What’s Up with the Economy?

Fenway CDC Annual Meeting

Barry BluestoneDean, School of Social Science, Urban Affairs, and Public PolicyNortheastern University

May 11, 2009

A Snapshot of the U.S. Economy

An National Economic Recession with Few Parallels

Already longer than any since 1929 and not over yet December 2007 – April 2009 (17 months)

As deep as the most pessimistic forecast made earlier this year

GDP contraction the steepest in 50 years

With unemployment that may reach 10 percent

Length of U.S. Recessions (1900 – Present)

Average Length of Recessionssince Great Depression:

10 Months

?

Source: NBER

This one is 17 months old andcould last 24 months or more

3.6%3.1% 2.9%

2.2%

0.0%

-6.3% -6.1%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2004 2005 2006 2007 2008:I 2008:IV 2009:I

Real GDP Growth Rate 2004-2009

Source: CEA

Worst quarterly losses in 50 years

5,692,000

7,001,000 7,078,000

10,080,000

13,700,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

2000 2006 2007 2008: 2009:April

U.S Unemployment (2000-2009: March)

Source: CEA

Nearly 14 million Americans out of work

8

Updated January 6, 2009

9

Actual2008:IV -6.3%

Updated January 6, 2009

Actual2009 -6.1%

10

Updated January 6, 2009

11

ActualApril 2009: 8.9%

Updated January 6, 2009

Debt Driven Recession

Continued stagnation in income Rise in foreclosures

Initially due to Subprime Mortgages and declining home values

Now due to rising unemployment and falling income

Impending increase in credit card & auto loan defaults

Continued falling home prices

$50,782

$52,173

$53,349

$54,127

$55,823

$57,734

$59,088$59,398

$58,545$57,920 $57,751 $57,705

$58,036$58,407

$57,648

$46,000

$48,000

$50,000

$52,000

$54,000

$56,000

$58,000

$60,000

$62,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Real Median Family Income ($2006)

Source: CPS

Stagnating Income since 2000

Consumer Credit Outstanding (1959-2007) (in $millions)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

$2.5 Trillion

Source: CEA

Massive Increase in Consumer Indebtedness

Mortgage Debt - All Properties (1949-2006) ($billions)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

19

49

.

19

51

.

19

53

.

19

55

.

19

57

.

19

59

.

19

61

.

19

63

.

19

65

.

19

67

.

19

69

.

19

71

.

19

73

.

19

75

.

19

77

.

19

79

.

19

81

.

19

83

.

19

85

.

19

87

.

19

89

.

19

91

.

19

93

.

19

95

.

19

97

.

19

99

.

20

01

.

20

03

.

20

05

.

$13.5 Trillion

Source: CEA

Massive Increase in Mortgage Debt

Challenges Facing Massachusetts

Economic TrendsDemographic TrendsCost of Living/Cost of HousingStructural Deficits

Massachusetts Economic Trends

Massachusetts real gross domestic product has already declined more than in the prior recession.

-10.0

-5.0

0.0

5.0

10.0

15.0

Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Growth in Current Economic Index, Massachusetts

Recessions: March 1980 - April 1980 (1 month)July1981 - December 1981 (5 months)January 1989 - August 1991 (31 months) (-9.5%)February 2001 - February 2003 (24 months) (-2.5%)April 2008 - present (11 months) (-2.8%)

Initial unemployment claims are higher than in the ‘89-91 recession.

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

Wee

kly

Leve

l, Lo

cal T

ren

d

Massachusetts Weekly Initial Unemployment Claims

Source: Employment and Training Administration, U.S. Department of Labor; UMass Boston

1989-1991

2007-2009

More severe than the last recession, but not as bad as the 89-91 recession.

-10

-8

-6

-4

-2

0

2

4

6

8

10

80 85 90 95 00 05 10

Qu

art

erl

y G

row

th a

t An

nu

al R

ate

s

Employment Growth, Massachusetts vs US

MA US

Source: NEEP, Moody's Economy.com

The pace of decline in Massachusetts may be slowing.

