The core theme is the unprecedented decline in intergenerational wealth transfer, where younger generations are no longer becoming wealthier than their parents, a trend that has historically been an expectation, and the underlying demographic and economic factors contributing to this shift.
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a society grows great when old men plant
trees who shade they know they shall
never sit in a greek proverb from a time
well before the problems of our modern
economies or the study of economics
itself is as true today as it was
thousands of years ago but do we really
live by this idea for the first time
since the industrial revolution
successive generations are not becoming
wealthier than their parents while there
have certainly been setbacks and
historical outliers from this trend it
has remained true in aggregate for the
populations of most developed economies
for a long time it was simply the
expectation that people's children would
have a better lifestyle in their
adulthood than they did but today that
really is no longer the expectation in
fact most young professionals can only
aspire to live the lifestyles that their
parents did younger generations are
finding it harder and harder to get
reliable jobs afford comfortable homes
start a family and save for retirement
this is despite the fact that the world
is a much richer place today than it was
at any point in the 20th century when
baby boomers were busy building their
now unassailable fortunes
so what is going on here how is it that
a world that is richer overall producing
generations that are poorer than the
ones that preceded them is there some
underlying cause to this if there is is
there some way to reverse it and if
there isn't does that mean that we can
only expect every generation going
forward to be poorer than the one that
came before it from now on oh and i
suppose it's probably also worth asking
does this even matter since everyone is
eventually going to die and pass down
their wealth anyway
here's a question for you all is it
better to be born into a large cohort
with lots of people the same age as you
or a small cohort with not a lot of
people the same age as you traditional
economic theory would suggest that a
small cohort is preferable it means less
competition for jobs housing social
programs spots in good schools and on a
macro level less competition for things
as basic as natural resources but how
then do you explain the baby boomers
which despite being part of the largest
population explosion ever are an
aggregate very wealthy
well lord david willets a british
politician demographer and author
suggests that the opposite may be true
and that in a democratic system being
part of a larger cohort is actually
preferable because it gives that group
more voting power on generational issues
and more sway in marketplaces when the
boomers were young they voted for
policies that benefited them low-cost or
free higher education family support
systems and strong social welfare when
they got to the peaks of their careers
their voting patterns changed again and
now this large block of voters was in
favor of lower income taxes less
business regulation more domestic
industry protections to avoid
outsourcing and global competition and
on a smaller scale things like zoning
laws which would protect the value of
their homes the push towards suburbs
with mandated single-family building
requirements meant that houses got
bigger and good locations got more
desirable because only so many family
homes could be built there in the 50s
houses were basically a commodity the
majority of the expense was in building
the structure itself and it wasn't
unreasonable for the family cars to cost
more than the family home fast forward
50 years and those houses are now
investments as much as they are places
to live in old age the boomers have now
started voting to support retirement
benefits pension schemes medical
infrastructure and to remove wealth
taxes even if that comes at the expense
of all the schemes that serve them well
in their young age of course david
willett's work focus specifically on the
uk and yes i know there are certainly
people that vote for the greater good
rather than their narrow self-interest
but on average it is easy to see this
trend throughout the past half century
in most advanced economies in my own
home of australia for example the 2019
federal election was more or less
decided by a policy decision that would
reduce the tax effectiveness of
australian retirement accounts the party
that advocated for keeping the favorable
tax structure ended up winning primarily
thanks to older australian voters we
recently just had another election where
that opposition party backed down on
their plan to change retirement account
taxes and they won very convincingly a
2017 british election study found that
over time votes for conservative parties
have shifted from being divided by rich
and working class to being divided by
young and old a lot of what i've
discussed so far came directly from
willett's book the pinch and a lecture
he ran at the royal institution it's
definitely worth a read if you are
interested in these demographic
processes now a lifetime of favorable
government policy can be hugely
beneficial to building wealth imagine
how much better off the average
millennial would be if they got free
college or secondary schooling even all
other things being equal this would be
the difference that a lot of young
people need to be able to put a deposit
on a house and that's the next big issue
to consider the housing divide
david willett's small cohort theory
probably omits or at least doesn't
emphasize one important detail that gave
baby boomers another advantage over
successive generations and no it's not
simply that they were able to buy houses
when they were cheap certainly that
didn't hurt but it's more a symptom of a
bigger issue they were a big cohort in a
small world they had all the voting
power and hardly any of the competition
in the 1950s and 1960s the global
population was roughly a third of what
it is today and not to start a whole
thing here but if you were a white man
and the countries that we are mostly
focusing on your competition was even
less severe so this added back all of
the apparent trade-offs that we thought
of earlier there really was less
competition for basically everything
including jobs because employers had a
smaller pool of labor to choose from
labor force participation amongst women
was very low which further reduced the
supply hence the bargaining power of
workers but it also meant that domestic
duties were normally taken care of which
reduced household expenditures on things
like child care food and general
maintenance these higher relative
incomes combined with lower outgoings
meant that houses could often be paid
off with as little as one year's income
yes they did have to endure higher
interest rates especially in the 70s and
80s which were their peak home buying
decades but it didn't really make the
difference it would today
the median home in the usa in 1985 was
82 000
that's median so 50 of homes like the
ones first home buyers would be looking
at would be cheaper than this but let's
keep it simple and stick with 82 000.
adjusted for median household incomes
that 82 a 000
a 000
and three thousand
the average mortgage rate at this time
was fifteen percent or roughly fifteen
thousand dollars per year it did get
higher in certain years but most
borrowers were fixed in at an absolute
max of about fifteen percent so that's
the worst case scenario the median home
today costs 430 000 and the average
interest rate is just over five percent
or 21 500 per year just in interest payments
payments
again this is adjusted for median
incomes at the time so on the surface
these seem pretty comparable maybe the
younger generations shouldn't be
complaining about unaffordable housing
after all a lot of people brush away
this comparison by saying that inflation
at this time was extremely high so these
higher interest rate payments didn't
mean anything but that's actually not true
true
inflation in 1985 was three and a half
percent and while it was as high as 13.5
in 1980 this was consumer price index
inflation not housing inflation the
prices of houses throughout these
decades actually grew at a relatively
modest rate it was everything else that
was getting expensive this is kind of
the opposite of what we expect today
where house price growth outpaces
inflation but that was not the case in
the 70s and the 80s so yeah the
inflation argument isn't totally fair so
is it fair to complain about how easy it
was for baby boomers to buy a house well no
no
they still had it easy for two other big reasons
reasons
it's not what you would expect but the
higher interest rates actually kind of
helped them saving money for a deposit
in an account that pays 10 interest per
year really accelerates that savings
goal higher interest rates also ensure
that house prices never got too high
because the repayments would just become
unaffordable in our example from before
we were looking at interest paid on the
loans from two time periods
but the thing with a mortgage is you
gotta pay back the principal as well
paying back the principal on a 430 000
mortgage over a standard 30-year loan
term will cost an additional 14 300 per
year bring the total annual repayment to
just under 36 000
the house from 1985 would have a
principal repayment of three thousand
dollars per year bring the total
repayment to just over eighteen thousand
dollars per year half of what the 2022
home buyer would be paying despite
interest rates been three times higher
put another way if the repayments were
kept equal the person buying the home in
1985 could have it paid off in five
years rather than 30 years
so why am i focusing so much on housing
well despite being a very important part
of our lives houses are also uniquely unproductive
unproductive
real estate is kind of unique as an
asset class because it doesn't produce
anything of value a house sitting on a
block of land can appreciate in value
and can provide a home to its owners or
rental income stream to an investor but
it doesn't make anything of course there
are other investments today like
cryptocurrencies that also don't produce
anything of value but their market is
minuscule next to the market for real
estate around the world minuscule and
also irrelevant if the value of bitcoin
goes to a million dollars well that's
great for the people that invest in it
and it will have some minor knock-on
impacts in other markets as people cash
out to buy whatever crypto millionaires
buy but it's not going to put anybody
out on the street housing affordability
can do that and it can also slow the
progress of entire economies every
economy in the world is still for better
or worse focused around large centres of
economic activity what a regular person
might call a city if the real estate in
these cities becomes too expensive then
it becomes infeasible for workers to
hold down jobs there because more and
more of their income will just go to
paying rent in the short term this can
be offset by higher wages but then these
centres are really just operating for
the benefit of the landlords that are
lucky enough to own property there the
money that landlords make from their
properties are unlikely to be reinvested
into company growth or spent on regular
consumer consumption that keeps these
businesses in business it is likely to
be spent on more property further
driving up market values and the amount
of money that gets sucked out of
productive centres to be shoved into
unproductive assets higher house prices
also reduce social and geographical
mobility a 2020 pew research study found
that 52 of young american adults between
the ages of 18 and 28 still live at home
with their parents one could also
reasonably assume that this number is
higher after two years of covert and
record high house price growth these
young adults are financially bound to
where their parents live if they get
offered a really good job in a different
city they would have to decide if it's
worth the pay increase versus the
increased cost of living on their own if
they decide it's not then they miss out
on a good job and a business misses out
