Transcript Friday Session I Presentation | The Economy in 2020

21st Annual APTC
Property Tax Seminar
The Economy in 2020:
Growth or Stagnation?
October 23, 2015
William R. Emmons
Federal Reserve Bank of St. Louis
[email protected]
These comments do not necessarily represent the views of the
Federal Reserve Bank of St. Louis or the Federal Reserve System.
1
The Economy in 2020:
Growth or Stagnation?
 My prediction: Both—it depends on how you define it.
 A global growth paradox
 Living standards are rising around the world.
 The U.S. (and other rich countries’) share of world population is
shrinking; the poorest countries are growing fastest.
 The paradox: Despite growth in living standards everywhere,
the median global citizen may be poorer in 2020 than today.
 U.S. economy in 2020: Growth and stagnation
 Overall U.S. economic output will be larger in 2020.
 The rewards are going increasingly to a few demographic groups
defined by age, education and race or ethnicity.
 The fastest-growing parts of U.S. population are benefiting less.
 Our home-grown growth paradox:
 Living standards are likely to stagnate for the “typical”
citizen even though overall GDP and wealth are increasing.
2
Vast Differences in the Standard of
Living Around the World
Median per-capita income in U.S. dollars
Rich countries
Poor countries
Middle-income
countries
3
Source: International Monetary Fund, 2009
Economic Growth Generally is Faster
in Countries that Are Poorer
Rich countries
Less-developed
countries
4
Source: International Monetary Fund, World Economic Outlook, April 2015
U.S. Share of World Population
Is In Decline
Percent
5
Source: U.S. Census Bureau
Population is Slow-Growing or Stagnant
in Other Advanced Economies, Too
Percent
6
Source: U.S. Census Bureau
Populations in Less-Developed
Countries Are Growing Faster
Percent
7
Source: U.S. Census Bureau
Fastest Population Growth in the LeastDeveloped Countries (Africa and S. Asia)
Percent
8
Source: U.S. Census Bureau
Hypothetical Illustration of the
Global Growth Paradox
 Split the world into three regions
 Advanced (rich) countries
 Developing (middle-income) countries
 Least-developed (poor) countries
 Highlight two countervailing trends at work
 Incomes grow fast in poor countries, raising average incomes
locally and globally.
 Population also grows fast in poor countries, lowering mean and
median global incomes (because more poor people get counted).
 Which force will win—rising quality or quantity of poor people?
 Income must grow very fast in poor countries to offset the relative
shrinkage of population in rich countries.
 From a global perspective, adding a person with $1,000 annual
income—even if it is growing fast—cannot offset the “loss” of a
person making a stagnant $50,000 income.
9
The Global Growth Paradox: A Race
Between Income and Population Growth
Median per-capita income in U.S. dollars
Rich countries:
Slow
population
growth
Middle-income
countries:
Moderate
population
growth
Poor countries:
Fast population
growth
10
Source: International Monetary Fund, 2009
A Simulated Example With 100
People in the World
Dollars
(log
scale)
People in
rich
countries
(17% of
global
population)
People in middleincome countries
(70% of global
population)
People in poor
countries (13% of
global population)
11
People ranked by income within their country group (highest to lowest)
Income Rankings Are Similar Using
Mean or Median
2015
Advanced countries’
mean income
Middle countries’
mean income
Poor countries’
mean income
Advanced countries’
median income
Middle countries’
median income
Poor countries’
median income
Global mean
income
Global median
income
2020
Percent change
$195,622
$60,150
$38,462
$57,648
$560
$26
$80,361
12
$1,983
2020 Scenario: Income Grows in Every
Region; Population Shifts from Rich to Poor
Dollars
(log
scale)
People in
rich
countries
(13% of
global
population)
People in middleincome countries
(70% of global
population)
People in poor
countries (17% of
global population)
13
People ranked by income within their country group (highest to lowest)
Mean and Median Incomes Grow
Faster in Middle and Poor Countries
2015
Advanced countries’
mean income
Middle countries’
mean income
Poor countries’
mean income
Advanced countries’
median income
Middle countries’
median income
Poor countries’
median income
Global mean
income
Global median
income
2020
Percent change
$195,622
$240,071
22.7
$60,150
$90,226
50.0
$38,462
$86,674
125.4
$57,648
$58,320
1.2
$560
$840
50.0
$26
$40
56.3
$80,361
??
??
14
$1,983
??
??
Global Mean Income Increases...
2015
Advanced countries’
mean income
Middle countries’
mean income
Poor countries’
mean income
Advanced countries’
median income
Middle countries’
median income
Poor countries’
median income
Global mean
income
Global median
income
2020
Percent change
$195,622
$240,071
22.7
$60,150
$90,226
50.0
$38,462
$86,674
125.4
$57,648
$58,320
1.2
$560
$840
50.0
$26
$40
56.3
$80,361
$105,635
31.5
15
$1,983
??
