Saturday, July 18, 2009

Breaching the Social Contract

Consider the following situations that I have encountered in recent weeks:

* A young lady in college is suddenly told by her parents that they no longer have the funds for her education. She will have to go to work to come up with the tuition. She cannot find work and doesn't know how she will graduate;

* A long-time employee of a large company is downsized to a part-time job and will be losing his benefits. He doesn't know how he will afford health care for his family. He heard about the earnings possible to traders and is considering applying for a training program that will tap him of much of his savings;

* A mid-career professional who has undergone an expensive divorce is horrified to find that her baby-boomer parents have declared "Chapter Heaven" after recklessly spending down their savings: they are using remaining funds to salvage a retirement income. They cannot deliver on promised financial help toward a modest new home, and she cannot find a mortgage loan, given expensive housing where she works;

* A retired couple learns that their investment adviser has put them in volatile, high load funds that were initially described as conservative. They are stunned when they see their account statement showing a large loss in their principal, and the husband is contemplating a return to the workforce;

* Midway through a job training program, an unemployed young man finds out that it will be terminated as part of budget cutbacks in his state. He offers to volunteer at firms to get a foot in the door but cannot find any takers.

In each of these cases, the individuals entered situations with expectations born of an implicit social contract. With the rending of the economy, that contract is breached--and breach brings hurt, confusion, anger, and despair. Listening to each of their stories, I am reminded of spouses who experience the infidelity of a partner: with the loss of trust, nothing is ever quite the same. It is difficult to sustain optimism and confidence in the face of doubt and uncertainty.

Looking at the debt that will constrain spending and buoy taxes for years to come, it is difficult to believe that the next generation, like its predecessors, will enjoy more opportunity than did its parents. The "Me Generation" has lived up to its name: baby boomers turned baby bummers are leaving behind a social contract in tatters and children whose levels of trust are growing as slim as their trust funds.


hippietrader said...

Many boomers are responsible folks saving up for retirement only to find that all they had worked for their entire lives were gone. They were robbed and deceived by big bankers in bed with the government. Their jobs are off-shored or vanished with the recession. The economy will recover - sooner or later. However, for many older workers, a reasonable job will never returned.

hippietrader said...

One thing more I like point out is that this isn't so much boomers ripping off the younger generation, but the the super-wealthy are ripping those in the middle, forcing them into poverty and destitution.

The descendants of the wealthy will inherit the wealth of their parents - they can move to some enchanted tax haven while daughters and sons of the poor may have to provide for elderly parents who lost their retirement funds after a life time of hard work.

Bob said...
This comment has been removed by the author.
GS751 said...

It really frustrates and one some levels angers me as an part of the generation that is going to have to cover (via taxes or inflation), all the excesses of the current generation.


Bob said...

Half those situations were no where near the end of the world. God forbid a student take out a loan to pay for their education. Or the person crying because she doesn't get assistance to get a house from her folks? Life is tough but people failing to take responsibility for their circumstances and instead asking for handouts is an even bigger detriment to our society.

Brett I have enjoyed your posts and I certainly have my own issues with the world our parents have left us but most every example you listed is about someone who felt entitled to something they didn't earn.

Brett Steenbarger, Ph.D. said...

Hi Hippie Trader,

Good point; the jobs of many (baby boomer) older workers are not likely to return.


Brett Steenbarger, Ph.D. said...

Hi Bob,

I probably should have clarified; the student maxxed out on loans and could not qualify for more. And, no, not getting promised financial support toward a home (due to reckless spending) is not the end of the world. It *is* a betrayal. As for the older couple that loses a major portion of life savings due to fraud: are they really asking for handouts or something they haven't earned?

Like you, I don't like victimhood. But that doesn't mean that some people haven't been victimized.


bruce said...

Everybody is missing a very large part of the point.

The young people are the voters who put the ten trillion dollar budgeted debt president in office.

It's only right that they pay for it.

nemo said...

Let's not forget the raping of Social Security during the Johnson administration to create "The Great Society."

Bob said...


Being maxxed out on student loans certainly changes the situation from my initial understanding. I paid for my school but suddenly finding out money I thought was available actually wasn't would have been a massive shock.

My main point was that those looking for handouts and all the adult sized children (never taught responsibility for their actions) of my generation are more to blame for their own troubles than anyone else.


heywally said...

"The "Me Generation" has lived up to its name: baby boomers turned baby bummers are leaving behind a social contract in tatters and children whose levels of trust are growing as slim as their trust funds."

