October 23, 2015 William R. Emmons Federal Reserve Bank of St. Louis 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

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  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 countriesLess-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 Source: U.S. Census Bureau Percent

7 Populations in Less-Developed Countries Are Growing Faster Source: U.S. Census Bureau Percent

8 Fastest Population Growth in the Least- Developed Countries (Africa and S. Asia) Source: U.S. Census Bureau 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

10 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

11 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 Percent change Advanced 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 Percent change Advanced countries’ mean income $195,622 $240, Middle countries’ mean income $60,150 $90, Poor countries’ mean income $38,462 $86, Advanced countries’ median income $57,648 $58, Middle countries’ median income $560 $ Poor countries’ median income $26 $ Global mean income $80,361?? Global median income $1,983??

15 Global Mean Income Increases Percent change Advanced countries’ mean income $195,622 $240, Middle countries’ mean income $60,150 $90, Poor countries’ mean income $38,462 $86, Advanced countries’ median income $57,648 $58, Middle countries’ median income $560 $ Poor countries’ median income $26 $ Global mean income $80,361$105, Global median income $1,983??

16...But Global Median Income Declines Percent change Advanced countries’ mean income $195,622 $240, Middle countries’ mean income $60,150 $90, Poor countries’ mean income $38,462 $86, Advanced countries’ median income $57,648 $58, Middle countries’ median income $560 $ Poor countries’ median income $26 $ Global mean income $80,361$105, Global median income $1,983$1,

17  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

18  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.  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. What‘s Going On Here? My Pet Example

19  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.  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.  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. What‘s Going On Here? My Pet Example

20  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.  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.  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. What‘s Going On Here? My Pet Example

21 Back to the Hypothetical Example of the Global Growth Paradox Dollars (log scale) Median = 50 th percentile Ranking of all people in the world (highest to lowest) 2015 global income distribution

Income Distribution Lies Above 2015 Distribution At the Top—Rich Get Richer Dollars (log scale) Median = 50 th percentile 2020 global income distribution 2015 global income distribution Ranking of all people in the world (highest to lowest)

23 But the Growing Number of Poor People Pulls Down the Median Dollars (log scale) Median = 50 th percentile Global income ranking (highest to lowest) 2015 global income distribution

Median Global Income Is Below 2015 Median Global Income Dollars (log scale) Median = 50 th percentile Global income ranking (highest to lowest) 2020 global income distribution 2015 global income distribution

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  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.

26 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.

27 The U.S. Economy Will Continue to Grow—But More Slowly Source: Bureau of Economic AnalysisAnnual data through 2014 Percent Last year of 3% growth: 2005 Average annualized real-GDP growth, : 1.4%

28 The US Economy‘s “Speed Limit“ Has Declined to 2 Percent Source: Congressional Budget OfficeProjections as of Aug. 25, 2015 Percent Growth rate of real potential GDP HistoryCBO forecast Contribution to GDP growth of labor inputs

29 Contributions of Both Productivity and Labor Input Have Declined Source: Congressional Budget OfficeProjections as of Aug. 25, 2015 Percent Contribution to GDP growth of productivity improvements Contribution to GDP growth of labor inputs Growth rate of real potential GDP HistoryCBO forecast

30 An Important Reason Labor Inputs are Slowing—Shrinking Share of Youth Source: U.S. Census Bureau Percent

31 Productivity Growth Should Return to Normal; Population Growth is Slow Source: Congressional Budget OfficeProjections as of Aug. 25, 2015 Percent Contribution to GDP growth of productivity improvements Contribution to GDP growth of labor inputs HistoryCBO forecast

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 BoardDaily data through Aug. 28, 2015

33 Real Household Wealth Likely to Grow Slowly Sources: Congressional Budget Office, Federal Reserve BoardProjections 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, Source: Federal Reserve Board, Survey of Consumer Finances Percent

35 Mean Wealth Grew Overall and for Most Demographic Groups, Source: Federal Reserve Board, Survey of Consumer Finances Percent

36 Median Income Growth Was Weak During , Hinting At Composition Effects Source: Federal Reserve Board, Survey of Consumer Finances Percent

37 Median Wealth Declined Overall and for Several Groups, Source: Federal Reserve Board, Survey of Consumer Finances Percent

38 This Pattern Likely to Continue—Typical Family Struggles Despite Overall Growth Source: Federal Reserve Board, Survey of Consumer Finances 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,  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 Source: Federal Reserve Board, Survey of Consumer Finances Percent

41 The Non-White Population is Growing Faster than the White Population Source: Federal Reserve Board, Survey of Consumer Finances People

42 Non-White Groups Generally Have Lower Incomes and Wealth than Whites Source: Federal Reserve Board, Survey of Consumer Finances Dollars

43 Non-White Groups Generally Have Lower Incomes and Wealth than Whites Source: Federal Reserve Board, Survey of Consumer Finances Dollars

44 Non-White Groups Generally Have Lower Incomes and Wealth than Whites Source: Federal Reserve Board, Survey of Consumer Finances Dollars

45 Non-White Groups Generally Have Lower Incomes and Wealth than Whites Source: Federal Reserve Board, Survey of Consumer Finances Dollars

46 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 1.5% 9.8% 88.3%

47 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 4% 11% 84%

48 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 13% 12% 69%

49 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 16% 13% 64%

50 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 19% 14% 61%

51 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 22% 14% 57%

52 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 25% 14% 53%

53 Non-White Groups Represent Increasing Shares of the Population Source: Federal Reserve Board, Survey of Consumer Finances Share of population Share in % 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.