Demography is Destiny

BNH spoke to Ken Gronbach, author of The Age Curve: How To Profit from the Coming Demographic Storm (AMACOM, 2008) and Common Census: The Counter-Intuitive Guide to Generational Marketing (Ford Odell Group, 2005). Gronbach, who ran an ad shop, KGA Advertising, in Middletown for years, sees in demographic trends reasons to espouse what most would describe as a contrarian view on America’s and China’s economic futures. Gronbach says demographics are destiny and marketers and public decision makers disregard them at their peril. BNH Publisher Mitchell Young interviewed Gronbach.

You had an agency for a long time in Connecticut. How did you transition into demographics guru?

My wife and I opened our own agency in 1979, and one of our signature clients was American Honda Motorcycle. We had all the dealers from the tip of Maine out to Pittsburgh down to Washington, D.C. — about 140 dealers. We were selling motorcycles like crazy, but [suddenly] in 1986, the bikes were shipped to the dealers. They put them on the floor, and no one came in.

Between 1986 and 1992, we tried everything, Honda put their full force behind it to solve the problem, but by 1992, business fell 80 percent and they closed all the dealers.

Was it the economy?

it wasn’t the economy; it was a demographic phenomenon. [Born] between 1965 and 1984, Generation X had nine million fewer people than the baby boomers. From a marketing standpoint, if you dropped the size of your market by over ten percent, you’ve essentially atomized it. We knew we sold motorcycles to men 16 to 24 years old and when the baby boomers exited that age, motorcycle business dropped like a stone. That’s what tipped me off to so many other issues in our marketplace. Generation X closed 30 percent of the public schools; Generation X shut down the motorcycle industry. It didn’t threaten the colleges, ironically, because they [Gen X] went to college at a much higher rate than the baby boomers.

Now Generation X age is into the car-buying age. The best customer for a Detroit automobile is a 43-year-old. That’s when the most miles are put on the car — ferrying the kids around, trips and all that jazz. The baby boomers move on, Generation X moves into the age when they’re expected to buy cars from Detroit at the level of the baby boomers, and Detroit starts firing their ad agencies and firing their presidents because sales are going down. They said, ‘We’re not getting our message out — our SUV sales are way down.’ Well, SUV sales wiped out because the buyers are wiped out. Nobody counted them.

The bottom line was that there were just fewer people to take the boomers’ place?

The most important thing was that we sent our production overseas, primarily to China. The reason for that was during the last 20 years it was an employees market: for every ten jobs being exited by the baby boomers, there were only eight [Generation X] applicants. McDonalds couldn’t even find people.

What is the birth-year range of the baby boom?

The baby boomers were born from 1945 to 1964. The next would be Generation X, and they were born between 1965 and 1984. The peak years for the boomers were between 1957 and 1961; it is a huge bell-shaped curve. Then you have Generation X, but it’s an inverted bell curve. Their lowest birth-rate years were between ’71 and ’74.

So Generation X made an employment shift from the baby boomers?

Generation X did not opt for the technical careers that the Boomers did, like factory work, electricians, plumbers. [Those occupations are] saturated with baby boomers, and boomers went into business for themselves because they couldn’t find work. That’s exactly what we’re facing right now: The kids currently between seven to 26 years old, Generation Y, are facing 50-percent unemployment. My kids can’t find summer jobs, you have to do something else — go into business for yourself. The jobs Generation Y are beginning to fill are jobs exited by Generation X. And X is a small footprint. Companies have achieved efficiencies, they’ve automated, entry-level doesn’t need as many people, a lot of things are bought online, there just aren’t as many opportunities for kids getting out of high school and college.

These demographic numbers are not secrets. So what are major companies or government agencies doing about it?

