverpool's hospitals were overwhelmed by the virus drew condemnation from many, But as the pandemic drags on, there's a deeper frustration building among young people, which is harder to dismiss. The hard reality is that the people at Grace's risk of dying from the virus are those of retirement age. But the economic disaster of COVID is disproportionately affecting the young and may do for

many years to come. COVID is absolutely the exacerbated these inequalities. That's still Filipovitch, the millennial author of Okay, Boomer, Let's Talk. Job losses in the US have been overwhelmingly concentrated among young people, and among millennials in particular. It's a similar

story across the globe. At the height of the pandemic, unemployment for Americans aged twenty to twenty four was more than ten percentage points higher than for any other age group, and young people are star seeing to get resent, full of restrictions, designs to protect others as they see their opportunities dwindling. Think about which industry has got hurt hardest because of COVID, and you know the attendant shutdowns, you know, and it's things like restaurants, bars, travel. All of those

industries are dominated by young people. Young people, millennials and Gen zeers who are bartenders and waiters and restaurants staff. Those joining the labor market for the first time may see their careers derailed for years because they have to settle for a job outside their chosen field or get stuck in unemployment. In Germany and Switzerland, lots of people are concerned that the billions of dollars the government su spending today will have to be paid back down the road,

forcing economic opportunity in the process. Tilman Kuban leaves the youth arm of the German Chancellor Angela Merkel's party. He says young people are the triple losers of the crisis because it's costing them in terms of education, social opportunities and future government benefits. Let's go, let's see that's um. Those who are done with their training or their studies now face a jobs market and the worst recession ever

in the history of the German Federal Republicans. On the other side, there are the three hundred billion euros worth of new debt that is being issued this year and next, a new issuance of debt bigger than Germany has ever experienced. The pile of debt is getting so big that our generation can hardly stomach condom Manuel, as a twenty one year old living in London, I can tell you that the talk of war between generations didn't start with COVID nineteen.

My friends and I have had to enter the job market burdened with student loans, struggling to get a foothold in a property market where start homes cost nine times average wages. Thanks to teenage activists Grassi Sumburg. We've also seen mass strikes by school children and students over climate change, all aimed at goding middle aged politicians to do something about the global catastrophe that will overwhelmingly hit their children

and their children's children. Economists at Deutsche Bank have warned that the pandemic is likely to only fuel this resentment among generations. To see which age group is doing best, let's look at wages. Ultimately, financial well being boils down to the amount of money people have in their pockets. Wage increases have been slowing across advanced economies, and the upshot is that today's young people can no longer count

on outs earning their parents. So if you look at cohorts that were born in the nineteen forties, more of them, on average earn more than their parents did at at the same name. That's Robert Manduka, a professor at the University of Michigan, who has studied the decline and intergenerational mobility, So they almost universally had this experience of upward mobility where living standards were rising for everyone. Um, but that's

really changed over the past forty or fifty years. So if you look instead of cohorts that were born in the nineteen eighties, what we show is that on about half of them of Americans born in the nineteen eighties grew up to out earn their parents at age thirty. He says, the phenomenon is strongest in the US, but it's also evidence in other countries like the Netherlands and the UK. Slowing economic growth is a factor, but rising

inequality is arguably an even bigger driver. So what we show is that you know, the US and Norwegian GDP in aggregate grew about the same rate over the past thirty years, but incomes for thirty year olds kept up with GDP to the large extent in Norway, but did

not in the United States. And so if if if there had been sort of I guess you could say, like intergenerational equity, if the if the games were being shared across all age groups in the society, the US upward mobility rate would have been um substantially higher, about fifteen percentage points higher. Probably parts of the trouble boils down to demographics. In many advanced economies, the working age

population is shrinking. That means that there were more older roses relative to young ones, and spending on things like state pensions can sum proportionately more government resources. Think about the US, both Donald Trump and Joe Biden are over the age of seventy. Author Jill Philipovitch thinks that this

is part of the problem. You have this disproportionate share of power concentrated in the hands of older people, and that means that the policies that younger people need for themselves, for their families, for their children, um frankly, for the future of planet Earth are not being They're not being implemented. For Stanford University professor David Gersky, radical change is needed.

He urges a recent branch overhaul of social systems like schools or the judiciary to ensure society becomes more acquisible. That's will help the economy to who he says, I would say that at least in the United States, but

I thinking all well off countries. We have a deep commitment to providing opportunity to everyone, and a deep commitment to the idea that it shouldn't be that opportunity is only available to those who have the money to buy it, buying into into into nice neighborhoods that have great schools, providing that private education, that that, in the US case, a ticket to success. That that that you know that being able to buy opportunity is not part of the dream.

If we don't have equal opportunity, we're not living up to one of the most profound commitments that that we that we all think should be part in. First, what what what? What? What a modern economy is about? COVID is shaking up economies and societies. My generation has been asked to stay home to protect older generations, and mostly we have. Now maybe it's signs to think about how to pay young people back. So that gave us a sense of what the generational divide feels like today. But

what about the future. Well, two very distinguished economists have a book out which claims demographic change is almost single handedly going to turn everything we thought we knew about the twenty one century economy on its head. Charles Goodheart is former chief economist of the Bank of England, Emeritus Professor of Economics at the London School of Economics, and his co author Manage Pradan is the founder of Talking Heads Macro and a former chief Global economist for Morgan Stanley.

That they're both on Stephanomics now, Charles, great to have you here. Your book is called The Great Demographic Reversal. What exactly do you see going into reverse in future as a result of the world population getting older? Well, two major trains are going to change. The first one

is a demographic change. Until very recently, what has happened is that enormous all countries there has been an increase in the size of the working population relative to the those who are not working dependence as they are called, the young up to the age of about twenty and the retirees over the age of about sixty five. Now the old and the unconsumed that they don't produce and

therefore they're inflationary almost by definition. And that means that as the demographics change and the proportion of dependence ceases to fall and now begins to rise very sharply as an increasing proportion of the population get to the age of over sixty five, what is going to happen is that these trends is going to lead to greater inflation.

Now that is combined with the second trend, which is that prior to about a few years ago, the world was becoming more globalized in that production could move to areas where previously were not included in the world's working system, particularly China, which incorporates a quarter of the world's population and a great deal of particularly manufacturing production when to these low wage areas, and the union proportional workers and

unions has been going down steadily. This is effectively meant that the bargaining power of labor has weakened more or less continuously. Now, globalization is in retreat for obvious political and other reasons, and that retreat has actually been re emphasized by the effect of the COVID crisis. So globalization is on the retreat, the dependency ratios are worsening, and both of those are likely to bring about higher underlying

inflationary trends over future decades. You know, a lot of people will say, as we got older, we've also been told that we have to work longer, and doesn't that offset this inflationary effect? Because if people are working until they're seventy or seventy five. Then you might not see a big change as big a change in the ratio of of workers to non workers. Why why wouldn't that

help solve the problem. Well, until very recently, the trends have been exactly the reverse, in that life expectancy has been increasing much faster than any increase in the age

of retirement. That's now changing a bit. But I even so, the increase in the number of the old is going to be very rapid, and increasing the age of retirement is politically extremely unpopular, and it is only introduced very gradually and very gingerly and virtually every country, and even in Putin's Russia, and Putin probably has a greater control

over his population than almost any other autocratic leader. His attempt to raise the retirement age ran into such political opposition that he was about the only thing that he was forced to modify into an extent back track on. Um, it's just politically extremely difficult. One quick thing I wanted to add is that I think I think we also have to take a look a slightly deeper look into

them demographic trends as well. For example, what is changing now is that the number of people who are what we would call the oldest all is increasing sharply, and as that age group starts increasing, along with it comes at the attendant increase in diseases like dementia that make people unable to after themselves, and that means that an increasing number of the labor force is going to start

looking after these people. Now, that's what Childs and I would call socially productive activities, But in the true economic sense, they are producing a product which is consumed by the old, who then do not go on to produce anything else. So I'm not sure we can call it economically productive. So dire as the Huan population statistic projections are for demography, they do not include that a larger part of the population, and in fact an increasing one, will go towards these

socially but not economically productive activity. So the story is actually a little bit more difficult than the statistics show. I think it's interesting because a lot of people will say, and certainly businesses who think about how does the economy change when there's a lot more old people. Um, it's wonderful to be able to sell lots of cruises and other things to the newly retired or the fit retired.

