Understanding the squeeze on millennials

Did rich countries like the U.S. betray the millennial generation — the people born in the 1980s through the early 2000s? Some make that claim. For example, a report in the Guardian discusses how high unemployment, sluggish income gains and student-loan debt have hit young people in Western countries hard.

While these hardships are real, most of them don’t constitute a betrayal. In general, governments don’t try to do things that raise unemployment and lower incomes.

Sometimes they inadvertently make mistakes — for example, austerity in some European economies has probably been a big unforced error — but even then, they are simply being misguided, not malevolent. Even the student-loan debacle was probably a result of government attempts to raise incomes by encouraging kids to educate themselves.

As much as we’d like to believe that government can control the economy, its power is limited. Productivity gains, which drive much growth, are often due to improvements in technology.

The government can spend money on research, tweak patent policies, craft more efficient financial markets and invest in early-stage companies, but it isn’t clear how much these things will really boost growth. Economists have recognized that productivity growth is slowing all over the world and that the chances of any one country’s policies being able to reverse this trend are probably fairly slim.

But that doesn’t mean the U.S. and other developed nations have done right by millennials. In some important ways, they have betrayed the young generation.

Any society faces a basic choice between consumption and investment. Producing the things that raise living standards requires physical capital such as buildings, machines and infrastructure. It also needs technological ideas, which are produced through costly and time-consuming research.

If we work hard and create more capital and more ideas today, our children and grandchildren can enjoy a richer life. When the baby boom generation sacrificed time and materials to build the interstate highway system, for example, it ensured that Generation X and the millennials would have nice roads to drive on.

Unfortunately, the U.S. hasn’t done as much of this sort of investment as it might have. Since the 1980s, private investment net of depreciation has been falling steadily as a percentage of gross domestic product:

Government spending on research and development has also fallen a bit since 1980.

Government investment has fallen too, not taking depreciation into account: