Generational Scarring And Its Effects On The Economy And Healthcare

Steven Attewell over at Lawyers, Guns, and Money had an interesting post about how generational expectations have effected the Democratic approach to healthcare. Older, more jaded Democrats who have lived through a series of defeats are more inclined to prefer the incremental path to universal coverage. Younger Democrats, who have seen success in areas like gay rights, tend to stress the importance of pursuing the progressive solution directly.

According to Attewell, the failure of the liberal project in the 1970s and the electoral successes of Reagan and Thatcher in the 1980s “scarred” the generation of that era. “[T]he political history of both Hillary and Bill Clinton was profoundly shaped by witnessing the backlash against George McGovern in 1972, the failure to achieve the left policy agenda in the 1970s, and the repeated electoral victories of Ronald Reagan and Margaret Thatcher…[The Third Way] could also be seen as a project of people with genuinely progressive sympathies and ideals who believed that their maximal ambitions could never be achieved and that the only way forward was to make peace with the Reaganite/Thatcherite status quo and try to win as many incremental gains as were possible without raising the alarm of the fundamentally conservative electorate.”

This “generational scarring”, as Attewell describes it, severely limits the groups’ conception of what is conceivably possible. This is why Hillary Clinton was constantly befuddled by the fact that, although her platform was probably one of the most liberal ever, she was constantly being attacked from the left and accused of being a neoliberal sellout. For politicians like Clinton, it is incredibly difficult to react when the ground that you have occupied shifts beneath your feet so quickly. Such is the case with the move toward single payer and the rise of young progressives in the Democratic party.

Another area where generational scarring has had an incredibly negative impact is in the economics profession, especially when it comes to central bankers. The inflation of the 1970s is the seminal event for central bankers and everything must be done to avoid any repetition. The fact that that inflation was largely driven by the unwinding of the Bretton Woods global monetary agreement, unmooring the world’s currencies, and the explosion of oil prices, two exceptional events, is largely forgotten. All that is remembered is the unwillingness of policy makers and politicians to reduce employment in order to control the inflation once it had gotten out of hand.

Regardless of the fact that the situation in the 1970s was largely unique, it has scarred economists for the last 40 years. Nowhere is that more evident than in the wake of the Great Recession. Even as the need for fiscal stimulus was immense, Ben Bernanke was still making sure that the world knew that inflation expectations would be anchored. In 2010, Bernanke assured markets that the Fed would be vigilant about long-term inflation expectations. The next year, the ECB went ahead and raised interest rates twice, again in an attempt to ward off mythical inflation, citing “upside risks” and the desire not to see inflationary pressures become entrenched. In Europe, the UK, and the US, the centrist parties on both the right and the left moved away from stimulus way to early and focused on austerity to fight off the anticipated inflation resulting from the increased money supply and rising government debt. Of course, for some on the right, that was just a convenient excuse to roll back the social safety net. Whatever the reason, however, the results have been a disastrous and far longer recovery than was necessary.

That fixation on runaway inflation still exists today, even as inflation has undershot the Fed’s inflation forecast for eight straight years. The Fed has been itching to raise interest rates for the last two years and has raised them twice this year, with another hike possible in December. Today, the Fed announced it would start unwinding its balance sheet, putting further upward pressure on interest rates. Kevin Warsh, a Fed governor, reflected the scarred generation thinking on inflation most clearly earlier this year when he said, “I don’t see things in the real data or the real markets that make me overly preoccupied with deflation risks. I don’t think we should be complacent about inflation risk. Inflation expectations will be anchored until they are not.”

Obviously, like the push for austerity, raising rates may have more of a political angle for some. But it is also a reflection of the path that you need to take in order to be successful and ascend in the scarred generation you live in. That limits the realm of the possible that you can or are even allowed to envision.

More importantly, the world is changing at a more and more rapid pace. Yet people are living longer, meaning that the scarred generations stay in power far longer than in the past. In this last election, Clinton was 69 and Trump was 70. A generation scarred by a past trauma that is no longer relevant to today is incapable of responding appropriately to the current challenge. We can see that clearly in our healthcare and economy.