Five Myths About America

1
Five Myths About Americas Future Economic Decline

• Stephen J. Rose,
• Georgetown Center on Education and the Work Force
• September, 2012

2
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.

3
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

4
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.

5
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 timecomparative
  statics versus longitudinal.
• Many researchers cook their results.

6
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 livesand 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)

7
Myth 1The 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

8
Steady Long Run Economic Growth
9
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

10
Broad Expansion of Educational Attainment
Source Current Population Surveys and PUMS 60
11
Myth 2 With the decline in manufacturing, most
service jobs are dead-end and low-paying

12
Service Jobs are mainly in offices, health care,
education, and communications.
13
With rising education, job quality has improved
Source Current Population Surveys and PUMS 60
14
Change in Male Employment
15
Change in Female Employment
16
Myth 3 The Middle Class has shrunk and stagnated
17
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.

18
Life Cycle Effect
19
Absolute Measure of Well-Being Confusion about
Median Income
20
Growing Inequality but Significant Growth in
Middle
Source CBO
21
Myth 4 We are Doomed by Debt

• Remember for every debt holder, there is a
  corresponding asset from the person doing the
  lending

22
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.

23
Student Debt is Rising

• 70 of students dont 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.

24
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 couldnt 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.

25
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.

26

• Myth 5 China Will Displace US as Dominant World
  Power

27
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.

28
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.

29
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.

30
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.