Phoney war between the generations masks worrying lack of reform
25 July 2013 12:38am
THE battle of the generations is raging. Did the Baby Boomers have an easier life? Or are the cosseted members of Generation Y – the demographic cohort born from the early 1980s onwards – just engaging in self-pity? The truth is not “somewhere in between”, and this debate is actively damaging.
Differences between the generations reflect a number of factors pulling in opposite directions. Broad measures of living standards show vast improvements for everyone. But aggregates only move in one direction at a time, while living standards are multi-faceted. They rise in some respects and simultaneously deteriorate in others, depending on changes in the structure of relative prices and wages. In the UK, for example, real median incomes have doubled since the mid-1960s. But the ratio of average house prices to average annual incomes has risen from under three to over five, and university education has become much more expensive at the point of use.
The downsides of these trends fall disproportionately, or exclusively, on Generation Y. But it is a mistake to classify them as intergenerational distributional issues. The problems faced by Generation Y are not the result of Baby Boomers taking something away.
Take housing. In a report called Hoarding of Housing, the Intergenerational Foundation (IF) argued that the housing affordability crisis is a distributional matter. In other words, the housing stock is presented as a cake of fixed size, with the elderly first in line, leaving only crumbs for the young. The IF recommends redistributing the existing housing stock: subjecting housing wealth to capital gains tax, making council tax more proportional to housing space, and withdrawing universal benefits from those with high housing wealth. Tax the elderly out of their homes so that the young can move in.
Why does the IF think this? Few new homes are being built in the UK, it says, so the distribution of the existing stock matters. This is true, but if our insane planning laws did not prevent the building of enough homes, and therefore did not make buying a first house so unaffordable, it wouldn’t be an issue if every pensioner had two, three or four homes.
Student funding, meanwhile, is an intra-generational issue, as redistribution does not happen across but within generations. Those Baby Boomers who went to university for free were subsidised by Baby Boomers who did not go. Can we improve the situation of both students and non-students among Generation Y? Yes, by making vocational training more accessible, thereby promoting competition within the education system. Universities would not just compete with other universities, but with vocational education providers, offering young people a genuine choice.
This battle of the generations is phoney. And it is not just unhelpful but actively harmful because it distracts from the real issues. Groups like the IF should be campaigning for planning reform and greater competition in education. It is a shame they are too busy counting the spare bedrooms of the elderly.
Kristian Niemietz is senior research fellow at the Institute of Economic Affairs.
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