I am thrilled to now be writing a bi-weekly column for the Globe and Mail, Canada’s national newspaper. See my first here – it is a look at how the gig economy is in force but our social policies are woefully out of step with it.
I am thrilled to now be writing a bi-weekly column for the Globe and Mail, Canada’s national newspaper. See my first here – it is a look at how the gig economy is in force but our social policies are woefully out of step with it.
Demographics drives a lot of things including Mergers and Acquisitions (M & A) activity. That is a lesson we are now learning from Japan, where there are apparently too few heirs to take over large companies as their boomer-aged Chief Executives head for retirement.
This piece from the Financial Times looks at what is going on, but the story is a simple one. Plenty of Japanese CEOs are baby boomers, meaning they are at retirement age or heading there soon. Whether they are company owners who do not have children at the ready to take over or simply in companies without a strong layer of younger managers, many do not have obvious successors. As a result, they are turning to advisory firms that can help them arrange mergers. The stocks of such advisory firms are on the rise and no wonder: Nomura Securities estimates that between now and 2040, there will be 40,000 companies per year in Japan facing succession and many of them will need help in arranging it.
Japan is an example of population aging gone crazy. In 2016, births fell below 1 million for the first time since births began to be recorded in 1899. It has become a vicious circle. Births have been low for years, which means there are few young women to have babies. Those that could are discouraged from doing so by a society where childcare for working mothers is very expensive. As a result, the fertility rate in Japan (the number of children the average woman has over her lifetime) was 1.45 in 2015, as compared to 1.86 in Canada and about 1.89 in the United States, and the number of births keep declining.
As in Japan, the fertility rates for Canada and the U.S. are below the ‘replacement level’ of two 2.0, but unlike Japan those countries rely on immigration to fill some of the gaps as do many industrialized countries. Japan frowns on immigration, however, meaning that the foreign born population in the country is less than 2 percent, compared to about 13 percent in the U.S. and over 20 percent in Canada. The end result is that the entire population is aging quickly, and the age of executives is as well.
Whether Japan is a unique case or there are lessons for North America here remain to be seen. Certainly there are huge differences in culture that suggest an-aging-CEO led M & A boom is not as likely in the U.S. or Canada. For one thing, Japan values having family-run companies more than most companies do, with many in that country boasting that they have been ‘family run’ for generations. The importance of being able to make that boast, however, makes that in many cases Japanese CEOs have gone as far as adopting an adult male. In fact, an astounding 90 percent of adoptees in Japan are apparently actually males between the ages of 25 and 30. Since being family-run does not matter as much in North America, there is no need for mergers to make it happen. As well, there are few large companies within North America that do not have a clutch of in-house candidates vying for any stray CEO openings.
Although North American companies may not merge between themselves immediately because of population aging, they may find themselves merging with Japanese ones. Given that the market within Japan for any products is also shrinking due to population aging, mergers with non-Japanese companies are also increasingly on the table. We saw a huge hint of things to come with the purchase of premium-spirits company Jim Beam by Japanese company Suntory holdings in 2014, but there may be much more to follow.
The way that aging affects North American companies may be different than the way that it does Japanese ones, but there are lessons to be learned from Japan just the same. Fewer people joining the workforce means the options for how to conduct business have to change. Mergers may be one unexpected thing to come out of population aging, but there will certainly be more – and more business opportunities – as boomers age in every country.
What if you built a wall to keep people out, and it turned out that no one really wanted to get in anyway? Okay, some people might still want to enter the U.S. from Mexico and other countries which have typically supplied low skill labor, but it looks like their numbers are dwindling. In fact, thanks to some demographic trends that are getting lost amidst the general hubbub, it may be that the numbers of migrants are headed down anyway, no wall required.
Demographics explain a lot, or at least that is my bias. They certainly explain a lot of the reasons why there was such a rush to countries like the U.S. from Mexico and Latin America in the past decades. The U.S., like much of the world, had a baby boom that lasted until the mid-1960s. That meant the supply of domestic-born, young, labor grew rapidly until the 1980s and then grew less rapidly thereafter. In other parts of the world, including Mexico, the baby boom went on longer which meant that young, low-skilled workers jostled with each other to get jobs in their home countries. Inevitably, some headed for the U.S., some illegally. That’s the part of the story we know, and it is that rush to reduce the number of illegal immigrants that is behind the idea of putting up a wall between the U.S. and Mexico. Except, maybe those who want that wall should maybe be considering whether it is worth the trouble.
