Intergenerational warfare

There was yet another attack on the post-war boomer generation in the Charlemagne column of The Economist issue of May 30th 2026. This time, because the column covers European affairs, it focused on European policies rather than those in the US and UK, but the tropes are all familiar with a heavy emphasis on housing and pensions. Somewhat shamefacedly the author admits to having parents who are members of the boomer generation (as I am too), but it seems that he learned almost nothing about economic history either from his family or from his studies at the LSE.

Let us start with a simple counterfactual. What would things be like today in France, Germany and Italy if the Trente Glorieuses in France and similar periods of strong economic growth in other West European countries had not occurred from 1945 to 1975? European countries, both individually and collectively, would be much poorer. The post-war recovery was a rising tide that raised all boats.

Even so, this was not a period that those who lived through it remember with great fondness. For many, life was grey, housing conditions were often awful, consumption was repressed by financial constraints, and the social constraints which underpinned high levels of investment – i.e. deferred consumption – were stifling. These factors were what drove the widespread rebellions of the young boomers in the late 1960s.

It was the parents of the boomer generation who made the effort and sacrifice required to forge the sustained post-war economic boom. It was their decisions which shaped the arrangements that the likes of Charlemagne complain about. Yes, their children – the boomer generation – were lucky to benefit from their parents’ achievements but during their childhoods they shared the greyness and sacrifice that was necessary to sustain the investment necessary to replace infrastructure and capital lost during the war as well as to build the assets that underpin the modern European economy.

Economic growth in Europe fell by a half after the oil shock of 1973, in part because of the industrial restructuring brought about by higher real wages and increasing competition in world markets. Even so, the average rate of real economic growth for the European Union was 2.3% per year over the three decades from 1975 to 2005 as compared with 1.3% per year from 2005 to 2024.

One of the reasons for the reduction in economic growth has been the decline in investment (or gross fixed capital formation) as a share of GDP. For the 1970s, the average share for the EU was 26%. For the last decade from 2015 to 2024, it was 21% - and the UK is even lower at 18.6%. This fall is more significant than it might appear. Rich countries need to spend at least 15% of GDP simply to maintain and replace their existing capital stock. Hence, the level of investment required to support economic growth has roughly halved from the 1970s to the most recent decade.

Even these figures understate the decline. In the last decade, all European countries have chosen to adopt policies to reduce CO2 emissions that involve large investments in highly capital-intensive forms of energy production and use. As part of this shift, they have abandoned assets and industries that are more productive but produce higher levels of CO2 per unit of output.

In the past, economists thought that the investment (as a share of GDP) required to support GDP growth of 1% per year was roughly 3 times the growth rate. Formally, this is called the incremental capital-output ratio (ICOR). The evidence suggests that the ICOR in Europe has increased from about 3 to between 5 and 6 today. The implication is that countries must invest much more to sustain economic growth. Instead, the share of net investment in GDP has fallen and, inevitably, so has the average rate of economic growth.

This background matters. The boomer generation, which is accused of obstructing the opportunities available to today’s working population, benefitted from the efforts and sacrifice of its parent generation. At the same time, it passed on to its children an inheritance of capital and opportunity that was significantly greater than its inheritance. The energy spent on complaining about the boomer generation might more reasonably be directed to asking why the level and productivity of capital investment over the last two decades have been so low.

To use a biblical parable, one might think of motes and beams:

1 Judge not, that ye be not judged.
2 For with what judgment ye judge, ye shall be judged: and with what measure ye mete, it shall be measured to you again.
3 And why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye?
4 Or how wilt thou say to thy brother, Let me pull out the mote out of thine eye; and, behold, a beam is in thine own eye?
5 Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother’s eye. [King James Bible, Matthew 7:1-5]

All societies and economies operate on a complex and usually unstated social compact between generations. I have already highlighted the physical capital which child generations inherit from their parents and grandparents. Equally important is the human capital, i.e. the size, level of education, and technology bequeathed to later generations. The immediate post-war generation chose to have many children and, on average, provided school education which lasted for 3 to 4 years longer than they had received. Tertiary education was quite restricted for those born in the first 5-10 years, but it became accessible for those born after the mid-1950s.

In their turn, the boomer generation chose to have fewer children but to invest more in both secondary and tertiary education as well as technological innovation for those children. It seems likely that the trend will continue in the next generation – fewer children but higher investment in human capital per child.

However, there is a problem that has become increasingly obvious over the last two or three decades. Beyond a certain point investing more education yields a rapidly decreasing return if the level of economic growth and investment in physical capital are not high enough.

This is reinforced by treating education as a form of consumption rather than an investment in productive skills. How many lawyers, social science or arts graduate does an economy need? And, how many can it absorb? In many European countries, the return to tertiary education has declined rapidly, while the return to technical and vocational education remains high. Peter Turchin refers to this as “elite overproduction”, in which expansion of what were elite educational opportunities leads to disappointed expectations of well-compensated employment and future lifestyles.

The intention of investing in human capital may have been good but expanding education in response to the preferences of those being educated rather than the needs of the economy all too often leads to disappointment and unrest. This is not new nor limited to rich countries. Many middle- and low-income countries from Egypt to India and China have found that, even with rapid economic growth, they cannot meet the expectations of a rapidly growing number of university graduates with limited technical skills and a belief that they have a right to jobs in traditional areas of elite employment – usually the bureaucracy and law.

