Challenges and Opportunities for Local Communities in a Global Economy

James R. Barth

Lowder Eminent Scholar in Finance, Auburn UniversitySenior Finance Fellow, Milken Institute

Fellow, Wharton Financial Institutions Center

Staying Ahead of the Game: Innovations for Increasing County Revenue43rd Annual Alabama County Government Institute

Auburn, AlabamaJune 6-7, 2013

U.S. (21.6%)China (10.1%) Japan (8.4%) Germany (5.1%)France (4.0%) Brazil (3.5%)U.K. (3.5%) Italy (3.1%)Russia (2.7%)India (2.6%)

Today

The World’s Top 10 Economies Percent of World GDP

20501820

China (28.7%) India (16.0%)France (5.4%) England (5.2%) Prussia (4.9%) Japan (3.1%) Austria (1.9%)Spain (1.9%) U.S. (1.8%) Russia (1.7%)

China (18.5%) U.S. (16.5%) India (12.0%) Brazil (4.8%)Indonesia (3.5%)Japan (3.1%)Mexico (3.0%)Russia (2.7%) Germany (2.4%)U.K. (2.2%)

Per Capita GDP: Europe and United States

1820 1870 1913 1950 2011

Europe $1,232 $1,974 $3,473 $4,594 $34,848

United States $1,257 $2,445 $5,301 $9,561 $48,442

Per Capita GDP by State, 2012

Per capita GDP Rank

Connecticut $58,908 1

Massachusetts $54,687 2

New Jersey $53,628 3

New York $52,095 4

Maryland $51,971 5

Alabama $35,625 46

Note: 2011 per capita GDP is $5,445 for China and $1,509 for India.

Total Employment of U.S. MNCs and Affiliates of Foreign MNCs

0

100

200

300

400

500

600

700

800

2007 2008 2009 2010

Alabama New York Texas CaliforniaThousands

Percent of Population Employed by U.S. MNCs and Affiliates of Foreign MNCs

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2007 2008 2009 2010

Alabama New York Texas California

Public Debt in Advanced Economies Approached Another Record High Gross Public Debt As Percent of GDP

0

20

40

60

80

100

120

140

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Percent of GDP1944: 117.8%

2011: 104.8%

U.S. Debt and Deficits Historical Perspective

-40

-20

0

20

40

60

80

100

120

140

1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010

U.S. federal deficits and debt - 1790 to 2010

Federal public debt

Federal surplus/deficit

% GDP

War of 1812

World War I(1914-1918)

World War II(1939-1945)

Great Depression(1929-late 1930s)

Mexican American War

(1847-1848)

Civil War(1861-1865)

SpanishAmerican War

(1898-1899)

Great Recession

(2007-2009)Vietnam War(1961-1975)

Korean War (1950-1953)

U.S. federal income tax introduced

(1913)

When Social Security was created in 1935, it was the definition of a solvent system – life expectancy at the time was 62 years old and the retirement age was 65. Most Americans died before they could retire!

Government Policies Need to Adapt

Impacts of Sequestration on Alabama Education and Jobs

Decrease in funding for

primary and secondary ed

Jobs at risk among teachers and aides

Decrease in number of students served

Decrease in number of

schools receiving funding

Decrease in funding for education for

children with disabilities

Decreased in staff for education for

children with disabilities

Alabama $11.0 million 150 21000 40 $9.0 million 110

Teachers and Schools

State

Decreased number of low

income students receiving aid

Decreased number of work study students

Alabama 940 280

Work-study jobs

StateDecrease in number of children with access to early education

Alabama 1100

Head Start

State

Job search funding losses

Decrease in number of people

getting helpAlabama $472,000 16,600

Job-search assistance

,

,

Impacts of Sequestration on Alabama Military and Law Enforcement

StateCivilian job furloughs

Gross pay reduction

Army funding cuts

Air Force funding cuts

Navy funding cuts

Alabama $27,000 $176.9 million

$91.0 million $8.0 million N/A

Military readiness

StateAmount lost from justice

assistance grantsAlabama 230,000

Funds for law enforcement and public safety

$

Impacts of Sequestration on Alabama Public Health

StateDecrease in number of children

with access to careAlabama 500

Child care

State Vaccines funding cutsDecreased number of

children receiving vaccinesAlabama $144,000 2,110

Vaccines for children

State

Loss of funds for public health threat

response

Decrease in grants to prevent and treat

substance abuse

Decreased admissions to substance abuse

programs

Department of public health

losses

Decrease in number of HIV tests

Alabama $457,000 1.2 million 1600 $165,000 4,100

Public health

$ ,

Impacts of Sequestration on Alabama Public Health

StateStop Violence Against Women

Program funding cutsDecrease in victims

servedAlabama $102,000 400

STOP Violence Against Women Program

StateDecrease in

environmental fundingDecrease in grants for fish

and wildlife protectionAlabama 2.0 million 1.0 million

Funding for clean air and water

StateDecrease in funds

providing meals for seniorsAlabama $865,000

Nutrition assistance for seniors

$ $

Alabama Personal Income Per Capita By County

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Bottom 5

Top 5

Note: As of March, 2013

Alabama Unemployment Rate By County

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Bottom 5

Top 5

Note: As of March, 2013

Alabama Population Top 5 Counties vs. Rest of State

Jefferson, 658,931

Mobile, 412,577Madison, 340,111

Montgomery, 232,032

Shelby, 197,936

Rest of State, 2,961,153

Total Population: 4,802,740

Note: As of March, 2013

Alabama Total Employment Top 5 Counties vs. Rest of State

Montgomery, 96,661

Shelby, 99,563

Madison, 160,831Mobile, 173,552

Jefferson, 285,709

Rest of State, 1,194,353

Note: As of March, 2013.