??
...But Global Median Income Declines
2015
Advanced countries’
mean income
Middle countries’
mean income
Poor countries’
mean income
Advanced countries’
median income
Middle countries’
median income
Poor countries’
median income
Global mean
income
Global median
income
2020
Percent change
$195,622
$240,071
22.7
$60,150
$90,226
50.0
$38,462
$86,674
125.4
$57,648
$58,320
1.2
$560
$840
50.0
$26
$40
56.3
$80,361
$105,635
31.5
16
$1,983
$1,694
-14.6
What‘s Going On Here?
My Pet Example
 You are a pet lover.
 Last year you owned one cat and two dogs.
 Your cat weighed 8 pounds; each dog weighed 12 pounds.
 Mean weight of pets = 10.7 lbs.; median weight of pets = 12 lbs.
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What‘s Going On Here?
My Pet Example
 You are a pet lover.
 Last year you owned one cat and two dogs.
 Your cat weighed 8 pounds; each dog weighed 12 pounds.
 Mean weight of pets = 10.7 lbs.; median weight of pets = 12 lbs.
 Today you own two heavier cats and one heavier dog.
 Your cats weigh 10 pounds each; your dog weighs 14 pounds.
 Mean weight of pets = 11.3 lbs.; median weight of pets = 10 lbs.
18
What‘s Going On Here?
My Pet Example
 You are a pet lover.
 Last year you owned one cat and two dogs.
 Your cat weighed 8 pounds; each dog weighed 12 pounds.
 Mean weight of pets = 10.7 lbs.; median weight of pets = 12 lbs.
 Today you own two heavier cats and one heavier dog.
 Your cats weigh 10 pounds each; your dog weighs 14 pounds.
 Mean weight of pets = 11.3 lbs.; median weight of pets = 10 lbs.
 Results of growing animals and changing mix
 The mean weight of all of your pets increased (10.7 to 11.3 lbs.).
 The mean weight of both your cats and your dogs increased (cats
increased from 8 to 10 lbs., dogs from 12 to 14 lbs.).
 But the median weight of your pets decreased.
19
What‘s Going On Here?
My Pet Example
 You are a pet lover.
 Last year you owned one cat and two dogs.
 Your cat weighed 8 pounds; each dog weighed 12 pounds.
 Mean weight of pets = 10.7 lbs.; median weight of pets = 12 lbs.
 Today you own two heavier cats and one heavier dog.
 Your cats weigh 10 pounds each; your dog weighs 14 pounds.
 Mean weight of pets = 11.3 lbs.; median weight of pets = 10 lbs.
 Results of growing animals and changing mix
 The mean weight of all of your pets increased (10.7 to 11.3 lbs.).
 The mean weight of both your cats and your dogs increased (cats
increased from 8 to 10 lbs., dogs from 12 to 14 lbs.).
 But the median weight of your pets decreased.
 The key point
 An adverse change in the composition of the group can reverse
overall trends that occur in each of the individual groups.
20
Back to the Hypothetical Example of
the Global Growth Paradox
Dollars
(log
scale)
2015 global income
distribution
Median
= 50th percentile
21
Ranking of all people in the world (highest to lowest)
2020 Income Distribution Lies Above 2015
Distribution At the Top—Rich Get Richer
Dollars
(log
scale)
2020 global income
distribution
2015 global income
distribution
Median
= 50th percentile
22
Ranking of all people in the world (highest to lowest)
But the Growing Number of Poor
People Pulls Down the Median
Dollars
(log
scale)
2015 global income
distribution
Median
= 50th percentile
23
Global income ranking (highest to lowest)
2020 Median Global Income Is Below
2015 Median Global Income
Dollars
(log
scale)
2020 global income
distribution
2015 global income
distribution
Median
= 50th percentile
24
Global income ranking (highest to lowest)
So Will the World Be Richer in
2020 Than It Is Today?
 Yes and no.
 Within each country or even within groups of similar countries,
it is likely that both mean and median income and wealth will be
higher in 2020 than in 2015.
 But the composition of the world’s population is changing.
 Poor countries are growing fast both in terms of income and
population.
 Rich countries are growing slowly in both income and
population terms.
 It is possible that global mean income (and top incomes) will
increase while global median income stagnates or declines.
25
The U.S. Version of the Global
Growth Paradox
 Income and wealth are likely to increase in the U.S. between
2015 and 2020 as measured by
 Overall means = real GDP and real household wealth.
 Sub-group means and medians (many but not all).
 But overall median income and median wealth may stagnate
or decline, as they have for many years.
 Overall (mean) income and wealth are likely to grow slowly.
 Some low-income and low-wealth groups are growing in size.
 How you ask the question determines how you answer it
 The approach I have been pursuing: The demographics of
income and wealth.
 Key demographics: Birth year, age, education, race or ethnicity.
