People are a product of their experiences. What can millennials - the oldest of them turning forty years old this year - look back on? The adulthood of most millennials is sandwiched between two of the three most severe economic crises of the past 100 years: the Great Recession of 2008 and the COVID recession.
Unsurprisingly, survey after survey have found that millennials are more cautious than their parents and more anxious about their future. Given millennials have overtaken baby-boomers as the largest generation group in the US, how they feel about their future and what they do about it matters for everyone, especially now.
Millennials, on account of their average age and earning profile, are the biggest beneficiaries of Biden’s $1.9 trillion American Rescue Plan Act that provides direct payments, tax credits, and subsidies to lower income and middle-class Americans.
A big question facing policymakers and traders alike is is what millennials are going to do with all this money: more specifically, how much of it will be spent versus how much is being saved.
If they spend it all, it will keep the economy going for a while; if they save it all, the party will be short-lived.
My gut tells me that millennials are more economics savvy than Biden’s economic team gives them credit for. The economic volatility they have had to live through should have taught them two lessons: nothing is free and good things don’t last forever. If so, perhaps they will be better practitioners of the inter-temporal substitution theory that is the foundation of modern economic theory. Permanent income hypothesis says that they should save most of their temporary increase in income and Ricardian Equivalence says they should save all of it.
What the millennials end up doing will have important implications on the outlook for the world economy over the next half year.