The Demographic Depression

James Surowiecki in the New Yorker:

Perhaps the most striking feature of this economic downturn is the way it changed the rate of household formation. Between 1947 (when the government first started collecting data on the subject) and 2007, the number of households in the U.S. rose every year, closely tracking population growth. This recession dramatically broke the trend. In 2008, 2010, and 2011, the number of households dropped, even as the population continued to grow. As Gary Painter, an economist at U.S.C., has argued, the decline in household formation was largely a response to the slow economy and soaring unemployment among the young.

The dwindling number of new households, which the economist Scott Sumner has called a “demographic depression,” isn’t just a result of the weak recovery; it has also been a major cause. We rely on new households to help drive economic activity, in part through the construction of new homes. But, this time around, construction, which normally leads the way out of recession, has been a drag on the economy. While overbuilding during the housing bubble bears some of the blame, so, too, does the lack of new households: when people are doubling up, there’s little demand for owning or renting. This hurts not only the construction industry but all the businesses that make the products that you put in new homes. Spending on durable goods—washing machines and the like—has been very weak over the past few years.

That’s the bad news. The good news is that when this trend reverses there will be a spike in demand, both for housing, especially rentals, and for all the stuff that you put in a house. Some pessimistic observers argue that this reversal will never happen, and that the U.S. will become more like European countries—Italy, say—where living at home until one is older is more common. But it’s easy, during a crisis, to mistake a cyclical change for a permanent one, and surveys show no evidence that young Americans are more interested in living with their parents now. Painter’s study of past recessions shows that, in the past forty years, household formation has slowed notably during downturns but has rebounded as the unemployment rate fell. It seems much more likely that the same will happen this time around than that American aspirations and social norms changed overnight in 2007.

Posted by on March 12th, 2012 at 11:43 am


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