The situation is outlined in this paper by economists Gordon H. Hanson, Chen Liu and Craig McIntosh of the Brookings Institution. As they see it, between the early 1980 and the mid-2000s, there were lots of reasons for migration from Mexico and elsewhere in Latin America to the U.S.. The U.S. economy was strong, and for those seeking relatively low-paying work, there was not a huge amount of competition from the U.S. born population, a situation at odds with their circumstances at home. Around the time that the last recession hit the U.S., however, the undocumented population in the U.S. declined by an annual average of 160,000 for the years from 2007 to 2014. Economics, the authors believed, just hastened a story that was going to happen anyway as a result of demographics.
So what does come next? Well, again you need to look at the demographics to understand it. The authors did that and came up with a very dramatic profile of what they expect migration to the U.S. to be over the next decades. Using population projections from the United Nations as well as historical migration data, they modelled the likely inflows into the U.S. through 2050. The picture they came up with for the next thirty years looks almost like the inverse of the last thirty. And keep in mind that is not assuming any kind of wall, merely a continuation of demographic shifts that are already taking place.
The dwindling supply of young labor post-baby boom is one that is being mirrored in many countries including China. Think about it: Mexico provided cheap labor for Americans while China provided cheap goods made by cheap labor. When all of these countries age, what happens to the cost of living in the U.S. and elsewhere? It is an economic problem that does not get discussed as much as it should, but the reality will hit soon enough.
In the meantime, plans for a wall continue. No doubt once constructed the numbers of migrants from Mexico will fall, but analysts looking at the future numbers might want to consider the actual cause of that decline.
If I had to think of an industry prone to poisonous industrial relations battles I would probably think first or the auto sector, or maybe even something like education or health. The battles in those industries, however, are apparently being matched by orchestras (can I say ‘in the orchestra industry’?) across North America. Like many people, I tend to think of the music industry as full of a few superstars and many starving artists, but as it turns out that is not quite the full picture. Orchestras, as it turns out, have long been a unionized sector, and like other unionized sectors they are facing changing times a tumultuous period of restructuring.
Orchestras are actually a fascinating sector, albeit fascinating like watching a train wreck. Over the past few years, a host of North American symphonies have faced bankruptcies and closures (those in Louisville, Honolulu and London, Ontario are examples), long strikes and lockouts (notably affecting orchestras in Philadelphia and Pittsburgh this year) and deficits (the New York Philharmonic and the Toronto Symphony Orchestra come to mind but there are actually too many to list). They play pretty music, but they are actually going through ugly times.
Not surprisingly, much of the source of strife in the orchestra sector is happening because of money issues. Like firefighters and autoworkers, orchestras are finding that the non-profits that have long employed them no longer have the means or the desire to pay for what had been long-held contracts. In Pittsburgh, for example, players have been making a base rate of $107,000, which is something over $51 an hour not including benefits, which is in contrast to an what the Bureau of Labor Statistics says was an average wage in Pittsburgh of little over $22 an hour as of 2015. The current dispute centers around a plan to cut musicians’ salaries by 15 percent, and as well to freeze their pensions and to reduce the size of the ensemble.
Some argue that the market for musicians is intrinsically different than say the market for retail workers. If you ‘let the market decide’ on the level of salaries, goes the argument, you would not get you the best musicians. That is, the salaries for retail workers might be low since there are so many people willing to do the work, and since the job is simple enough that there is no shortage of qualified people. There may be lots of unemployed musicians, but if you let them outbid each other to work cheap, you might not get the ‘best’ ones. And $100,000 there is a different pool available than there might be at $30,000, or at a ‘pay by the gig’ agreement.