3.6 3.4 3.53.8 3.7 3.6

3.43.0

2.3

0.6

-1.4

-4.4 -4.2

-3.1 -2.8

4.8

2.7

0.8

1.5

0.0

4.8 4.8

-0.2

0.9

2.8

-0.5

-6.3 -6.1

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2006 2007 2008 2009

Qu

art

erl

y G

row

th a

t A

nn

ua

l Ra

tes

Growth in Real Product, Massachusetts Current Economic Index vs. U.S. GDP

MA US

Source: U.S., Bureau of Economic Analysis; Massachusetts, Massachusetts Benchmarks

Projected

Mass Tax Revenues: Another severe revenue crisis

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Jan-

69

Jan-

70

Jan-

71

Jan-

72

Jan-

73

Jan-

74

Jan-

75

Jan-

76

Jan-

77

Jan-

78

Jan-

79

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Pe

rce

nt

Massachusetts Total Revenues for Budget

Growth from Same Month Prior Year

local trend

local level

The capital gains nightmare was not just a dream.103

161

223 359

692

295

268

199

168

184

221

291

290 410 544

769

900

914

1,1

64

337

459

786

1,1

47

1,5

13

1,6

54

2,0

80

1,0

91

873

-

5

10

15

20

25

30

35

40

45

-

500

1,000

1,500

2,000

2,500

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 E

st

2008 …

2009 …

MA

Cap

ital G

ain

s R

ealiz

atio

ns (

$ b

illio

ns)

MA

Cap

ital G

ain

s T

axes (

$ m

illio

ns)

Capital Gains Taxes, Tax Years 1982 to 2009

MA Tax Year Capital Gains Taxes

MA Tax Year Capital Gains Realizations

Long-term capital gains tax rate 0-5%, raisedto 5.3% ef fective 5/02

Federal capital gains tax increaseenacted 11/86 but ef fective 1/87 spurred

sale of capital assets at end ofcalendar 1986

Source: DOR

• Between 2000 and 2007, the population of Massachusetts increased by less than 87,000 (1.4%) – the second slowest increase in New England (after Rhode Island) … and 1/5 the rate in the U.S.

• Since 2000, Massachusetts has suffered a net domestic out-migration of over 305,000 residents.

• This outflow of people has been softened only somewhat by the arrival of about 206,000 foreign immigrants.

Population Trends

Massachusetts Population

5737.0

6016.4

6363.2 6407.6 6431.8 6438.5 6433.7 6429.1 6434.4 6449.8

5000.0

5200.0

5400.0

5600.0

5800.0

6000.0

6200.0

6400.0

6600.0

1980 1990 2000 2001 2002 2003 2004 2005 2006 2007

Popu

latio

n (in

thou

sand

s)

U.S. Bureau of the Census

Population Trends in New England

Population Growth, 2000-2007

1.36%

0.67%

1.86%

2.65%3.13%

6.08%

6.88%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

MA RI VT CT ME NH US

33,292 33,347 31,785 29,041 26,51530,285

27,014

-22,892

-39,506

-48,514

-61,980 -60,053

-49,528

-35,121

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

Foreign Migration Internal Migration

Immigration & Net Domestic Migration

Massachusetts Domestic Net-Migration and Foreign Immigration

-15

-10

-5

0

5

10

15

20

25

30

35

Under 5 5-19 20-24 25-34 35-54 55-64 65+

Massachusetts US

Percent Change in Population by Age Cohort, Massachusetts v. U.S., 2000-2006

Who’s Leaving Massachusetts?

