Higher interest rates are the last thing they need.

Photographer: Tom Williams/CQ Roll Call

Give Millennials a Bailout

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Matt Bruenig, a writer at the think tank Demos, has a very interesting theory about poverty. He points out that poverty declines as people age. Much of it is simply due to the life cycle of earnings -- as people get older, they earn more money. Earnings tend to increase steadily from age 25 to age 45, then top out.

Why does this occur? Young people are more energetic than middle-aged people. They have quicker and more flexible minds. If productivity and skills determine earnings, why are young people making so much less money than old people?

It may be because energy and mental quickness aren’t the most important determinants of productivity. As people work, they learn on the job, adding to their stock of skills and knowledge. Perhaps more importantly, they add to their knowledge and understanding of markets. They become more adept at navigating organizations, and improve their ability to manage teams. And they expand their human networks, allowing them to build more productive business relationships. Add all these up, and the life-cycle pattern of earnings doesn’t seem so mysterious.

What this means is that some of the poverty and inequality we see in the headline statistics simply isn't that worrying. There are two kinds of poverty we don’t like -- chronic poverty and unpredictable poverty. If some people are trapped permanently in poverty, that’s bad. And if economic disaster can strike anyone at any time, that also is bad.

But the poverty that comes with youth and disappears with age is neither permanent nor unpredictable. So it doesn’t really require government intervention to alleviate, because people can alleviate it themselves. Simply borrow money when you’re young and poor -- for example, by taking out student loans or car loans -- and pay it back when you're middle-aged and comfortable. If poverty is a predictable function of age, then lenders will lend to you, and both they and you know that you will probably be able to pay it back. Problem solved.

Of course, this doesn’t eliminate our entire poverty problem. Although many young people escape poverty as they get older, many others do not. For the poorest Americans, income doesn’t even rise between ages 25 and 55. These people still need some kind of government help.

But because a big chunk of poverty is age-determined, we should think a little more about how our society can facilitate the transition from young and poor to old and comfortable. Instead of focusing only on the problems of the poor, we should direct some of our attention toward the problems of the young.

Remember, to smooth the transition from youth to middle age, young people need to borrow. But borrowing exposes people to a lot of risk. If the labor market tanks, and interest rates or inflation soars, people who borrowed a lot of money could be stuck with an unbearable debt burden.

That seems like it may have happened with our current millennial generation -- especially the slightly older members of the cohort. The Great Recession left a lasting scar on that generation’s employment prospects and earning power. Unfortunately, that generation also took out record amounts of student loans.

In other words, millennials suffered a huge shock that reduced their chances of becoming old and comfortable, at the exact time that they had made themselves most vulnerable to such a shock. That one-two punch is taking its toll, and the generation is buckling under the strain. A huge number have moved back in with their parents. Meanwhile, fertility rates have plunged to lows not seen since the 1970s, erasing much of the demographic advantage that had recently made the U.S. look like a better long-term bet than other rich countries.

To relieve the burden on our young people, the U.S. will need to address the mountain of student-loan debt -- not just the cost of college, but the debt overhang crushing the millennials. That is a problem, since the government owns a huge amount -- more than $1 trillion -- of the student debt outstanding. If we write down some student debt, or make it easier to expunge in bankruptcy, that could put a hole in U.S. government finances.

But that’s not so bad. The government now can borrow at very low interest rates -- near zero, in fact. That is much lower than the rates on student-loan debt. So the government could write down some of the millennials’ debt, or let them more easily wipe out debt in bankruptcy, and it could replace those obligations with its own, cheaper debt.

So our government should consider helping the millennials out with their loans. The battle to save the young is a big part of the battle against poverty.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net