There is some merit to this view. For one thing, I would argue that at the higher salary, you are not only choosing different workers, but as well guarding against the turnover that would inevitably happen if you hired at a lower or a gig rate. It would only make economic sense for musicians to migrate towards better paying short term gigs if they did not have security and a decent salary. Whether that decent salary should be above what a nurse gets paid (which in Pittsburgh is $25.84 an hour according to payscale.com) is up for debate, however. And, the overriding trend in the labor market is to ‘gigify’ even the most traditional of jobs, which means the musicians are fighting a bit of a losing battle.
The bigger question really is what the correct industry model should be for orchestras. Should they be considered a public good, and therefore pretty much paid for by the state as they are in Europe? Or should they be left to sell tickets to pay their costs? That one is a bit of a non-starter if you want orchestras to survive, since virtually none are able to do so without outside support. According to a report by the League of American Orchestras, detailed in this story from The New York Times, as of 2013 (the last year for which data is available) orchestras had reached a ‘tipping point’ where they now rely more on philanthropy than ticket sales to generate revenue. Of course, private sector philanthropy rather than government grants could theoretically work, although there are far more demands for revenue from arts organizations than there is money to go around.
In my reading of it, orchestras actually should be a growth industry and the well managed ones could face a bright period ahead. Think about the major changes we are seeing as an economy and as a society. One of the biggest ones, to me, is the retirement of the baby boomers which will give a lot of people nothing but time – and those with time have time for music.
Boomers, retired or not, are now searching for ways to give their lives more meaning. Getting involved in hobbies, and in particular in music is a natural way for them to do that. Baby boomers also want to be on boards or to do meaningful volunteer work, and to have some input into organizations that interest them. If orchestras can help them to do that, then the the next step for them is to get them to write checks. Rich boomers can write big checks and poorer ones can write small ones or buy tickets. The trick is to tell them what is available and make it accessible to them. Savvy orchestras have already increased the size of their marketing departments and community outreach programs in order to reach this market.
The existence of cultural institutions is also an important consideration as baby boomers think about where they want to live once they retire. When listing what they want close to them, many cite proximity to cultural and entertainment venues as a consideration. Florida, the haven for many pre-boomer retirees and in a way of model of how many communities will evolve, is actually a hub of small orchestras. Communities that want to attract or retain boomers would do well to retain their orchestras as well.
Even with higher demand ahead, the path for orchestra musicians is unlikely to be a smooth one. The economic future we are facing is one where many will go from gig to gig, and where job security is not a given for anyone. Musicians outside of the orchestra sector know what that career path looks like better than anyone. Perhaps they could give some coping lessons both to their colleagues and to the labor force at large.
Here’s a new one to me: the ‘divorce mortgage’. No its not some crazy, invented term to describe a financing vehicle (my mind went back to ‘plain vanilla swaps’ from the days when derivatives were the buzz), but rather exactly what it sounds like: a mortgage that suits people who own a home together but are getting a divorce. Right now it is a British phenomenon, but it certainly has the potential to spread through the rest of the world as well.
The divorce mortgage, as it is being proposed, would make it easier for one partner to buy out the other and stay in the family home if a marriage breaks down. As it stands now, if a couple divorces their assets, including any appreciation in the home since they purchased it, are split. If one partner wants to keep the house, they have to buy out the other. Given that that is often difficult to do, particularly if there has been a lot of home price appreciation, more often that not houses get sold.
As described in this piece from The Telegraph, with the divorce mortgage a financial institution would lend the partner who wants to stay in the home enough money to pay out their spouse. The bank would also lend an extra amount that would be used to pay interest on the loan. After the set period time is up, the borrower would either sell the asset and pay the lender back, or take over the mortgage themselves, assuming their circumstances had changed enough to allow them to do so.
Although I could certainly understand why this arrangement would be appealing to borrowers (particularly if they had children they did not want to disrupt) it took me a moment to see the appeal to lenders. After all, divorce mortgage or not, either partner in a divorce is always able to buy the other out and stay in their house, providing that they had the financial wherewithal to do so. If they cannot afford it, why would the lenders be interested in financing it? The appeal, however, is apparently that whatever interest rate they charge on the loan makes it worth their time. And of course if the borrower if able to refinance at the end of the period, everybody wins.
As a loan, the divorce mortgage would work well for someone who believes they can get on their feet within a few years and buy out the house, or at least be in a better emotional space to sell it. For someone whose circumstances did not change within the time period, it would just put off the day when they had to move, although that could work too if the object was simply to stay in the home for a reason like waiting until the kids got older.