Among the complaints that the Charlemagne column highlights is that most European countries chose the path of pay-as-you-go pensions rather than setting aside capital in pension funds that could have financed high levels of investment. This argument highlights the historical and economic illiteracy that underpins much of such intergeneration warfare.

The choice to fund pensions in Europe out of current taxation was made decades before the boomer generation had any influence on economic policy. It was, in fact, the product of the decisions made by late-19^th century realists, such as Count von Bismarck, in trying to resolve the social conflicts that accompanied rapid urban and industrial growth. The slow accumulation of pension funds would have deferred or greatly reduced pay-outs to industrial workers at the time.

This practical decision was greatly strengthened by the impact of severe wartime and post-war inflation on accumulated capital funds. Few in Germany in 1950 would have much confidence in pensions that relied on the accumulation of capital funds. In the UK, the inflation and economic trauma of the 1970s effectively killed any belief that a universal pension scheme could be funded other than out of current contributions and taxes.

The second major argument offered by Charlemagne concerns housing costs. Remember he is writing about continental European countries – not NIMBY groups and planning systems in the UK. These are countries that were more than willing to build lots of housing to repair wartime neglect and damage and to accommodate the large transfers of population from rural areas to towns and cities. It is not the boomer generation who are failing to build enough houses to meet population movements but their children – Charlemagne’s generation. Though Charlemagne may be reluctant to admit the fact, the nature of population movements has changed. His generation is reluctant to tax itself to fund large scale housebuilding for poorly integrated immigrant populations who were admitted without the consent of the native population.

Stepping back from the familiar tropes, it is obvious that large swings in population size from one generation to the next can undermine economic arrangements that assume relatively steady growth over time. Since there was going to be a surge in the number of retired people as the boomer generation aged and life expectancy increased, it is reasonable to argue that the standard retirement age should have been increased earlier and more quickly to limit the impact on the ratio of retired to working people. However, social compacts are slow to change. It is the boomer generation’s children who have most strongly resisted even a very minor increase in standard retirement ages in France.

Retirement funds exist to be drawn down to finance consumption when people reduce work commitments or leave the labour force entirely. It doesn’t matter whether pensions are paid out of taxes or out of accumulated capital. In macroeconomic terms, an increasing portion of total output must be transferred from current producers to the retired population to fund consumption by the latter. This is simple arithmetic of demographic change, not the fault of the boomer generation.

However, what is self-harm is the perverse reaction of Charlemagne’s generation. In particular, the adoption of taxes and other policies designed to penalise the accumulation and use of wealth. To reduce the transfer of resources the sensible approach would be to encourage retired people to consume less and save more. That means supporting the accumulation of wealth by the boomer generation on the basis that they can’t take it with them when they die and will, ultimately, transfer the wealth to their children or grandchildren.

But is that what the tax system encourages? Of course not – who is that naïve? Many of Charlemagne’s generation want to tax wealth more heavily, penalise inheritance, and, specifically, reduce the return on any investment in housing. Much of this agenda is driven by what is seen as the increase in inequality due to the accumulation of wealth by the lucky and super-rich, but its effects are almost entirely counter-productive with respect to the desirable goal of increasing saving by the boomer generation.

Why should anyone preserve or increase their wealth if they face effective marginal tax rates from 30% to 60% on even modest estates? Or, if any investment in rented housing, which has long been one of the preferred forms of capital accumulation used to finance retirement consumption, is targeted by rent controls and protections for existing renters. The desire both to raise significant revenue from wealth taxes and to benefit specific groups who rely on the services generated by wealth undermines any prospect of encouraging greater saving and investment by retired households.[1]

Post-war demographics have had good and bad effects on the living standards of three adult generations. Any discussion that focuses solely on the circumstances of current workers neglects the long-term accumulation of physical and human capital which sustains current output. If the children of the boomer generation feel harshly treated, they might consider how they will feel in 30 years when they too are accused by their children of pre-empting too large a share of total economic output.

Taking a more Olympian perspective, European countries have failed to maintain levels of investment in physical capital while increasing investment in low return human capital. The result is disappointed expectations for those who thought that surviving the rat race of acquiring conventional qualifications would entitle them to well-paid jobs and high living standards. Nothing can guarantee such outcomes, while the failure of European economies to increase productivity and incomes per capita has made the unavoidable arithmetic squeeze of a large generation of retirees more painful.

What Charlemagne appears to want is to reduce that squeeze by lowering the consumption levels of a generation that has limited defences. An old solution to an old problem. In effect, a large retrospective capital levy. Like all taxes on capital assets and wealth, this strategy pays no attention to the future and the impact that such policies have on the willingness of future generations to accumulate and deploy all forms of capital. Societies – and especially journalists – learn almost nothing from the past beyond their lifetimes.

[1] A recent review of inheritance, estate and gift taxes in Europe published by the IFO Institute in Munich illustrates how daft academic economists can be when dealing with issues of entrepreneurship and behavioural responses to tax policies. In essence, the review argues that because academic studies can’t identify behavioural responses, they don’t exist.