october 23, 2015 william r. emmons federal reserve bank of st. louis [email protected]...

October 23, 2015

William R. EmmonsFederal Reserve Bank of St. Louis

[email protected]

These comments do not necessarily represent the views of the Federal Reserve Bank of St. Louis or

the Federal Reserve System.

The Economy in 2020:Growth or Stagnation?

1

21st Annual APTC Property Tax

Seminar

mailto:[email protected]

2

The Economy in 2020:Growth or Stagnation?

My prediction: Both—it depends on how you define it. A global growth paradox

Living standards are rising around the world. The U.S. (and other rich countries’) share of world population is

shrinking; the poorest countries are growing fastest. The paradox: Despite growth in living standards everywhere,

the median global citizen may be poorer in 2020 than today.

U.S. economy in 2020: Growth and stagnation Overall U.S. economic output will be larger in 2020. The rewards are going increasingly to a few demographic

groups defined by age, education and race or ethnicity. The fastest-growing parts of U.S. population are benefiting less. Our home-grown growth paradox:

Living standards are likely to stagnate for the “typical” citizen even though overall GDP and wealth are increasing.

3

Vast Differences in the Standard of Living Around the World

Source: International Monetary Fund, 2009

Median per-capita income in U.S. dollars

Rich countries

Middle-income countries

Poor countries

4

Economic Growth Generally is Faster in Countries that Are Poorer

Source: International Monetary Fund, World Economic Outlook, April 2015

Rich countries Less-developed countries

5

U.S. Share of World Population Is In Decline

Source: U.S. Census Bureau

Percent

6

Population is Slow-Growing or Stagnant in Other Advanced Economies, Too


Percent

7

Populations in Less-Developed Countries Are Growing Faster


Percent

8

Fastest Population Growth in the Least-Developed Countries (Africa and S. Asia)


Percent

9

Split the world into three regions Advanced (rich) countries Developing (middle-income) countries Least-developed (poor) countries

Highlight two countervailing trends at work Incomes grow fast in poor countries, raising average incomes

locally and globally. Population also grows fast in poor countries, lowering mean and

median global incomes (because more poor people get counted).

Which force will win—rising quality or quantity of poor people? Income must grow very fast in poor countries to offset the relative

shrinkage of population in rich countries. From a global perspective, adding a person with $1,000 annual

income—even if it is growing fast—cannot offset the “loss” of a person making a stagnant $50,000 income.

Hypothetical Illustration of the Global Growth Paradox

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The Global Growth Paradox: A Race Between Income and Population Growth

Source: International Monetary Fund, 2009

Median per-capita income in U.S. dollars

Rich countries: Slow

population growth

Middle-income countries: Moderate population

growth

Poor countries: Fast population

growth

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Dollars (log

scale)

A Simulated Example With 100 People in the World

People in rich

countries (17% of global

population)

People in middle-income countries

(70% of global population)

People in poor countries (13% of global population)

People ranked by income within their country group (highest to lowest)

12

Income Rankings Are Similar Using Mean or Median

2015 2020 Percent changeAdvanced countries’ mean income $195,622 Middle countries’ mean income $60,150 Poor countries’ mean income $38,462

Advanced countries’ median income $57,648 Middle countries’ median income $560 Poor countries’ median income $26

Global mean income $80,361 Global median income $1,983

13

Dollars (log

scale)

2020 Scenario: Income Grows in Every Region; Population Shifts from Rich to Poor

People in rich

countries (13% of global

population)

People in middle-income countries

(70% of global population)

People in poor countries (17% of global population)

People ranked by income within their country group (highest to lowest)

14

Mean and Median Incomes Grow Faster in Middle and Poor Countries

2015 2020 Percent changeAdvanced countries’ mean income $195,622 $240,071 22.7 Middle countries’ mean income $60,150 $90,226 50.0 Poor countries’ mean income $38,462 $86,674 125.4

Advanced countries’ median income $57,648 $58,320 1.2 Middle countries’ median income $560 $840 50.0 Poor countries’ median income $26 $40 56.3

Global mean income $80,361 ?? ??Global median income $1,983 ?? ??

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Global Mean Income Increases...



Global mean income $80,361 $105,635 31.5Global median income $1,983 ?? ??

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...But Global Median Income Declines



Global mean income $80,361 $105,635 31.5Global median income $1,983 $1,694 -14.6

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You are a pet lover. Last year you owned one cat and two dogs. Your cat weighed 8 pounds; each dog weighed 12 pounds. Mean weight of pets = 10.7 lbs.; median weight of pets = 12 lbs.

What‘s Going On Here?My Pet Example

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Today you own two heavier cats and one heavier dog. Your cats weigh 10 pounds each; your dog weighs 14 pounds. Mean weight of pets = 11.3 lbs.; median weight of pets = 10 lbs.


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Results of growing animals and changing mix The mean weight of all of your pets increased (10.7 to 11.3 lbs.). The mean weight of both your cats and your dogs increased (cats

increased from 8 to 10 lbs., dogs from 12 to 14 lbs.). But the median weight of your pets decreased.


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Results of growing animals and changing mix The mean weight of all of your pets increased (10.7 to 11.3 lbs.). The mean weight of both your cats and your dogs increased (cats

increased from 8 to 10 lbs., dogs from 12 to 14 lbs.). But the median weight of your pets decreased.

The key point An adverse change in the composition of the group can reverse

overall trends that occur in each of the individual groups.


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Back to the Hypothetical Example of the Global Growth Paradox

Dollars (log

scale)

Median

= 50th percentile

Ranking of all people in the world (highest to lowest)

2015 global income distribution

22

2020 Income Distribution Lies Above 2015 Distribution At the Top—Rich Get Richer

Dollars (log

scale)

Median

= 50th percentile



Ranking of all people in the world (highest to lowest)

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But the Growing Number of Poor People Pulls Down the Median

Dollars (log

scale)

Median

= 50th percentile

Global income ranking (highest to lowest)


24

2020 Median Global Income Is Below 2015 Median Global Income

Dollars (log

scale)

Median

= 50th percentile

Global income ranking (highest to lowest)



25

So Will the World Be Richer in 2020 Than It Is Today?

Yes and no. Within each country or even within groups of similar countries,

it is likely that both mean and median income and wealth will be higher in 2020 than in 2015.

But the composition of the world’s population is changing. Poor countries are growing fast both in terms of income and

population. Rich countries are growing slowly in both income and

population terms.

It is possible that global mean income (and top incomes) will increase while global median income stagnates or declines.

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The U.S. Version of the Global Growth Paradox

Income and wealth are likely to increase in the U.S. between 2015 and 2020 as measured by Overall means = real GDP and real household wealth. Sub-group means and medians (many but not all).

But overall median income and median wealth may stagnate or decline, as they have for many years. Overall (mean) income and wealth are likely to grow slowly. Some low-income and low-wealth groups are growing in size.

How you ask the question determines how you answer it The approach I have been pursuing: The demographics of

income and wealth. Key demographics: Birth year, age, education, race or ethnicity. Prediction: Young, less-educated and non-white Americans will

continue to struggle as they become a larger share of population.

Annual Growth in Real GDPPercent

5-Year Moving Average Annual Growth in Real GDPPercent

20151005009590Source: Bureau of Economic Analysis /Haver Analytics

5

4

3

2

1

0

-1

-2

-3

5

4

3

2

1

0

-1

-2

-3 27

The U.S. Economy Will Continue to Grow—But More Slowly

Source: Bureau of Economic Analysis Annual data through 2014

Percent

Last year of 3% growth: 2005

Average annualized real-GDP growth,

2006-14:1.4%

Growth Rate of Real Potential GDPPercent

Contribution of Labor Input to Real-GDP GrowthPercent

3025201510050095908580757065605550Source: Congressional Budget Office /Haver Analytics

6

5

4

3

2

1

0

6

5

4

3

2

1

0 28

The US Economy‘s “Speed Limit“ Has Declined to 2 Percent

Source: Congressional Budget Office Projections as of Aug. 25, 2015

Percent

Growth rate of real potential GDP

History CBO forecast

Contribution to GDP growth of

labor inputs

Growth Rate of Real Potential GDPPercent


3025201510050095908580757065605550Source: Congressional Budget Office /Haver Analytics