Whether or not the divorce mortgage gets implemented in Britain or in North America, looking for ways to safeguard financial assets after divorce are worth discussing and not just in a personal finance context. The reality is that the ‘grey divorce rate’ (which these days mostly encompasses baby boomers) is uncomfortably high, and with each divorce comes a splitting of assets that cuts into the funds available to fund retirements. Given that the majority of baby boomers do not believe they have enough saved for retirement anyway, the income prospects of the next wave of retirees is rapidly becoming a macroeconomic issue.
If the divorce mortgage provided a window that allowed assets to be better preserved, that would certainly be a good thing from a big picture point of view. However, given that it would work best for those whose incomes are likely to rise the fastest in the years following a divorce (and hence allow them to refinance) it is not clear to me that the existence of the divorce mortgage would make much difference in terms of boosting assets. And of course if the home depreciated in value, holding on to it would have definitely proved to be the wrong choice.
The divorce mortgage may not be the way to go, but this is definitely a good time to thing about financial vehicles that allow people to preserve assets even if they cannot preserve their marriages. For some it might be better if they could do both, but from an economics perspective it will certainly be a lot worse if they end up doing neither.
Twenty and thirtysomethings would apparently rather buy experiences than things, and that has some very definite implications for retailers – or as least that is one theory. As this article from Bloomberg Business suggests, the stock market tells the tale of what is happening very clearly, and will continue to do so as the millennials reach their peak earnings years. While I agree that equities related to ‘equities’ have more potential than many in the ‘goods’ category, I think it is a little more complicated than the millennial theory would suggest.
Millennials – the share of the population born between 1980 and 2000, more or less – are now a generation with economic power. The oldest of them are out of school and in the workforce, and their preferences are shaping the economy. Once upon a time that might have meant a big boost to furniture retailers or purveyors of any kind of home goods, or even to the clothing retailers who could be expected to outfit them for the workplace. If you look at the companies that have done the best post-financial crisis, however, it is clear that something has changed.
As the article notes, those stocks related to leisure and travel and dining have done better than have general retailers over the past few years. In fact, if you look at the U.S. and European indexes tacking the two kinds of industries industries, the outperformance of the ‘experience’ ones over the ‘goods’ ones as at the beginning of 2016 was the highest since at least 2011. The theory, which is plausible enough, is that Millennials would rather spend their money on tickets to a sporting event or music streaming than on a shirt from Banana Republic or wherever. And to be sure, these days things like music streaming and cell phone service have become something akin to ‘staples’ to younger consumers, which no doubt crowds out the money they have available to make other purchases. Twenty years ago, no young person had to have money in their budgets for texting plans. Now they do, and that can be expensive.
Where I have a problem is with the suggestion that the ‘experiences’ over ‘things’ trend is limited to, or even driven by, Millennials. After all, it is the Baby Boomers and Generation Xers who have houses full of stuff that they would like to pare back. Organization-guru Marie Kondos’ books (The Life Changing Magic of Tidying Up was the first) have become huge bestsellers because they are about getting rid of surplus things and decluttering homes and lives. That sentiment is consistent with choosing to buy a meal out rather than more cookware to fill the over-stuffed kitchen cabinets.
In actual fact, if I did think it was Millennials who were completely behind the gains in experience stocks, I would probably be more worried that things would turn around. After all, in their case it may well be that they are only putting off buying homes and filling them up with the things that go along with setting up house. In the case of older consumers, however, the closets are already stuffed. As long as that sentiment continues, the experience stocks may well continue to be the ones to watch.
When people rhyme off the things they want to do in retirement, ‘pay off debts’ is never on the list. Nevertheless, it is something that baby boomers will have to do anyway, if data from the New York Federal Reserve (NY Fed) is to be believed.
According to a just-released study by the NY Fed, Americans in their 50s, 60s and 70s are carrying substantially more debt than was the case in previous generations. The average 65 year in the U.S. now apparently has 47 percent more mortgage debt and 29 percent more auto debt than a 65 year old did in 2003. A small percentage now also has student debt at the age of 65, and it is a category that is apparently growing quickly.