Projected Percent Change in Households by Age Cohort, 2006-2017

The Future Demographics of Massachusetts

Change in Number of Households by Age Cohort: 2006-2017 Massachusetts

40

37,681

-82,548

111,437118,566

14,614

-6,326

-100,000

-50,000

0

50,000

100,000

150,000

18-24 25-34 35-44 45-54 55-64 65-74 75+

Source: U.S. Census Demographic Projections

Of a net increase of 193,500 households, 244,600 are projected to be age 55 +

Cost of Living/Cost of Housing

Greater Boston most expensive metro area in the country

High cost of living is adversely affecting population growth

We are losing the 3rd U.S. Civil War … the battle between states and regions for young people

Boston

Monthly Housing $1,266Monthly Food $ 587Monthly Child Care $1,298Monthly Transportation $ 321Monthly Health Care $ 592Monthly Other Necessity $ 500Monthly Taxes $ 824Monthly Total $5,388

Annual Total $64,656

Raleigh-Durham-Chapel Hill

Monthly Housing $ 779

Monthly Food $ 587Monthly Child Care $ 866Monthly Transportation $ 358Monthly Health Care $ 368Monthly Other Necessity $

369Monthly Taxes $

350Monthly Total $3,677

Annual Total $44,124

A Tale of Two Cities:The Cost of Living Challenge

Source: Economic Policy Institute, “Family Budget Calculator, 2005”

Boston vs. Raleigh

Net Domestic Migration (2000-2006)

Employment Growth(2000-2006)

Boston - 6.0 % -2.0 %

Raleigh +17.8 % +11.9 %

Housing Costs – Top 10 MSAs

1. Honolulu, HI2. San Francisco-Oakland-Fremont, CA3. Santa Cruz-Watsonville, CA4. Oxnard-Thousand Oaks-Ventura, CA5. San Diego-Carlsbad-San Marcos, CA6. Boston-Cambridge-Quincy, MA-NH7. Santa Barbara-Santa Maria-Goleta, CA8. Washington-Arlington-Alexandria, DC-VA-MD-WV9. New York-Northern New Jersey-Long Island, NY-NJ-

PA10. Los Angeles-Long Beach-Santa Ana, CA

Net Domestic Migration Rates (2000-2006) by Housing Cost Decile

-0.21%

0.48%

2.95%

2.01%

3.56%

4.94% 5.07%

5.66%

-1.99%

0.38%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1st Decile 2nd Decile 3rd Decile 4th Decile 5th Decile 6th Decile 7th Decile 8th Decile 9th Decile 10th Decile

Massachusetts State & Local Government in Trouble

Facing a continuing budget crisis

Current deficits are only the tip of the iceberg in the Commonwealth

The cost of state government services is spiraling out of control

Given the rising cost of debt service, public employee pensions, and Medicaid, the Commonwealth is facing a massive long-term “Structural Deficit” that will destroy public services

Price Increases: Total Economy vs. Cost of State and Local Services

2000-2008:I

21.3%

26.8%

40.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Total Economy Private Services State & Local Services

Price of State & Local Services risingtwice as fast as overall prices

A deepening structural deficit in Massachusetts

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Th

ou

san

ds

of D

olla

rs p

er

Mo

nth

Total DOR Taxes, Seasonally Adjusted and Smoothed, vs. Trend

Trend Total Taxes for Budget

Source: DOR, author's calculations

Debt Service, Public Pensions, & Medicaid Payments as % of Massachusetts State Budget (2001-2027)

32.8% 33.5% 35.6% 37.1% 38.8% 40.1% 40.9%45.0% 46.0%

64.4%

90.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2018 2027

Debt Service, Public Pensions, and Medicaidwill devour most of the Mass State Budget

How Do We Solve the Structural Deficit?

Reform inefficient government bureaucracies and government programs Transportation

Public sector union reforms Work rules and job classifications Pension & medical insurance reform

Raise more tax revenue Sales tax, gasoline tax, income tax

Regionalize public services

A New Grand Bargain Reductions in Work Rules and Job

Classifications Public Sector Pension Reform Universal buy-in on Group Health

Insurance Advocate for School Reform Wage Freeze during times of grave

economic crisis Keep public services public