Five Myths About America’s Future Economic Decline

Stephen J. Rose, Georgetown Center on Education and the

Work ForceSeptember, 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

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

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.

With rising education, job quality has improved

Source: Current Population Surveys and PUMS 60

Change in Male Employment

Change in Female Employment

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

Absolute Measure of Well-Being: Confusion about Median

IncomeMedian household income (2004)

$20,846 $27,226$44,389

$63,300$74,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

age 25 andunder

age 60+ Allhouseholds

Prime-agehouseholds

Multi-YearPrime Age

Growing Inequality but Significant Growth in Middle

18%28%

35%43%

65%

278%

0%

50%

100%

150%

200%

250%

300%

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile 81st-99thPercentiles

Top 1 Percent

Percent Change

Growth in Real After-Tax Income, 1979-2007

Source: CBO

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 K-12

system, rising medical costs) but we will remain wealthy and vibrant.