The reasons for the growth in debt are not hard to imagine. Before the financial crisis hit in 2008, Americans took advantage of high home values to refinance their homes and add to their debtloads. Job losses since have meant dislocations to many households’ financial situations. Added to that, the extremely low interest rates we have seen since the crisis have made it enticing for those who qualify to borrow ever more.
It all seems to be a bit of crisis in the making – for both the boomers and perhaps for the government. That is, ideally people retire with plenty of assets (a defined pension would be nice too, but those are getting scarce) and the leisure to enjoy their life post 65. These days, the precarious financial situations for the boomers – not only have they not saved enough, they apparently still have debts to pay – is making retirement more difficult for many. And, if they run out of money at some point, the government will be on the hook to eventually cover some of their living costs.
The good news is that as well as their debts, the older borrowers do have decent asset bases, as well as the ability to service their loans. According to the New York Fed, as a group they have high credit scores and the low rates of interest clearly help a lot with carrying costs.
So it is all okay – for now at least. Still, no one wants to imagine the scenario of households in retirement suddenly having to increase their debt payments and finding themselves in a worse financial situation than ever. That’s one more thing that Janet Yellen and the Federal Reserve need to consider as they carefully allow U.S. rates to move higher.
Like it or not, the sharing economy is everywhere. I’ll go as far as saying it will be one of the big economic stories of 2016, although its influence will extend far longer than that. It’s a different way to do business, and it works for a lot of people and a lot of businesses. But not for everyone.
Two stories about the sharing economy got my attention today, and each had a quote that stuck out for me.
The first was a story about a borough in Quebec called Rosemount-La Petite-Patrie, whose leaders apparently see the potential of the trend. They are so all over it, in fact, that they want to change zoning bylaws in town to allow for more short term rentals. For example, if there is a church parking lot that is only used to capacity on Sundays, they would like to change the bylaws to allow the church to rent out the space the rest of the time.
“Don’t discourage a behavior that would be beneficial to all just because it happens to be against the regulation already in place that was put there a long time ago before all this was possible’, Guillaume Lavoie, the councilor spearheading the initiative, is quoted as saying.
Contrast that attitude with the words of a lawyer in California who, according to this article from Mother Jones, thought about lawsuits almost as soon as she heard about Uber. “Why should we tear apart laws that have been put in place over decades to help a $50 billion company like Uber at the expense of workers who are trying to pay their rent and feed their families?” says Shannon Liss-Riordan, an attorney who likes to sue large businesses on behalf of workers.
Changing the rules is not something that tends to get done without some dissent. And yes, it does require tearing apart laws that were appropriate at another time when different technologies were in place, and different attitudes as well.
What is wrong with Ms. Liss-Riordan’s statement is that it fails to recognize that the success of Uber does not just help the owners of $50 billion company. Rather, Uber’s existence helps everyone who is tired of the frustrations that go with using cabs and would prefer to try something else. The Ubers of this world do not prosper because someone in Silicon Valley wants them to; rather they take root when people want their services. Not to mention, having businesses do well rather than have them fail tends to be better for the economy as well.
And yes, as companies like Uber expand, they will change how work is done. Up to now, we have mostly spoken of the sharing economy as it relates to Ebay or Etsy or AirBnB or Uber, looking at the efficiency of the way that it can provide a sales platform. The flip side of things is that the sharing economy is about how the nature of work has changed. Whether or not they would have chosen it, Uber drivers are independent contractors, and sellers on Ebay and Etsy are running businesses. Like it or not, large companies are also moving to employing more working on a contract basis rather than taking them on for life.
It is a brave new world, and we may indeed need regulations to make sure it runs properly. But they need to be of-the-minute regulations, not something that was created for an economy that no longer even exists.
We all say it, and we worry about it too: we are an aging society, and that’s going to have repercussions. In Canada, the median age of the population is now close to 41 while in the U.S. it is still-youthful 37ish but rising (according to the last census, seven states have a median age above 40). We can see some of the effects of this already: stores are stocking more reading glasses these days (Costco sells them in blister packs of three, just so you know) and seniors centers are getting more crowded. But that’s all early-days-of-aging stuff. If you really want to know what can happen when a society gets old, you need to look eastward, and specifically to Japan.