Total Employment: 2,010,669

Alabama Total Unemployment Top 5 Counties vs. Rest of State

Tuscaloosa, 5,674

Montgomery , 7,612

Madison, 10,192

Mobile, 15,163

Jefferson, 19,485

Rest of State, 90,174

Note: As of March, 2013

Total Unemployment: 148,300

Alabama Unemployment Rate and Number Unemployed

Alabama Average Hourly Wage

Alabama Local Government Total Revenue 2002 vs. 2012

2002US$ 13.9 Billion

2012PUS$ 21 Billion

Alabama Local Government Spending 2002 vs. 2012

2012PUS$ 21.2 Billion

2002US$ 14.6 Billion

Challenging Local Fiscal Conditions Alabama

*: Projected

Sardinia, Italy

Loma Linda, California, U.S.A.

Large number of people over 100 years!

Physical activity

Strong social networks

Diet rich in antioxidant fruits and vegetables, healthy grains and proteins

Extreme Longevity Areas of The World Where People Live Longer

Okinawa, Japan

U.S. Aging Population is Growing Fast

0

10

20

30

40

50

60

70

1980 1990 2000 2012 2020 2030

Millions 50-64 65-84 85+

33

23

2

3328

3

42

31

4

61

37

6

63

48

7

60 63

9

* *

* Projected.

State and Local Pension Funded Ratios Slightly Lower

91

8590 88 87 86 88

8479

76 75

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Funded ratios of state and local pension plans (%)

34 States Had Pensions Funded Under 80 Percent, 2010

Notes: Study is based on 61 key U.S. cities and fiscal year 2009 data. *Birmingham, AL is 20th out of 61 at 81% funded ratio.

A Widening Gap in Cities Pension Funding: Top and Bottom Cities

24

42

43

50

52

Charleston, WV

Providence, RI

Omaha, NE

Portland, OR

Chicago, IL

Worst-funded cities

Funded ratio (%)

81

94

94

97

104

113

Birmingham, AL

Charlotte, NC

Wichita, KS

San Francisco, CA

Washington, DC

Milwaukee, WI

Funded ratio (%)

Best-funded cities

*

Alabama Has Lagged National Recovery So Far

Alabama Is Supported by Reviving Motor Vehicle Industry

Alabama’s Recovery Lags National Rate Due To Housing Drags

Alabama Is Expected To Speed Up and Grow At a Moderate Pace

Job Losses Exceeded National Trends, And Hiring Recovery Is Slower

Recession Took a Bigger Toll on Alabama’s Economy

Employment Expanded More Than National Average, But Is Stagnant

Human Capital in United States 2012

Financial assets25%

Human and social cap-ital75%

Total: $76.3 trillion

Source: Derived from Kevin Murphy and Federal Reserve, Flow of Funds Q1 2012.

Going to College Still a Smart Move Americans’ Lifetime Earnings by Highest Educational Attainment, 2011

Bachelor’s degree holders can earn 77% more than those with a high school diploma

Highest educational attainmentLifetime earnings

(US$ millions)Less than high school 1.0High school graduate 1.4

Some college 1.6Associate's degree 1.8Bachelor's degree 2.4

Master's degree 2.8Doctoral degree 3.5

Professional degree 4.2

Educational Achievement

Less than 25% college graduates More than 25% college graduates

Increase education and practical skills

Import people with skills

Improve health and quality of life so that people are more productive

Three Ways to Build Human Capital

Return

Preschool Programs

Age

Job Training

School

Opportunity Cost of Funds

Return on Human Capital Investment

“The rate of return to a dollar investment made while a person is young is higher than the rate of return to the same dollar made at a later age.”

Nobel Prize Economist James Heckman

“Big gaps in educational attainment are present by age 5. Some children are bathed in an atmosphere that promotes human capital development, and, increasingly, more are not.”

“By 5, it is possible to predict with depressing accuracy, who will complete high school and who won’t.”

James HeckmanNobel Prize in

Economics

We need to strengthen the sector’s information infrastructure to enable a system in which information can be shared and used dynamically. Specifically, we need to build on current initiatives regarding data classifications (to create consistent

definitions), technical standards (to facilitate data exchange), reporting protocols (to specify what data is reported when), knowledge platforms (to allow data to be productively captured), and governance (to ensure intellectual property rights and

privacy concerns are managed, to build consensus, and to drive compliance).

Building a Better Tomorrow Requires Structuring Our Fragmented Information Today

STATE, COUNTIES & CITIES STATE, COUNTIES & CITIES

This Will Help Information Flow Freely

Structuring and organizing data will make information more accessible and useable, increasing the supply and use of information, just as it has in other markets.

Alabama Real Per Capita Personal Income Rank 1929-2012

Rank