Transcript Towards a New Social Contract: Why It Is Needed and What

Five Myths About America’s
Future Economic Decline
Stephen J. Rose,
Georgetown Center on Education and the
Work Force
September, 2012
Past, Present, and Future
• We look to the past to predict the future.
• Key question: Is the present downturn a
cyclical problem, or does it reflect the
maturation of structural problems?
• Reinhardt and Rogoff find the economic
crises set off by financial problem take over
4 years to recover from.
Economics Fundamentally Boils
Down to Two Questions
•
Size of the pie
–
–
–
•
Technology
Infrastructure--physical, finanical, legal, and cultural
Full utilization of Resources
Distribution of the Pie
–
–
–
Between profits and compensation
Between workers and nonworking elderly and
children
Between different types of workers
Pessimism is Attractive
• Remember when the Japanese were going
to eat our lunch?
• Remember the fear of automation in the
1950s and so-called high structural
unemployment?
• The dismal science of economics has often
argued that stagnation was a constant threat.
Data Issues Make It Tough to Get
Things Right
•
•
•
•
World is Complex: hard to develop appropriate metrics
and collect necessary information.
Different theoretical perspectives make people highlight
certaina data and not others and interpret trends in
different ways .
Different statistical measures: absolute, relative, change,
change in rate of change; in terms of making
comparisons over time—comparative statics versus
longitudinal.
Many researchers “cook” their results.
What Some Are Saying
• Elizabeth Warren and Amelia Tyagi: “Never before have
middle class families worked so hard just to break even.”
• Kusnet, Michel, and Teixeira: “With most people, the
intensity, the insecurity, and the arduousness of their
economic struggles are woven into the fabric of their
lives—and are central to their identity.”
• Kuttner: “At least two-thirds [of Americans] are
economically stressed… [Over the past three decades] all
of the [productivity] gains went to top 10 percent (most to
the top 1 percent)”
Myth 1:The Inevitability Claim
• Like Rome and the United Kingdom before
us, dominant powers eventually lose their
place as the world leader.
• Alternative view is a “convergence club
with America being the leader of a group of
nations with similar standards of living
Steady Long Run Economic
Growth
Rise in Real GDP Per Person, 1929-2010
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
1929
1934
1939
1944
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
Basic Strengths of US Economy
• Largest single market
• English is the world language and American
cultural output is widely available
• Strong Financial and Legal Systems
• Openness to Change
• Best higher education system in world,
especially at graduate level
Broad Expansion of Educational
Attainment
Educational Attainment, Prima Age Workers 1960-2009
60.0
50.0
40.0
less than HS dipl
Share
HS diploma
30.0
Some college
College BA BS
Graduate/Prof Degree
20.0
10.0
0.0
Year
Source: Current Population Surveys and PUMS 60
Myth 2: With the decline in manufacturing, most
service jobs are dead-end and low-paying
Service Jobs are mainly in offices, health care,
education, and communications.
50
Employment By Functional Areas, 1960-2009
45
40
35
Office, Public Administration&Finance
30
Industrial Production, Construction,&Transportation
25
20
15
10
5
0
Retail and Low-Skill Services
Education, Health Care, and communication
Agriculture, Mining, & Timber
With rising education, job quality
has improved
Shares of Occupation Tiers, 1960-2008
45
Skilled Blue Collar, Supervisors, and Clerical
40
35
30
Less Skilled Blue-Collar, Sale
clerks, and Service
25
Managers and Professions
20
15
Source: Current Population Surveys and PUMS 60
Change in Male Employment
Evolution of Male Jobs, 1979 to 2005
High (Greater than $75,000)
Net Gain
from 1979 to
2005
High Moderate ($50,-75,000)
Share of
Employment
1979
Low Moderate ($25,-50,000)
Low ($25,000 and lower)
0
10
20
30
Share of Employment or Gain
40
50
Source: March Current Population Surveys, 1980 and 2006. Earnings from 1980 are adjusted to 2005 dollars using the CPI-U-RS.