Japan is the canary in the coal mine for the rest of the world’s aging societies. The median age in the country is 45, and the population is actually dropping as birth rates cannot keep up with deaths. That’s not that unusual by the way: we pretty much have the same thing going on in North America, but we make up for the difference through immigration. Japan is pretty much closed to new entrants, so it is has aged quickly and thoroughly, so much so that entire towns are becoming abandoned.
This article from Bloomberg Business cites analysis by the Nomura Research Institute forecasting that by 2033 about one-third of the housing stock in Japan will be empty. That’s right, not just ‘not in high demand’, but empty. The country is part of the way there already actually: at present there are about 8 million homes have already effectively been abandoned. It’s not exactly boom times for the real estate industry.
Still, as much as there are parallels between North America and Japan, there are differences as well. About half of Japanese houses are typically built out of wood and not expected to last more than a couple of decades anyway. From a North American perspective that seems puzzling, but it has to do with (what seems like) a bizarre tax policy that depreciates the value of homes to zero in twenty years. According to Bloomberg, that has led to only about 15 percent of sales being in the secondary market, as compared to close to 90 percent in the U.S..
Maybe what Japan shows us is not just the economic havoc that demographics can wreck, but the havoc it can wreck when not accompanied by good economic policy. If the Japanese government had wanted to avoid ghost towns, tax policy should have been shifted years ago (and arguably immigration policy as well).
Let’s keep an eye on Japan’s economy and the way that it changes the next few years. Japan is not exactly a blueprint for the way that North America is headed, but it could be a cautionary tale of things we need to avoid.
I had barely heard about Campus Coliving and their business model before I saw the sad announcement yesterday that they were closing down the company, a result of not being able to make any money at it. The problem I’d say is that as a company they were ahead of their time. We have not heard the last of ‘coliving’.
Actually, there is nothing really new about ‘coliving’, which is really just a fancy way of saying living with roommates. Its something people tend to do in college, and maybe for a while in their 20s. What Campus Coliving (one of a number of startups in the space) seized on though, is the fact that real estate prices in large cities like San Francisco and New York was making the possibility of solo living, even for employed college graduates, an incredibly difficult thing to do. In San Francisco, the typical rent for the ‘median’ one bedroom apartment is $2,450, and buying is out of the question. So Campus Coliving proposed formalizing the idea of having roommates, and putting them all together in beautiful spaces. Many were open to the idea.
Campus Coliving took on large leases (for houses say) and then subleased them to individuals. The idea seems to work fine with the renters, who are numerous enough to have filled 30 communities run by the company in the Bay Area, and another 4 in New York. Other companies are also in the business, or are getting into it. At its best, its a way to bring people together and let them live in spaces they would not normally be able to afford. At its worst, its a version of dorm living at exploitative prices (or that’s what New York magazine basically said in an examination of them).
Actually, in the case of Campus Coliving, it was the company who ended up being exploited. As well as taking on the leases, the company was providing furniture and shared items (everything from pots and pans to soap) and cleaning. Renters paid an extra fee for some of those things, the company still found the profit margins on their projects pretty tight. “We’ve been driven by a desire to help build meaningful relationships and bring a little more love and belonging to the world” reads the mournful message on the company’s website. ” Maybe they succeeded at that part, but they also say that “Despite continued attempts to alter the company’s current business model and explore alternative ones, we were unable to make Campus into an economically viable business.” Operations will cease in August.
Okay so they failed -but that does not make the idea a bad one. Maybe companies who want to adopt this model need to make the accommodations less swish, or to experiment wth higher rents. Or maybe they need to change their target audience.
As this story from Fast Company details, up to now it has mostly been eager young millenials who have embraced the coliving model, but they are not the ones who really need to save on housing costs. The really cash crunched in years ahead are, in my opinion, going to be retired baby boomers who find themselves in need of ways to save on everything, including housing.
Single boomers are the market, especially those who end up alone after first dividing up their assets through divorce. You may need a more welcoming, less dorm-like name for the companies who provide it, but they will be open to the idea of shared accommodation – or any accommodation as long as its cheaper than what they afford on their own.