 Prediction: Young, less-educated and non-white Americans will
continue to struggle as they become a larger share of population.
26
The U.S. Economy Will Continue to
Grow—But More Slowly
Percent
Last year of 3% growth:
2005
Average annualized
real-GDP growth,
2006-14:
1.4%
27
Source: Bureau of Economic Analysis
Annual data through 2014
The US Economy‘s “Speed Limit“
Has Declined to 2 Percent
History
Percent
CBO forecast
Growth rate of real
potential GDP
Contribution to
GDP growth of
labor inputs
28
Source: Congressional Budget Office
Projections as of Aug. 25, 2015
Contributions of Both Productivity
and Labor Input Have Declined
History
Percent
CBO forecast
Growth rate of real
potential GDP
Contribution to GDP
growth of productivity
improvements
Contribution to
GDP growth of
labor inputs
29
Source: Congressional Budget Office
Projections as of Aug. 25, 2015
An Important Reason Labor Inputs are
Slowing—Shrinking Share of Youth
Percent
30
Source: U.S. Census Bureau
Productivity Growth Should Return to
Normal; Population Growth is Slow
History
Percent
Contribution to GDP
growth of productivity
improvements
CBO forecast
Contribution to
GDP growth of
labor inputs
31
Source: Congressional Budget Office
Projections as of Aug. 25, 2015
Confirming Evidence: Investors Expect
Very Low Interest Rates for Many Years
Percent
Aug. 28, 2015:
3.57%
nominal
short-term
yield in 2035
Aug. 28, 2015:
1.45% real
short-term
yield in 2025
32
Source: Federal Reserve Board
Daily data through Aug. 28, 2015
Real Household Wealth Likely
to Grow Slowly
Index values
equal 100 in
1995
Real household
wealth
Real GDP
33
Sources: Congressional Budget Office, Federal Reserve Board
Projections as of Aug. 25, 2015
Mean Income Grew Overall and for
Most Demographic Groups, 1989-2013
Percent
34
Source: Federal Reserve Board, Survey of Consumer Finances
Mean Wealth Grew Overall and for Most
Demographic Groups, 1989-2013
Percent
35
Source: Federal Reserve Board, Survey of Consumer Finances
Median Income Growth Was Weak During
1989-2013, Hinting At Composition Effects
Percent
36
Source: Federal Reserve Board, Survey of Consumer Finances
Median Wealth Declined Overall and for
Several Groups, 1989-2013
Percent
37
Source: Federal Reserve Board, Survey of Consumer Finances
This Pattern Likely to Continue—Typical
Family Struggles Despite Overall Growth
Percent
38
Source: Federal Reserve Board, Survey of Consumer Finances
Clearest Illustration of the Growth
Paradox in the U.S.—Race and Ethnicity
 Virtually all measures of income and wealth have increased
for each major racial and ethnic group, 1989-2013.
 But overall measures of median income and median wealth—
representing the experience of the “typical” American
family—have declined.
 How? The low-income and low-wealth parts of the population
increased as share of the total.
 This pattern is likely to continue.
39
Overall Median Income and Wealth Stagnated
While Most Groups Enjoyed Growth
Percent
40
Source: Federal Reserve Board, Survey of Consumer Finances
The Non-White Population is Growing
Faster than the White Population
People
41
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Generally Have
Lower Incomes and Wealth than Whites
Dollars
42
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Generally Have
Lower Incomes and Wealth than Whites
Dollars
43
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Generally Have
Lower Incomes and Wealth than Whites
Dollars
44
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Generally Have
Lower Incomes and Wealth than Whites
Dollars
45
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 1940
Share of
population
0.4%
1.5%
9.8%
88.3%
46
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 1970
Share of
population
1%
4%
11%
84%
47
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2000
Share of
population
6%
13%
12%
69%
48
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2010
Share of
population
7%
16%
13%
64%
49
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2020
Share of
population
6%
19%
14%
61%
50
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2030
Share of
population
7%
22%
14%
57%
51
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2040
Share of
population
8%
25%
14%
53%
52
Source: Federal Reserve Board, Survey of Consumer Finances
Non-White Groups Represent Increasing
Shares of the Population
Share in 2050
Share of
population
9%
27%
15%
49%
53
Source: Federal Reserve Board, Survey of Consumer Finances
In Sum: Will the U.S. and Global
Economies Be Richer in 2020?
 Yes and no—total and average (mean) incomes and wealth will
be greater than today.
 But the typical (median) U.S. and global citizen may be no
better off.
 Source of the global and U.S. “growth paradoxes:” A race
between economic improvement and fast growth in the
number of disadvantaged citizens.
 Our national and global challenges:
 Increase the overall growth rate.
 Make growth more inclusive so it benefits the least-welloff as much as possible.
 Broaden the public debate to focus on median as well as
mean measures of economic progress.
54