The December 2013 UCLA Anderson Forecast ended the year with a New Year’s resolution for the nation: Start saving now, before it’s too late. According to Forecast economists, a slow-rolling catastrophe of grossly inadequate national savings is upon us, and the crisis will affect us on personal, city, state and national levels.
“Our forecast on this—and you don't want to believe it—is next year we'll be a year older,” said Forecast Director Edward Leamer. Looking at current long-term demographic trends, we are an aging nation with a growing savings deficit and little political or personal will to change course. “We need an AAYP to offset the AARP. The “Y” stands for young. We are engaging in a huge transfer from the young to the old. You have to choose: Who should pay for kids’ schooling and who should pay for the elderly’s Viagra?”
The keynote talk by Laurence Kotlikoff, William Fairfield Warren Distinguished Professor of Economics at Boston University and author of “The Clash of Generations: Saving Ourselves, Our Kids and Our Economy,” highlighted further the intergenerational impact of our dwindling savings. “I think we're stealing from our children, and I think we've been doing that as a policy for the past 60 years,” he said. “It's not pay as you go, but take as you go.”
Both Leamer and Kotlikoff focused on the shift in spending peaks from a mid-life high to the growing trend in high spending by the elderly. “Who's been consuming so much more?” Kotlikoff asked. “Is it Uncle Sam or is it grandma? It's grandma.”
In the short term, the Forecast predicts the economy won’t quickly help swell empty or near empty bank accounts. On a national level, the forecast calls for real GDP growth in the current quarter to be a modest 1.8 percent, and by the second quarter of next year a sustained 3 percent growth path. “In this environment, employment will be on track to add about 200,000 jobs a month and the unemployment rate will decline to about 6 percent by the end of 2015,” wrote David Shulman, senior economist of the Forecast and author of the most recent Forecast nation report. At this morning’s event he summarized it this way, “The economy’s going to grow if we can get Washington out of the way.”
In California, the Forecast drew a marked contrast between the financial health of coastal vs. inland communities. The vast majority of employment gains are in communities along the coast, while job growth remains stagnated in inland California. “Aggregate job growth remains geographically disparate,” said Jerry Nickelsburg, senior economist of the Forecast and adjunct professor of economics at UCLA Anderson. “Along the coast in California, we're outperforming the United States. But there’s really a difference in performance in parts of Los Angeles and inland. Those areas are moving apart and the gap is widening.”
William Yu, economist at the Forecast, focused on the human capital in Los Angeles, citing his First 5 L.A./UCLA City Human Capital Index. The Forecast found Los Angeles’ human capital is among the lowest of the nation’s largest metro areas, ranking 26 out of 30 metros. Within L.A. County, the Yu’s Forecast report showed a growing gap between prosperous and faltering areas. Regions with high human capital have higher income levels, higher home values and higher employment, while regions with low human capital predict just the opposite. “We see two Los Angeleses growing apart,” Yu said. “Rising human capital areas of Los Angeles lead the country in human capital value, while falling human capital areas of Los Angeles come in last. It’s like the difference between developed and developing nations.”
The Forecast event ended with a panel discussion about the future of savings. Anderson Professor Suzanne Shu; Michael Hiltzik, business columnist for the Los Angeles Times; Ann Boynton, deputy executive officer of Programs, Benefits and Policy at Calpers; and David Crane, lecturer and research scholar at the Stanford Institute for Economic Policy Research, gave differing viewpoints of the challenges facing all sectors of the national economy.
Financial decision-making and behavioral economic choices are two of Shu’s main research foci. She said, when it comes to Social Security, most people act against their best interests. “From a financial perspective, waiting until later—assuming a regular life expectancy—is better, yet most people claim it earlier,” she said. “There’s a loss aversion for after you're dead. “Boynton, followed Shu’s comments with more advice for retirement. “Our research shows that a defined benefit plan is the best way to save for retirement,” she said.
On the political side of the savings and economy debate, Hiltzik agreed with the growing chorus of critics. “I think the reason people don’t want things to change is that everyone in Washington has a vested interest in the status quo,” he said. Extending the possible interest groups resisting reform, Crane added the current Bogeymen in New York to the challenges to new policy creation. “There is an unholy alliance between public pension plans and Wall Street private equity,” he said.
The next Forecast event is tentatively scheduled for April with special topic "Solutions for our City." Head to the UCLA Anderson Forecast website for more details.