How George Costanza may hold the key to saving the economy

Last week I wrote that America's leaders are afraid to tell the people the truth: that many won't be able to give their kids the standard of living which they themselves received as children. The way things look now, there's nothing anybody can do about it - the children will live a harsher existence than their parents did.

And lo, entirely by chance, I stumbled across a television news piece that demonstrated my point. It turns out that in recent months, as tough times turn tougher, more and more people are moving back in with their parents.

No surprise there, especially when it comes to young singles. Jason Alexander, magnificently represented the problem, the solution and the price when playing George Costanza in "Seinfeld." George sees an attractive woman at a restaurant. Despite urging from Elaine, he doesn't make a move: "Elaine, bald men with no jobs and no money who live with their parents don't approach strange women," he tells her.

One starts to raise an eyebrow, however, when whole families, mom, pop and the kiddies and dog move back to the grandparents because their own home has been seized.

The TV piece described one such family: a couple, apparently in their 30s, with two small children, who moved into the basement of the wife's parents.

The father had lost his job and hadn't managed to find a new one. The family had defaulted on mortgage payments and lost the house. They couldn't afford to rent a place of their own: The fact is that the little equity they'd had went to buying the house they'd lost.

They moved back in with the wife's parents, a house in a typical American suburb, because they had to.

Stressed for money and cramped, they set about selling much of their goods, from household appliances and furniture to the lawnmower. They don't need it any more, certainly not at this point, nor do the wife's parents want their fridge. They have one of their own.

It's common for three generations to live under one roof in developing nations. The economic advantages of such arrangements are tremendous. The grandparents help bring up the young'ns, supervising them while the parents are at work. Later, as the grandchildren grow up, the two younger generations take care of the enfeebled grandparents.

Beyond the savings on childcare and nursing homes, they spare themselves the need to buy and maintain a house for each generation: hence the popularity of such arrangements in poorer countries.

In the sated West, however, that style of living went out of fashion long ago. Economic prosperity led to social change during the 20th century and three generations sharing a home became out, while outsourcing became in: hire a nanny for the kids and a nursing home for the old folk.

I am not saying which is the better method. To each their own. But one thing's clear: To sustain the West's pattern of a home per generation and outsourced family care, one needs to make a lot of money. It is, to use an economic term, an inefficient method.

The key to sustaining the Western pattern lies in the jobs market, and when times are hard and young adults can't find good jobs at high pay, they can't afford a home of their own.

When studying economics at college, you'll learn a lot of mathematical formulas. But you won't hear much about the psychological and social aspects of economic events. That is changing, though, which is a good thing: The psychology of economic decision-making is coming into style.

Psychological analysis is right and good at the level of the individual. Even at the level of society as a whole, sociological processes can have tremendous economic impact. And vice versa - economics can impact social processes.

That TV piece described an isolated case, but a case presented as representative of a widespread phenomenon. The weaker the American jobs market becomes, the harder it becomes to make mortgage payments, and the more families will find themselves taking shelter in grandparents' basements.

It goes beyond that. Unmarried young adults will stay home longer. During hard times, divorce rates tend to drop, not because love burns anew but because the difficulty of maintaining two homes overcomes the desire to separate.

Economically speaking, sociological and demographic phenomena are still waters that run deep. They have far-reaching, long-term economic effects. But they aren't front-page newsmakers like financial rescues or extreme spikes in the financial markets.

They may well develop without anybody noticing. It's hard to pinpoint the moment when things changed, except in hindsight.

But if economic hardship really is creating a trend of going home, or leaving home at a later age, the economic impact will be large.

We often tend to forecast future economic growth and demand based on estimated population growth. But a person or family living in the basement isn't buying a home, or a fridge, or a living room set. They don't pay municipal taxes or property taxes.

Thus the population may well grow, but demand may not grow commensurately. Tax revenue may contract relative to population growth. Newly built homes will stand empty.

There is a good chance that economists are in for a nasty surprise, because they completely missed this sociological phenomenon, which has been going on quietly for a long time now.

Obviously, the case of one family shown on one television program doesn't attest to the rule. One doesn't have to declare an anecdote to be the harbinger of a flood. But I wouldn't dismiss its importance. The longer the labor market remains weak, the more central this phenomenon is going to become.

At the end of the article, the woman sighed that what hurts her the most is that she can't give the kids what she had. When she and her brother were the same age as her kids are now, she said, each had their own room.

Now they're all crowded in the basement and, she said, she doesn't even have a kitchen of her own. They're going backward instead of forward, she moaned, and has a nasty suspicion that their temporary shelter in the cellar is going to become a permanent arrangement.

That is exactly what I meant about the standard of living spiraling down.

The author is the chief executive of Compass Investments, a member of the Psagot group.


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