But in general people feel like there is less consumption from old people and that that could be a problem of the economy. I guess your point is there's less consumption in terms of things like going to restaurants and other things. But at that crucial those last few years if you're very old, can be enormously expensive and draining of social resources. Yes, absolutely, if we accept the demographics. There's another assumption that you make that we can't offset

this with faster productivity growth. You're assuming that the economies which are older overall, the global economy that is older is going to grow more slowly and have relatively relatively low productivity. With that, I guess a lot of people would say, well, hang on, we have all this innovation, why why wouldn't we become more productive to compensate. Well, to take one point, and some people think that robotics can deal with the ILD, I can tell you that

that will not happen. And anyone who's been in a demential ward, and unfortunately have been with my older brother, knows perfectly well that what the old people really need is emotional support and the emotional quotient of a robot

is exactly zero. Robots can help with certain repetitive physical tasks, maybe like lifting people in and out of bath or in and out of bed, but in terms of looking after people with Parkinson's or dementia, the idea that robots can do this and is just just it's just not true. What we're going to need, unfortunately, in some ways in future is much more of of the qualities that we will need will be empathy and emotional support rather than

muscular strength. If I may once, it's going to add is just related to the argument I was making earlier, which is that we will need an increasing number of firm people to look after the elderly. What Charles and I are hoping for is that we do see job destruction and other parts of the economy. In fact, we depend on robotics and automation to get rid of repetitive tasks in the manufacturing sector in parts of the services sector. Without that, you would see a net decline in the

working age population at a much faster pace. So some of the robotics and automation stories that are happening right now are actually part and parcel of our thesis, without which our thesis would be a lot scarier, if you will,

we need that job destruction. So that's fascinating. So when people look at these jobs disappearing in all these interestries, you're saying that can't happen fast enough because we don't realize we've got this enormous need for jobs coming and we need as much as many people as possible to

do those jobs. Exactly right. I mean, if you look at how the National Healthcare Service has revealed itself to be completely underfunded, the demands of the future looking after the elderly are something that is simply not part of the equation right now. We're only looking at one piece of the puzzle, which is the automation part, but not

the other. But if you have a lot of people moving in if what sound what your sounds like you're talking about is a lot of people moving from the private sector to the public sector, how does that get financed? Even if you're moving the workers, how are you able to pay for that shift into the public sector if

you've got a reduced private sector. That's a very good question because if you look further forward, what you will see is increasing costs of medicine, increasing costs of pensions, incasing costs of public support for the old and that is one of the factors which even before the COVID pandemic hit, was driving expenditures, public sector expenditures up relative to tax revenue, and that is going to be a problem.

One of the effects of all of this is going to be that taxation is going to really have to rise quite sharply. And here the difficulty is that, like raising the retirement age, increasing taxation is very unpopular. If we do not increase taxation relatively rapidly, the only real way that we can then get out of this increase in debts and deficit is actually through inflation. It's worth

spelling out. I mean, we spend some time on this podcast talking about financial markets, although possibly less than than other parts of Bloomberg, and we should probably make clear that if you're right, an awful lot of people are going to lose a lot of money based on the

current pricing of financial assets. It could just spell out, um, how different your of the world is and the one that's currently expressed in bond prices and the record low, very long term interest rates, low record low interest rates that are currently being charged to the governments all around the world for borrowing, well, I think it couldn't be

more different. Just to give you a very quick preface into the argument that comes in most people look at tenure and twentie yields and they say, what's priced into the markets is that inflation is never going to rise and we are going to have law for longer. The only question is whether real heels come up into slightly positive territory or slightly negative territory because of the vagaries

of inflation. And so to be clear, that's also why more long term mortgage rates are currently extremely low as well. Everyone can borrow for a very long time at a

fixed rate which is extremely low. Correct. And it goes beyond that also, I think, because it goes on to a more nuanced argument that says, if inflation is not part of the problem, then the central bank really does not have a growth inflation trade off, which means every time growth is in trouble, central banks can ease policy and they don't really have to tighten, which means the equity market can depend very solidly on a central bank put in a way that just would not be possible