In 1998, Aetna wanted to buy US Healthcare and a friend on the board wanted me to share my opinion. I said it would be a demographic disaster. The generation that was paying into health-care insurance and using more than they were paying was the generation called the Silent Generation, born 1925 to 1944. They were tiny — their numbers are down around 50 million. The baby boomers’ numbers are up around 80 million. I told them, the Silents are going away, they’re going on Medicare. What’s next is baby boomers are moving into the age where they’re going to be paying into the system and using more [health care] than they’re paying for. You’re expecting the next generation [Gen X] that’s 11 percent smaller to pick up the slack. I couldn’t convince Aetna that this was an obvious demographic disaster. They did it anyway, and then lost $10 billion.

You said that to fix the jobs problem you have to fix the housing market. Why?

What we learned from 2008 was that the housing market is the economy. Seventy-five percent of the housing market in Arizona is foreclosures, which means there is no market. I would tell our legislators, senators and congressmen to enforce President Obama’s Home Affordable Mediation Program [HAMP]. They were supposed to sit down with the homeowners and figure out how to keep people in their homes. Take the foreclosures off the market, and you have shrunk your market in some cases by 60 percent. If you shrink the housing market in Connecticut by 60 percent, the market would come back, home values would go through the roof, it would be a signal to buy, and everybody would be back to work.

There are major assumptions about the growth of China, but you have different viewpoints of China’s future demographics.

Demographers worldwide know what’s going to happen in China. The number of people they prevented from being born through their one-child-only policy was 400 million people. To take 400 million people out of the last 32 years of the population is to literally reduce fertility by 75 percent. They went from 40 million babies per year to approaching ten million per year.

But they have a lot of people, so why would that be a bad thing?

Because you can’t cut a hole in your population. The part of the population that does the heavy lifting are the ones between 40 and 60 years old. So when it becomes the turn of this tiny group of under-30-year-olds to do the heavy lifting, they simply don’t have enough people. Economists have begun writing about their mysterious labor shortage. If you literally cut your fertility rate by 75 percent, you should expect a labor shortage.

They’ve set the stage for their country to go into economic chaos and there’s no reversing it. They simply will not have enough people to produce enough to care for their elderly. Imagine that you’re 70 years old and lost your usefulness as a laborer. You’ve worked 40 years for zip, so you don’t have much saved up, and now the country doesn’t have enough taxpayers to support you. But China never had that system anyway. Their Social Security was called ‘family’ — and they obliterated it.

Aren’t the elderly in China a more or less protected class?

They’re protected culturally by the family, but it has nothing to do with the government. They went from two grandparents with eight children and 32 grandchildren. That was the system that supported the elderly. Now it’s four grandparents, two parents and one child. They don’t even know what the word ‘cousin’ means.

To throw another wrench in the works, [demographer] Nicolas Eberstadt believes the single biggest problem China is going to have is their management model to run the companies. Their model to date has been family, because they don’t trust anyone. There’s no president, two vice presidents and a chain of command; it’s family. And without family running the businesses, the businesses won’t run.

Is there a similar problem in India? They have 1.1 billion people.

Nobody knows how many people are in India; it could well be in excess of China right now. No one knows. The CIA Factbook can guess, but there’s no way to count those people. It could be as much as 750 million in northern India alone. It’s abject poverty and no education whatsoever up there, and probably 20 to 30 years behind China. The southern part of India is where the wealthy people are and they’re doing exactly what the Chinese are doing. So their problems are very similar. Is India in better shape than China? Yeah, in the long term. One, they’re our friend, and China is not. The real problem is their proximity to China.

But aren’t more prosperous Indian families having more children?

We see that wherever the Western culture goes, when people become prosperous they have fewer kids because they enjoy their wealth. They’re more selfish. Here is the big picture: If you live in Spain, France, Portugal or Germany right now, you have come to the conclusion that you’ve made a mistake by not having kids. Because the Muslims are overwhelming you. They’re having ten kids and you’re having none. Only one in seven German couples get married, and they don’t have kids. The E.U. [European Union] is done. If you want to go experience Italy, you’ve got to go now, because in ten years you won’t be able to experience Italy. France is feeling it big time. The problem is that they forgot to have kids. Remember that people precipitate economics, not the other way around. Without people, you don’t have anything.

