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Brexit Demonstrates the Power of the Old

Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
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Britain's vote to leave the European Union should serve as an important reminder for the leaders of all democracies with aging populations: Pay more attention to what older folks think, and learn how to communicate with them.

Of all age groups, people 65 and over voted most overwhelmingly in favor of Brexit. This demonstrates that seniors have a unique set of interests and understanding of economic trade-offs -- all of which policy makers ignore at their peril.

Consider, for example, how governments respond to economic shocks, such as the potential fallout from Brexit. Economists typically advise them to rely heavily on central banks, which seek to support growth and keep inflation near target primarily by taking actions designed to lower interest rates.

Older folks, however, have ample reason to oppose such monetary stimulus. They have more net worth, and hence more to lose when investment returns decline along with interest rates. They hold a lot of annuities and bonds that benefit when inflation is unusually low. And they tend to be retired, meaning that they're less interested in boosting employment and wages. (In all those areas, the U.S. Federal Reserve's policies over the past few years have actually benefited seniors at the expense of the broader economy.)

Economists have also argued that, with interest rates low, the government should borrow money to invest in infrastructure projects such as road repair, which would create jobs while increasing the economy's longer-term potential. But older folks have less incentive to support such fiscal measures, which are designed to pay off in large part when they’re long gone.

All this suggests that the people charged with managing the economy should rethink how they do their jobs in older societies. There may, for example, be ways to offset the political pressures that work against effective monetary policy.  In the U.K., social security payments are partially indexed to wage growth, giving seniors more reason to support the goals of full employment and higher pay.  

Even with such adjustments, though, I suspect that many seniors will still push back against easy money. This will require more reliance on fiscal policy, with tools tailored to garner the support of older citizens. Measure such as public investment in medical facilities and training, or increased subsidies for long-term care and pharmaceuticals, might be more palatable than spending on roads and bridges while being no less useful economically. 

Finally, economic policy makers may need to change how they communicate. They typically try to sell their plans as a way to protect the economy against downside risks. Some research suggests, though, that older people tend to put relatively little weight on bad outcomes when making decisions. If further studies bear this out, economists may need to focus more on the positive.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Narayana Kocherlakota at nkocherlako1@bloomberg.net

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net