in an inflationary environment. And how has COVID change this Well, it's actually fascinating because the COVID has led to two very very different scenarios. Scenario one, which is the mainstream, one is the resulting unemployment, the need for industrial adjustment, and all that will keep inflation even lower for as

long as all that continues. The argument against that has been that the massive policy expansion, both fiscal and monetary, is going to mean that the inflationary pressures will occur stronger and quicker than we had actually initially thought. We are expanding the money supply, and we're expanding public sector debt like crazy, and we won't stop until inflation actually does hit sufficiently strongly to make everyone have to change their tune. And the question, great question is when is

that going to be? What is going to be the stronger force determining inflation in the next few years, unemployment or monetary growth and expansionary policy, And we don't know. We've never really been in a situation where the two main determinants of inflation have been so strongly moving in quite opposite directions. Just a final question, and without embarrassing Charles, I would say, I'm glad that the whole podcast about

generational challenges. We have all generations represented on this program, having started with someone in their twenties. But Eileen, who spoke to us at the beginning of the program, feels like many twenty somethings that quite already quite put upon as a generation facing much tougher challenges financially than her previous generations. What's the sort of single best way that older generations could try and do right by people of

her age group. What's the thing that if we were being selfless, or the exes and the baby boomers and older people, what's the best thing that they could do to make this scenario less painful. Well, in the very short run, I get the vaccine through so that we can all go back to some normality. The young can enjoy university again, and my grandchildren now in university, and it's not what it should be, nor of course is

the drug market where you should be. So that the first short run need is to get the vaccine distributed and get back to normality and allow the young and reasonable life again. They have been worse hit by the pandemic probably than any other group except perhaps the over eighties, who are so vulnerable in the longer term. I have to say that I really rather wish that the future that we paint does not come about for one reason or another, because it is actually going to be really

quite difficult to maneuver our way through. I fear that we're going back to something rather akin to the stag clation of the nine seventies for quite a long time, and in a much worse condition than we were then, because the underlying debt ratios have become so much worse. Uh. I think that I would in some ways respond to you along what the Irishman is always space to have said. I wouldn't. I would rather not have started from here. Charles, good up, Thank you very much. I didn't promise you.

One more slice of the Bloomberg New Economy Forum. Here's Mark Connie, former Bank of England governor, now you n Special Envoy for Climate Action, talking to my colleague, the Bloomberg television host Alex Steele. But how to make all finance sustainable? Finance? Mark, there's been data that says that total required investment in the energy sector is going to be three and a half trillion dollars a year, and a lot of that going to say carbon capture to

decarbonize the world. Tell me how we get there? Well, uh, and that data is right, and that's just energy really, it's energy infrastructure, and then there's a decarbonization above and beyond that in other sectors of the econ to me, So we need a whole economy transition. We need to mainstream sustainable finance. We need to ultimately get to a point where every financial decision is taking climate change into

account the impact on the transition. And we actually dropped the adjectives sustainable because it's just what finance professionals do. So we're gonna get to sort of the policy part of it in a second. But financial flows are really important, and the private sector money is going to be key.

How do we get more money from the private sector? Well, I think we What we're working to do is with the private sector to put in place the information, um, the tools, and the markets that are needed in order to do this. The information. It starts with reporting, and it's the TCFD reporting making it mandatory, so all companies reporting their climate risk. That's something actually Mike Bloomberg spearheaded five years ago. It's moving into mainstream. We wanted everywhere

by COP twenty. Secondly, on the risk side, we need the banks to look at the risks around the climate transition, which then flipped to opportunities. On the opportunity side, it's really about looking for a transition plans from all companies and backing those who are part of the solution and taking capital away from those who are part of the problem.