Ten years is a pretty short time period.

It’s going to happen in our lifetime. When things go south, they go very fast. Look at 2008 — we almost lost the world economy. Once the façade of China is realized you’re going to see [that] as fast as China advanced, it’s going to decelerate.

So the high unemployment rate among Generation Y in the U.S. is because of their large numbers.

Yes. We’re the only industrialized nation in Western culture that had kids. And Generation Y is bigger than the boomer generation. The magic number is about 2.2 — you have to have more than two

    .

    If China is going to have a labor shortage, won’t that be good for the American Generation Y?

    It’s perfect. Manufacturing will start coming back to the States, and it’s going to come back with a vengeance. Colleges are reporting that their populations are 60-40 women. So where are the men?  They don’t need to go to college. The boomers dominated the technical trades. And as they retire, the Generation Y men have picked up on it. Here’s an example: you have twins — a boy and a girl. The boy wants to be an auto mechanic, and the girl wants to be an attorney. She goes through four years of high school, then to a good four-year college. At 22 she goes through another three years of school to become an attorney. Now she’s 25, and has $300,000 in student loans. She gets her first job and makes $60,000, not a bad start.

    Her brother goes through four years at a technical school. He gets out at 18 and goes to a Mercedes dealership and is an apprentice for two years. He buys his own tools over that time, and then at 20 years old they offer him a full-time job and pay him $100,000. At this point his sister is still in her third year of college, and at 25 he’s already made half a million dollars, while she’s in debt $300,000.

    You asked about my advice for our governor: Spend some money on our technical schools, because that’s where the big dividends will be.

    In Connecticut we believe that college is where the dividends are.

    So what you’ll have is a bunch of highly educated people that have no jobs.

    Many complain about the inability of the young kids to get down and work. Why?

    You haven’t felt the effect of Generation Y yet. Their peak birth rate was around 1990, so they’re only 21 years old. You’re not going to feel them for another three to five years.

    What will they be like in the workplace?

    You’re going to hire the best people you ever hired, the smartest people you ever hired, and you’re going to have the best choice of people you ever had. You’ll run an ad and people are going to wrap around your building. They’re going to come in, and they’re going to understand that hard work is a condition of employment. They’re not going to call in ‘tired.’ Believe me, Generation Y is going to be the most productive generation in our history. A tremendous influx of people will pour into our labor system. And that’s good for insurance, because they’ll be paying in and not using it.

    But because they’re young and healthy, won’t they not buy insurance?

    They’ll buy insurance because they’re going to get married younger. And that’s because you’ll have a whole crop of young men that are going to be making a livable wage at 21 instead of 27.

    What do people need to know that they don’t know now — what do we need to fix?

    There’s a shortage of dads. Half the babies born in the U.S. today don’t have dads. According to Eberstadt, who has roots in secular demography, the strength of the U.S. is faith and family, and he’s not saying that as an evangelist. We need to make sure our kids understand that it’s important to get married and it’s important to keep your word and it’s important to be responsible, and it’s important to have children. There was a 20-year interval where we didn’t have [enough] babies. Not having them between 1965 and 1984 is what created the problem for consumption and labor.

    Well, today Americans are reacting to immigration in part because of the job market.

    Immigration is our strength. The immigrants who came in filled in the hole in Generation X. Latinos poured into the country because that’s where the opportunity was. Let’s say Latinos assimilate in 20 years; their kids won’t even speak Spanish. The stats of the number of Latinos in the military is overwhelming. If they’ll fight for the country, they want to be Americans. In 2025, we will begin a new generation called the ‘Baby Blenders.’ Our kids will intermarry because they don’t see color or race any more. We’ll look like Derek Jeter.

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