While I agree that my generation is a 'self entitled' one (I like to think I largely have not participated in that), I think it's the overall system that has us where we are. In the 60's, my generation blamed our parents for Vietnam and other perceived ills but of course, it was the HUGE system and the evolution of that, a herding event, largely out of control.

I also don't believe that the current apparent macro malaise necessarily need to translate to many years of doom. The US still has leverage in the world and can gradually extract itself from this in spite of the constant negative spins on just about every web site and blog out there.

Trader Kevin said...

Dr. Brett: "Baby boomers turned baby bummers are leaving behind a social contract in tatters and children whose levels of trust are growing as slim as their trust funds."

I think this is the real point of your post. There is a dramatic change in mindset being forced upon America. For about 60 years there has been an expectation of kids being more prosperous than their parents. That seems unlikely for the foreseeable future.

A similar dramatic change in mindset happened in the 1930s. It's interesting how things come full circle.

My mom is a child of the Depression. She has always lived below her means, has no debts and uses no leverage, and has a conservative mix of equities and high-quality interest-bearing instruments in her portfolio.

I don't have to worry about mom in her retirement. Why? Because of the attitude instilled in her by her parents in the wake of the Depression.

Will today's youngsters learn the same lessons of thrift, savings, and delayed gratification? Will they have any choice?

GS751 said...

Last summer I read Roger Lowenstein book "While America aged" It talks about the pension crisis across the country. A pretty easy read that gets to the heart of the matter and does not sponsor a political agenda.

Trader Kevin said...

hippietrader: "Many boomers are responsible folks saving up for retirement only to find that all they had worked for their entire lives were gone. They were robbed and deceived by big bankers in bed with the government."

They were also robbed and deceived by their own laziness. Perhaps they were "responsible folks" but they didn't take responsibility for their own portfolio. They didn't bother to learn about the economy and the markets. Instead they dutifully dumped money into equities like clockwork every month.

They also borrowed against the equity in their homes, apparently having never read Extraordinary Popular Delusions and the Madness of Crowds and somehow believing their home values would continue to rise forever.

Kishore said...

For an average person, the living conditions in USA are still better than anywhere else in the world.

Also, USA has a better chance of recovery, if only the people can take responsibility for fixing their governments, state and federal, and bring the governing back to local levels, i.e. closer to home.

Eric W said...

The breach in the social contract is not about entitlements, fallen home values, fallen investment values, or even lost jobs. The real breach is awakening to the realization that the government, both parties participating, has been on a path for decades that screws the middle class. The inflation boom/bust cycle, since 1913, has benefited government by giving it excuses to expand power, and banks that win on both sides of the cycle. Where does the power and winnings come from? You, me, the student's parents, the retired couple... everybody else.

The contract that has been breached has a name: The Constitution of the United States of America.

Ariel said...

Many boomers have gotten squeezed between caring fir elderly parents, and paying for college + student loans fir their kids. We boomers have paid SocSec+Medicare taxes where the benefits have been reaped by our parents. Many boomers have actually cashed out retirement accts to pay for assisted living for our parents, which Medicare & Medicare don't cover. I'm not saying all boomers are saints. Just pointing out that, in the spiraling effort to keep up with the Joneses and achieve ever better standards of living that everyone's come to expect, the bill has mostly arrived in the boomers' mailboxes. The social contract evolved over time and came to be heavily debt-financed.
The new reduced standard of living will impact everyone in some way, even if some more than others at times. Ironically, the feeling of financial despair drives people to the arms of non-free market mechanisms that don't really make things better.

Michelle B said...

Though your focus on baby boomers being a large part of the present problems in America has a superficial, scapegoating, soundbitish feel to it, your concern regarding the present social situation in America rings true as there are many negative aspects resulting from a financial mess that is largely American based that will challenge all Americans (and the world) to confront and solve regardless of their generation.

There are baby boomers all over the world (many of them have saved and not spent recklessly). Do they count? If not, then this problematic trend is more connected with the American culture (rabid consumerism), rather with an actual generation of people. Did the American baby boomers conceive of the throwaway consumer culture that dominates America? No, they did not. Were they encouraged to consume so they would fulfill their destiny as good Americans. Yes, they were.

As for social contract violation, minorities (including women) have always felt that sting in America and such violations has always crippled America. However, America learns from its mistakes more often than not on the social scale.

Trader Kevin said...

hippietrader: "the the super-wealthy are ripping those in the middle, forcing them into poverty and destitution."

It seems highly unlikely that the super-wealthy are richer now than they were before this crisis began. The various stock indices are down sharply over the past year, the recent rally notwithstanding. When the Forbes 400 is announced in September look for the entry price and total wealth to be significantly lower than it was last year.