That's how you mainstream. One last point, and I know we'll get to this, is it's very important to also help build those nature based solution and carbon offset markets as well. That's a missing market and it should be measured in the ten civilians a here. How long do we have and how long is that going to take? How long? Well, we don't have a lot of time at the moment with the carbon budget on where we're headed somewhere between ten and twenty years, depending on how

you measure it. So we need to act now and we need to buy some time. That's part of what offsets will do for us UM. But also we need to invest now. I mean we're we're touch what we're going to be coming out of the health and economic crisis. Uh, the question is what direction are we pointing our economies? We're going to point towards sustainable growth, huge investment. You rightly started with that alex huge numbers for investment. That's

capital intensive, it's job heavy. UM. Having that information now so companies and investors can put money to work is critical. So what role then does policy play in that? UM? We just had election obviously here in the US. UM, what's the role of public policy? Yeah, so I think there's a couple of roles. One and I wouldn't under understate this. First bit is set the direction. So one of the one of the planks of President elect Biden platform was the US is going to move to clean

energy and net zero by So you set the direction. Secondly, you put in place the frameworks that are necessary that that information for investors to make the decision, and you also have credible regulatory policy. So you're you're showing the direction of the economy more hydrogen, you know, zero mission vehicles, moving towards electrifying more of the economy and moving economy or sorry the elector electricity sector in generation towards renewables.

All of those things send signals to investors, provide the information as well, and gets money moving. So that's what government has to start with the objective, fill in with the framing, and then candidly get out of the way so the private sector figures out where to go. Has COVID helped or hurt that? I think you know, if you'd asked me that question ten months ago or nine months ago and it started, I've i've I would have hatched. Like a good central banker, I would have told you

both sides of uh is in Absolutely it is. It has helped because it's forced a couple of things. One is a social reset. You know, we've all sort of stepped back and thought, well, what are some of our priorities. Resilience for our economy, sustainability, solidarity, all these aspects, but also strategic resets for companies because look, there are a few companies and they've benefited through valuations that were well

positioned for the shifts that covids brought on. But most companies are having to change their strategies, re optimized given what's happened. As they reoptimize, if they're in one of a hundred and twenty six trees now not including the US yet, but countries that have a net zero strategy, if you want to be around for the long term, you're gonna have a net zero strategy. That helps because it it brings forward the investment that we need to

get to where we need to go. So we have public policy, we have private money, and I just want to get your take on what central banks can do to help this or not. The FED recently joined the Network for Greening the Financial System. They will late to the party, but is there a role for central banks here? There's absolutely a role, which is why the FED is joining, and I'm very much a salute by share of quarrels

for that announcement. Um. Look, there's a few things central banks can do, and as you know, Alex, central banks vary by jurisdiction. Some have more powers than others. But if you oversee the banking system, what a central bank can do is ask the banks, have you thought about where your exposures are and where your opportunities are as we transition towards net zero. That's something the Bank of

England's doing. You can take it all the way to conducting climate stress tests, which eighteen of the world's major central banks are doing. You can also start to think about your collateral policy over time because ultimately, um, you know, again speaking like a central banker, badgets uh. Victim is you lend against good collateral. Well, in a world where you're transitioning towards net zero, good collateral is consistent with that transition, and that's something the CPS looking at, other

central banks are looking at. So there's a range of things we can do in the end, though we're not going to set carbon policy or climate policy. Governments are going to do that and the private sector is going to provide us. One last question on this um can we do it without China? How key is China going

to be in all this? China's key to virtually everything in the in the world, just as United States is and European Union is UM and was very significant a few weeks ago when President g announced China zero objective. China is one of the biggest producers of electric vehicles, of wind and solar um. They have to do a lot more. They know they have to do a lot more, but they will be essential as all major economies will be.

And that's part of what the UK has to do in partnership within lye is for cop over the course of the next twelve months. Thanks for listening to Stephanomics. We'll be back next week with more on the ground reporting and analysis, and remember you can always find us on the Bloomberg Terminal, website, app, or wherever you get your podcast. This episode was produced by Magnus Hendrickson, with special thanks to Monty Python, Eileen Bagbo, Catherine Bosley, Nimrod, Allen,

Charles goodheart Man, Alex Steele, and Mark Kearney. I should add that ju Lynn and prim Turi helped out with end the current piece of Asia last week and didn't get a mention. Sorry about that and thank you to them too. Lucy Meekin is the executive producer of Stephanomics and the head of Bloomberg Podcast is Francesca leaving the