Economists keep scratching their collective heads about the ongoing strength of the economy. With the COVID stimulus funds close to spent and the Federal Budget deficit flattening out the question is: where does the economy come up with the ability to grow at a rate of two percent per annum, net of inflation? 

The answer is demographics. Currently about a fifth of the population is over 65. At the start of the last recession in 2008 the proportion was closer to 8 percent. Like the other two broad demographic groups (the young and working-age adults), seniors have, as a group, distinctive demographic characteristics. Aside from spending on health care and social security, seniors do not ask a lot of the government. They do not need new schools or roads built. They are, as a group, well capitalized. They are living off their investments. They in general do not work but create a demand for labor with their spending. 

Contrast this to the other two groups. The young need all kinds of government services, from schools to infrastructure. They live mostly at the pleasure of their parents. They as a group are mostly too young to work, or too subsidized by their parents to take on entry-level employment. 

Working adults help pay for the seniors and young both with their taxes and commerce. While a person of any group must pay taxes in proportion to their income, working-class adults subsidize the retired and the young at the same time, as there are more of them working. Until children are set off, working age adults are not able to accumulate financial assets outside their retirement accounts, and many are expecting to inherit assets from their parents’ estates when they pass on. They may be disappointed. 

Seniors are living longer than before and are as a group more active. There has been a change in attitudes. Seniors after World War II often felt obligated to live frugally to pass assets on to their children. Nowadays, older adults feel that the educational and social opportunities given to their children are 

inheritance enough. As a result, more seniors are spending more money on themselves, supporting the economy in the process. 

There have been some attempts to redistribute the wealth of the senior affluent to other parts of the economy. Social Security is now taxed 85 percent taxable at the highest marginal rate. Medicare premiums are means-tested, with premiums increased by income level. The accumulated wealth of seniors is not taxed until spent, nor should it be. Aside from estate taxes, this country has no history of taxing funds accumulated. If wealth is sold it is generally taxed at capital gains rates, which are lower than for earned income. Retirement distributions are taxed as income, which is seen as a timing delay. 

Given that seniors make up 20 percent of the population, their spending is formidable. Out of pocket healthcare spending alone is over twice the level of a decade ago. Spending on travel, homes, etc. is all up sharply. Remember that most in this category do not work. Thus, they generate demand for labor with no offsetting supply. 

In this context, the tightness of the labor market is more understandable. Since wages make up almost two-thirds of GDP, the demand for labor is a key component in the overall inflation rate. As it takes about 20 years to increase the labor supply internally, the obvious solution is some sort of worker visa program. 

The problem with the worker visa idea is that it runs into political opposition from those less knowledgeable about the problem. Stereotyping immigrants as gang members, thieves and rapists overlooks the fact that a conviction of the commissioning of a crime is an automatic deportation. Last month, $5.6 billion was wired by immigrants to help their families. This does not sound like the conduct of those with criminal intent. 

As the US equivocates about immigration, other countries move ahead. Canada has one of the most vibrant AI industries in the world, chiefly due to more expansive immigration policies. Contrast this with the conduct of Florida, where crops rot in the fields due to new restrictions on even temporary agricultural workers. 

Seniors will be a positive economic force for some time. In 1936, the year Social Security was begun, 20 percent of those over 65 lived below the poverty line. Today that figure is less than 5 percent. With their collective wealth and willingness to spend it, the entire economy should benefit. It may come at the expense of those who were waiting for the intergenerational transfer of wealth. They may be impacted less than desired. 

The Economy 

Economic activity continues to plod along. Higher interest rates have so far not been an impediment to the economy moving forward. 

Post COVID, the economy is broadening. Travel is up sharply, as are retail sales and new home purchases. There seems to be an increased willingness to take on debt. This is a sign of consumer optimism. 

Finally, there are many numbers of factories under construction to shorten supply lines and prevent the disruptions of a few years ago. While manufacturing does not provide the employment numbers of an earlier era, the wages are in general much higher. 


Inflation is an issue that gives the Federal Reserve heartburn. The goal of two percent inflation is nowhere near being achieved any time soon. Labor market tightness ensures that strikes and demands for wages and benefits will escalate. 

As previously stated, only an increase in qualified labor can balance the equation between supply and demand. So far, Washington does not want to hear of it. The Federal Reserve has no jurisdiction over labor, government spending, or any of the other factors that contribute to inflation. They can only raise interest rates to reduce demand. The approach by the Fed works best when there is a lot of speculative buying to beat price increases. So far that has not been the case. 

Interest Rates 

Interest rates have gone up and lately paused. They will likely go up more and stay up longer than most anyone is predicting. Raising interest rates and restricting credit creation are the only two tools the 

Fed uses to regulate the economy. Restricting credit with larger down payments, etc. has seen its effectiveness eroded with the rise of so many non-bank lenders who are outside the Fed’s purview. 

The Stock Market 

In the first half of the year, the Dow Jones Industrial Average went up 3.8 percent, the Standard and Poors 500 increased 15.9 percent and the tech-heavy NASDAQ market went up 31.8 percent. Clearly, technology and its potential were a better investment vehicle than the reality of a more mature company. 

It was the best first-half return for the NASDAQ in 40 years. Forty years ago, in 1983, the market was awakening from a ten-year period where the averages did nothing. In the context of the current market such is hardly the case. 

Rising interest rates tend to cause stock prices to fall as they provide competition for potential returns from stocks with the more predictable returns from holding debt. Evidently some investors have not read this memo. The potential of bitcoin, AI, the cloud, etc. seems too attractive to pass up for clipping coupons. 

Markets keep rising until they are not. A Factor that could derail the market is an economic war with China that is already underway. Other less obvious issues include the propensity of large firms to invade each other’s businesses (Elon Musk’s Twitter vs, Threads, offered by Meta Platforms formally Facebook comes to mind). Amazon and Microsoft may need to restrict the cloud services sold in China. Also impacted along are the chips of Nvidia and other semiconductor makers. Another reason for stock market correction would be a panic by seniors who are currently holding disproportionate amounts of stock index ETFs due to their recent performance. 

Remember that what is referred to almost monolithically as “the stock market” is really a market of stocks. Not all issues have led the way up. Not all lead will the way down. Some who lead the way down will probably stay there for a long time if they survive at all.  

Warren M. Barnett, CFA

July 11, 2023

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