US Economic Outlook and Policy Challenges May 2017

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1 US Economic Outlook and Policy Challenges May 2017 Kevin Mumford Associate Professor of Economics Krannert School of Management Purdue University

2 Percent of Labor Force Unemployed Unemployment is at pre-recession level National Unemployment Rate Source: US Department of Labor: Bureau of Labor Statistics

3 Unemployment is geographically clustered Source: US Department of Labor: Bureau of Labor Statistics

4 Total Private Job Openings, Hires, and Quits Seasonally adjusted, in thousands Source: BLS, Job Openings and Labor Turnover Survey, April 11, 2017

5 CPI-U 240 Midwest Area Consumer Price Index Midwest CPI-U Source: US Department of Labor: Bureau of Labor Statistics

6 Billions Dollars Seasonally Adjusted GDP is still below potential 19,000 18,000 17,000 Potential GDP 16,000 15,000 Nominal GDP 14,000 13,000 12,000 11,000 10, GDP is the market value of all final goods and services produced in the U.S. in a year Source: Bureau of Economic Analysis (U.S. Department of Commerce)

7 It s been 7 years since the recession... Unemployment rate is back at pre-recession level But GDP growth is slow 0.9% annual real GDP per capita growth rate since % annual real GDP per capita growth rate since % annual real GDP per capita growth rate in the 90s 2.2% annual real GDP per capita growth rate in the 80s 2.2% annual real GDP per capita growth rate in the 70s What explains long-run economic growth?

Model of Economic Growth Solow Model Named for Bob Solow, 1987 Nobel Prize winner Model Assumptions: Population and work force grow at rate, n No government spending,

8 Model of Economic Growth Solow Model Named for Bob Solow, 1987 Nobel Prize winner Model Assumptions: Population and work force grow at rate, n No government spending, closed economy GDP = F(K,L) GDP per capita = f(k), k is the capital-labor ratio Capital depreciates at rate d, so (n+d)k is needed just to maintain current production

9 GDP per worker Solow Growth Model (n+d)k f(k) per-worker production function Consumption per person Maximum consumption per person Capital-Labor Ratio, k k* Capital-Labor Ratio, k

10 GDP per worker Solow Growth Model f(k) f(k) Consumption per person Maximum consumption per person k* Capital-Labor Ratio, k

11 Labor Productivity 110 Output / Hour Labor Productivity Source: US Department of Labor: Bureau of Labor Statistics

12 Lessons from the Solow Model Capital accumulation only produces growth if k is below k* Productivity growth is the cause of long-run economic growth GDP = A F(K,L) Without productivity growth, long-run GDP per capita would be stagnant. Productivity growth comes from: New technology Education International trade

13 Trade and Technology Cause Inequality Since 1980, income inequality has increased Income inequality is driven by wages, not capital gains The rise in inequality matches the rise in the college wage premium

14 Share of Income to the Top 10 Percent in the United States Including capital gains Excluding capital gains Source: Piketty and Saez (2003) Income Inequality in the United States QJE updated June 2016

15 0.300 Share of Income to the Top 1 Percent in the United States Including capital gains Excluding capital gains Source: Piketty and Saez (2003) Income Inequality in the United States QJE updated June 2016

16 Cumulative Log Change in Real Earnings by Wage Percentile Top 10% Median Bottom 10% Source: Acemoglu and Autor (2011)

17 Cumulative Log Change in Real Earnings by Education Level for Men Post- College College Some College High School HS Dropout Source: Acemoglu and Autor (2011)

18 Cumulative Log Change in Real Earnings by Education Level for Women Post- College College Some College High School HS Dropout Source: Acemoglu and Autor (2011)

20 Population Netflow by State (2015) number of people (thousand) CA FL IL IN MD MI NY OH TX Non-college netflow College netflow Note: >0: inflow; <0: outflow

21 Tradeoff between Growth and Inequality Skill-biased technological change Skill-biased international trade Universities are not responsive to changes in population Politically, reducing income inequality is essential for growth

22 Source: Charles, Hurst, Hotowidigdo (2015) Share Having Attended Any College Men, Age 18-29

23 Source: Charles, Hurst, Hotowidigdo (2015) Share Having Attended Any College Women, Age 18-29

24 Labor Force Participation Rate Male Labor Force Participation Labor Force Participation Rate (25-54) right left Labor Force Participation Rate (16-24) Source: US Department of Labor: Bureau of Labor Statistics

25 Labor Force Participation Rate Female Labor Force Participation 80 Labor Force Participation Rate (25-54) Labor Force Participation Rate (16-24) Source: US Department of Labor: Bureau of Labor Statistics

26 It s tough to make predictions, especially about the future -Yogi Berra Employment growth in occupations: Automation is difficult (no repetitive tasks) Outsourcing is difficult Personal contact is important Data analysis

27 Employment growth is clustered in occupations 14,000,000 12,000,000 10,000, ,000,000 6,000,000 4,000,000 2,000,000 0 Management Finance Analysis & Computers Education Healthcare Food Preparation Personal Care & Service Social Services

28 Employment losses are also clustered 16,000,000 14,000, ,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Engineering Office Support Sales Construction/ Extraction Maintenance Production Transportation

29 US Federal Budget Why can t the government balance it s budget? Government is not going to retire (no need to save) Very low cost of borrowing (about 1% currently) A small deficit is very useful (financial markets) So, how large a deficit is OK? It depends on the rate of economic growth Economists get worried if the debt/gdp ratio increases

30 Federal Revenue and Expenditure as % of GDP Spending Average Spending 1971 to 2015 projected Revenue Average Revenues 1971 to Source: US Congressional Budget Office (historical budget data) and (projections under current law)

31 60 Percent of Total US Federal Spending Defense Social Security Income Security Health All Other *estimate

32 Question: What Do Budget Deficits Do? What would change if the federal government had a 1% deficit rather than a 3.5% deficit? Standard Macro Model Lower deficit higher investment and net exports Over the long run (30 years) higher wages lower return on capital (lower profits) higher GDP growth rate future lower tax rates Magnitudes depend on how the deficit was reduced (higher taxes or lower spending)

33 Social Security Legacy Debt Ida May Fuller was born in 1874 in Vermont. In 1939, 3 years after the start of Social Security, she had paid $24.75 in payroll taxes She retired in 1939 and claimed her benefits of $22.54/month She lived for 35 more years and collected a total of $22, (924% nominal return on her investment) Every time benefits have been expanded, this adds to the legacy debt

34 Overlapping Generations Model Every one lives 2 period, earn $20,000 in income when young. 5% population growth rate, 5% growth rate in real wage Social Security begins in period 2 with a 10% payroll tax Perio d Youn g Old Earnings per young worker Taxes Paid per young worker Taxes Paid total Benefits per old retiree Rate of Return for retiree $20, $21,000 $2,100 $220,500 $2,205 Infinite $22,050 $2,205 $242,550 $2,310 10% $23,153 $2,315 $266,225 $2,420 10% $24, % Stop Social Security in period 5

35 Trust Fund Exhausted

38 Contact Information: Kevin J. Mumford Department of Economics Krannert School of Management Web: Teaching: Labor Economics PhD students Managerial Economics Master s students Econometrics Undergraduates & Master s students

Balancing the U.S. Budget. Professor Kevin Mumford August 6, 2012

Balancing the U.S. Budget. Professor Kevin Mumford August 6, 2012 Balancing the U.S. Budget Professor Kevin Mumford August 6, 12 Presentation Ground Rules No Normative Analysis I will try to answer what happened? or what would happen if? questions Normative questions