6

5

4

3

2

1

0

6

5

4

3

2

1

0 29

Contributions of Both Productivity and Labor Input Have Declined


Percent

Contribution to GDP growth of productivity

improvements

Contribution to GDP growth of

labor inputs

Growth rate of real potential GDP


30

An Important Reason Labor Inputs are Slowing—Shrinking Share of Youth


Percent

Contribution of Productivity Improvements to Real-GDP GrowthPercent


3025201510050095908580757065605550Source: Haver Analytics

6

5

4

3

2

1

0

6

5

4

3

2

1

0 31

Productivity Growth Should Return to Normal; Population Growth is Slow


Percent

Contribution to GDP growth of productivity

improvementsContribution to GDP growth of

labor inputs


3-Month Nominal T-Bill Yield Implied 20 Years in the FuturePercent

3-Month Inflation-Adjusted T-Bill Yield Implied 20 Years in the FuturePercent

2015100500Source: Federal Reserve Board /Haver Analytics

7

6

5

4

3

2

1

0

7

6

5

4

3

2

1

0 32

Confirming Evidence: Investors Expect Very Low Interest Rates for Many Years

Aug. 28, 2015:3.57%

nominal short-term

yield in 2035

Percent

Aug. 28, 2015:1.45% real short-term

yield in 2025

Source: Federal Reserve Board Daily data through Aug. 28, 2015

Real Household WealthAverage level in 1995 equals 100

Real GDP With CBO Forecast through 2025Average level in 1995 equals 100

25201510050095908580757065605550Source: Haver Analytics

240200

160

120

80

40

20

10

240200

160

120

80

40

20

10 33

Real Household Wealth Likely to Grow Slowly

Sources: Congressional Budget Office, Federal Reserve Board Projections as of Aug. 25, 2015

Index values equal 100 in

1995

Real household wealth

Real GDP

34

Mean Income Grew Overall and for Most Demographic Groups, 1989-2013

Source: Federal Reserve Board, Survey of Consumer Finances

Percent

35

Mean Wealth Grew Overall and for Most Demographic Groups, 1989-2013


Percent

36

Median Income Growth Was Weak During 1989-2013, Hinting At Composition Effects


Percent

37

Median Wealth Declined Overall and for Several Groups, 1989-2013


Percent

38

This Pattern Likely to Continue—Typical Family Struggles Despite Overall Growth


Percent

39

Clearest Illustration of the Growth Paradox in the U.S.—Race and Ethnicity

Virtually all measures of income and wealth have increased for each major racial and ethnic group, 1989-2013.

But overall measures of median income and median wealth—representing the experience of the “typical” American family—have declined.

How? The low-income and low-wealth parts of the population increased as share of the total.

This pattern is likely to continue.

40

Overall Median Income and Wealth Stagnated While Most Groups Enjoyed Growth


Percent

41

The Non-White Population is Growing Faster than the White Population


People

42

Non-White Groups Generally Have Lower Incomes and Wealth than Whites


Dollars

43



Dollars

44



Dollars

45



Dollars

46

Non-White Groups Represent Increasing Shares of the Population


Share of population

Share in 1940

0.4%

1.5%

9.8%

88.3%

47



Share of population

Share in 1970

1%

4%

11%

84%

48



Share of population

Share in 2000

6%

13%

12%

69%

49



Share of population

Share in 2010

7%

16%

13%

64%

50



Share of population

Share in 2020

6%

19%

14%

61%

51



Share of population

Share in 2030

7%

22%

14%

57%

52



Share of population

Share in 2040

8%

25%

14%

53%

53



Share of population

Share in 2050

9%

27%

15%

49%

54

In Sum: Will the U.S. and Global Economies Be Richer in 2020?

Yes and no—total and average (mean) incomes and wealth will be greater than today.

But the typical (median) U.S. and global citizen may be no better off.

Source of the global and U.S. “growth paradoxes:” A race between economic improvement and fast growth in the number of disadvantaged citizens.

Our national and global challenges: Increase the overall growth rate. Make growth more inclusive so it benefits the least-well-

off as much as possible. Broaden the public debate to focus on median as well as

mean measures of economic progress.

october 23, 2015 william r. emmons federal reserve bank of st. louis [email protected]...

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