Prime-age workers (25-62) were used to avoid the demographic differences associated with the baby boomer cohort that was entering
the labor force in large numbers in 1979. If the prime-age restriction were not used, the increase in the share of male workers in the
Change in Female Employment
Evolution of Female Jobs, 1979 to 2005
Net Gain from
1979 to 2005
High (Greater than $75,000)
Share of
Employment
1979
High Moderate ($50,-75,000)
Low Moderate ($25,-50,000)
Low ($25,000 and lower)
0
20
40
Share of Employment or Gain
60
80
Myth 3: The Middle Class has
shrunk and stagnated
If All of the Gain From 1979-2007 Had Gone
to Richest Decile?
• Since GDP per capita is up 63%, this
growth would represent 39% of all income.
• If the top 10 percent started with 30 percent
of all income, then their share with all of the
growth going to them would be 60 percent
of all income!
• The top quintile would have over 75 percent
of all income.
Life Cycle Effect
The Life Cycle: Changing Incomes with Age
$90,000
Equivalent Incomes;
Adjusted to Family of Three
$80,000
$70,000
Median Incomes
$60,000
$50,000
Reported
Incomes
$40,000
$30,000
$20,000
$10,000
Age in 2005
78
76
74
72
70
68
66
64
62
60
58
56
54
52
50
48
46
44
42
40
38
36
34
32
30
28
26
24
22
20
18
$0
Absolute Measure of Well-Being:
Confusion about Median Income
Median household income (2004)
$100,000
$74,000
$80,000
$63,300
$60,000
$40,000
$44,389
$20,846
$27,226
$20,000
$0
age 25 and
under
age 60+
All
households
Prime-age
households
Multi-Year
Prime Age
Growing Inequality but
Significant Growth in Middle
Growth in Real After-Tax Income, 1979-2007
Percent Change
300%
278%
250%
200%
150%
100%
65%
50%
18%
28%
35%
43%
0%
Lowest Quintile Second Quintile Middle Quintile Fourth Quintile
Source: CBO
81st-99th
Percentiles
Top 1 Percent
Myth 4: We are Doomed by Debt
Remember for every debt holder,
there is a corresponding asset from
the person doing the lending
Are American Households
Drowning in Debt?
• According to Survey of Consumer
Finances, 2010:
• 60% of Households have no credit card
debt; median debt of those with debt is
$2,600. This share is down; it had been
around 54% over the last 18 years.
• 25% of Households have no debt of any
kind.
Student Debt is Rising
• 70% of students don’t pay the sticker price.
• High sticker prices allow colleges to
provide support to low and middle income
students.
• 35% percent of BA grads and 83% of their
parents have no undergraduate debt.
• The median debt of those with debt is
26,000; only 10% have debts over $40,000.
Housing Debt is the Issue
• Nearly 80% of household debt is mortgage
debt.
• The craziness of the housing bubble led
many people to buy homes they couldn’t
afford and to take home equity loans that
led them to be under water today.
• This will take time to unwind and there will
be lots of pain; but this is not a structural
problem.
Public Debt Will Bankrupt the
Economy
• We need to align wants and revenues.
• Supporting elderly non-workers is
expensive but doable.
• The key issue is setting tax rates at a level
that keeps carrying costs manageable.
• Currently, even with high debts, low
interest rates mean low carrying costs.
Myth 5: China Will Displace US
as Dominant World Power
Fear that Foreign Imports
Undercut Domestic Output
• This theory started with the Mercantilists in
the 17th century.
• When we started running trade deficits in
the early 1980s, Ben Friedman predicted an
imminent “day of reckoning” and declining
GDP.
• There is no statistical connection between
rising trade deficits and rising
unemployment.
China Can Undersell US in Every
Commodity Eventually
• Balance of Payments must be zero in every
year for every country. A country cannot
just sell goods.
• China keeps its currency low by buying US
treasuries.
• Although we have net debts of over $3
Trillion, our foreign capital income is
greater than our payments to foreigners.
China is a Fast Growing But
Faces Many Problems
• Its GDP per person is less than 20% of US
level.
• It has raised 500 million people out of
poverty, but another 500 million remain in
poverty.
• There are tensions over the authoritarian
rule of the Communist Party.
• Inflation and social unrest loom on the
horizon.
Conclusion
• The economic crisis has taken a severe toll.
• But the toll is probably greater for our
European competitors.
• China, Japan, and Europe face an explosion
of costs to support their elderly.
• We have problems (e.g., inequality, poor K12 system, rising medical costs) but we will
remain wealthy and vibrant.