September 11, 2012
Government, no matter its intentions, cannot create product or wealth. They only redistribute it. If fewer people are willing to work and the population remains the same, then per capita wealth necessarily goes down. The rate at which it declines is a function of many things, although the labor participation rate is among the more important.
Productivity is an important element. People are more productive when they have better tools and equipment to work with. Included among their tools is an education. “Human capital” is primarily a function of the quality and quantity of education, something that has been in decline for decades. Tools and equipment are a function of past wealth creation or savings. As this diminishes, so too does the productivity of workers.
As the population ages, demographics come into play. An aging population means proportionately fewer people working and more not. Fewer people then must support more. Social security and medicare were both programs that depended upon their funding from those working. They were based on unreasonable assumptions (if you prefer, they were Ponzi schemes from the start) regarding demographics. As a result of rosy assumptions and increased benefits, these program are insolvent and will not last much longer in their current configurations.
Now it appears another factor is coming into play. The participation of youth in the workforce is declining. Bruce Krasting describes the deterioration:
The most disappointing element of Friday’s NFP report was the drop in Work Force Participation (WFP). This important measure of the labor force fell to a 31 year low. A look at the details shows things are even worse than the headline report. Consider this chart of WFP for two groups; workers 22-55 (white) and those 55+ (brown). The lines crossed in 2002. The negative gap has widened every year. It’s fallen off the chart the past three years.
This chart describes a real crisis for America. The long term consequences to the economic health of the country are tied up in this chart. All long-term macro economic analysis of the USA assumes that the current crop of younger workers will evolve to be a productive group for the rest of their lives.
Why are the young not working as they did in the past? That is moot. Some blame our school system, others the ease of living off welfare and still others the moral and cultural decline in the country. I suspect all are factors in the decline. The important point is how this change alters the future. The standard of living and the per capita wealth of Americans is going down. These results are already showing up in various competitiveness surveys.
If the trend continues, the US will turn into a third-world nation quicker than most anticipate.