on a productive worker the concentration
of wealth in a particular generation is
something that can have very real
consequences for entire economies and
these effects are only going to get more
pronounced as populations continue to
age places like japan are clear examples
of this and they don't have the same
kind of housing problems that we do in
the west but long term does this even matter
matter
i don't want to get too morbid here but
people eventually die and their wealth
will get transferred down to their
children or some other beneficiary so
the concentration of wealth in a single
generation is at worst a transient issue
i actually made an entire video last
year about the great wealth transfer
which is the process of the baby boomers
dying and leaving their wealth behind
the problem we discovered in that video
was that a lot of the wealth that is
being passed down is coming in the form
of private family businesses in brief
the problem with that is that often
these small businesses need the owner to
continue operations and the people that
stand to inherit these businesses are
either unwilling or unable to run them
small businesses are a huge part of the
economy losing them will do a lot of
harm now a glimmer of hope here is that
these businesses can be sold by their
inheritors to people that do have the
skills and desire needed to run them
perhaps they will sell them to people
who have themselves got the money they
need to buy the business from their own
inheritances the problem here is the
type of people that will actually be
receiving this money
most people don't receive money from
their parents passing until they are
pretty old themselves often approaching
the end of their careers or starting
retirement if the money gets handed down
to them they are likely just going to
use it to fund their own retirements and
then just hand down whatever's left to
their own elderly children
money pooling in the hands of older
people means less opportunity will be
afforded to younger people to do all the
things that they do to build a
functioning economy buying a house
getting a good job and you know starting
a family so that there is a continual
supply of workers to run an economy you
can't run an economy on people waiting
to get old enough to finally do
something with their lives economists
call this the intergenerational wealth
problem i like to call it the prince
charles paradox but it is something that
we are going to have to address things
like wealth and estate taxes are
commonly proposed solutions but even if
they did work they are going to be very
unpopular amongst the huge voting bloc
that got us here in the first place
the final thing we got to ask ourselves is
is
is this all the boomers fault
i know a little bit of intergenerational
bickering is all good fun but blaming
our current economic issues on a single
generation is not going to be very productive
productive
voting in your own best interests and
policies been enacted in the best
interests of the majority is the
foundation of democracy and i don't
think that anybody is reasonably going
to argue that this is a bad thing i
think it's also very important to look
at examples of economies where this has
not happened the second largest economy
in the world china is a great counter
example their generational baby boomers
are known locally as the lost generation
because they spent most of their working
life in a dysfunctional economic system
they were also too old to truly benefit
from the rapid economic expansion that
took place in the decades after the
economy started opening up this meant
that despite still being a large portion
of the population they did not enjoy the
same economic prosperity as their
western peers economic prosperity was
also something that boomers enjoyed that
wasn't necessarily within their control
the last half of the 20th century by
historical standards was very peaceful
the world also opened up to
international trade and growth was put
into overdrive by an abundance of cheap
energy in the form of fossil fuels it
was a great time to make a fortune and
people did which is probably the final
piece of the puzzle once people become
extremely rich and i'm talking about
multi-millionaires and billionaires here
they don't normally become poor again
the clump of billionaires that came from
this generation will be skewing these
figures to make them look worse than
they really are remember in a group with
one billionaire and 999 people who are
completely broke the average member of
that group is a millionaire
most billionaires are pretty old and
these people will be making outsized
impacts on their generational wealth statistics
statistics
again if we look at billionaires by age
in china a country where voting by the
general population doesn't really happen
in the traditional sense we can clearly
see that wealth comes from periods of
strong economic conditions not just
having the ability to bend public policy
to suit you and your peers although of
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