1. Professor Emeritus of Economics October 24, 2015 The New Normal October, 2015

2. GOOD NEWS Relative to the rest of the world’s economies we are in good shape BAD NEWS Our new normal growth rate is significantly below the old normal growth rate October, 2015

3. October 2009 unemployment rate = 10.2 % Septembe r 2014 unemployment rate = 5.9% September 2015 unemployment rate = 5.1% Number employed back to high hit in Jan 2008 148.8 million Number unemployed Oct. 2009 =15.7 million Sept. 2014 = 9.3 million Sept. 2015 = 7.9 million October, 2015

4. September 2015 UNEMPLOYMENT BY LEVEL OF EDUCATION  Less than H.S. 7.9 %  H.S. no college 5.2%  Some college 4.3%  Bachelor’s degree 2.5% or higher Cognitive skills win in today’s labor market STAY IN SCHOOL! October, 2015

5. Unemployment rate – including marginally attached workers and part-time workers SEPT 2000 7.2% Sept 2014 11.8% Sept 2015 10.0% October, 2015

6. NEW NORMAL Participation rate = % population over age of 16 in labor force September 2000 67.4% September 2014 62.7% September 2015 62.4% Between Aug 2015 & Sept. 20015 350,000 worker left the labor force October, 2015

7. NEW NORMAL Employment rate = % of population over the age of 16 employed September 2000 67.1% August 2014 59.4% September 2015 59.2% Between Aug 2015 & Sept 2015 236,000 fewer people working October, 2015

8. September 2015 Population 25 years and over Participation Rate Employment Rate Less than H.S.44.8% 41.3% H.S. no college56.9%54.0% Some college 66.0%63.1% Bachelor’s Degree74.4%72.6% or higher NEW NORMAL STRUCTURAL UNEMPLOYMENT October, 2015

9. Selected States Unemployment – Aug. 2015 Top unemploymentLowest unemployment 1. West Virginia 7.6%1.Nebraska 2.8% 2. Nevada 6.8% 2. North Dakota 2.9% 3. D C 6.8% 3. Hawaii 3.6% 4. New Mexico 6.7% 4. South Dakota 3.7% 5. Alaska 6.6% 5. Utah 3.7% 6. Arizona 6.3% 6. Minnesota 4.0% 7. Mississippi 6.3% 7. Texas 4.1% 8. Alabama 6.2% 8. Montana 4.1% 9. California 6.1% 9. Colorado 4.2% October, 2015

10. Facts 1. Jobs requiring middling skills have declined sharply. 2. Employment in low skill jobs have increased. (service sector) 3. Employment in high skilled occupations have increased significantly. 5.8 million job openings in September October, 2015

11. NEW NORMAL Labor’s share of national income is declining 1947-2001 70% 2010-2014 62% October, 2015

12. Why stagnant wages for many? 1. Globalization of markets 2. Substitution of capital for labor 3. Weakening of workers’ bargaining power 4. Lower price of technology and investment 5. Opportunities to shift capital overseas 6. Massive increase in world supply of labor* since 1980s *Think – China, India, former USSR, Viet Nam, Thailand, Cambodia October, 2015

13. GDP 2013GDP 2014 GDP 2015 Q1 1.9%Q1 -0.9% Q1 0.6% Q2 1.1%Q2 4.6% Q2 3.7% Q3 3.0% Q3 4.3% Q3 1.0%* Q4 3.8% Q4 2.1% GDP GROWTH FOR 2014 = 2.4% GDP GROWTH FOR 2015 = 2.5%* * estimate October, 2015

14. Why do we have slow growth? Multiple explanations 1. Hangover from financial crisis 2. Foreign economic problems 3. Failure of government to spend enough 4. Taxes are too high/too many regulations 5. We have an aging population/shrinking labor force October, 2015

15. Countries that use the Euro = Euro zone Unemployment in the Euro zone is 11% Growth rate in the Euro zone is 0.9% If the Euro zone was a country it would be the second largest economy in the world – 22% of world GDP October, 2015

16. GROUP OF SEVEN – SLOW TO NO GROWTH GDP GROWTH 2015 est. BRITAIN 2.7% U.S. 2.5% GERMANY 2.1% FRANCE 1.1% CANADA 1.0% JAPAN 0.8% ITALY 0.7% October, 2015

17. BRICS Nations Drag on global economy World GDP Growth GDP Rank 2014 2015 est. 8 BRAZIL 0.1%-1.5% 14 RUSSIA 0.6% -3.7% 7 INDIA 7.2% 7.0% 2 CHINA 7.3% 6.9% 34 SOUTH AFRICA 1.4% -1.3% 42% OF WORLD POPULATION 20% OF WORLD GDP October, 2015

18. New normal As China goes, so goes the global economy Facts about China 1. Population 1.4 billion 2. Second largest economy in the world (maybe largest) 3. Accounts for 19% of world GDP 4. Largest exporting nation in the world 5. Second largest importing nation in the world 6. Average growth rate 1989-2015 10.9% 7. China’s current growth rate at 25yr low – 6.9%* *estimate October, 2015

19. What countries will be most affected by China’s slowdown ? % of China’s imports(2014) 1. Japan 18.0% 2. South Korea 14.0% 3. United Sates 11.0% 4. Germany 8.3% 5. Australia 6.6% 6. Brazil 3.8% October, 2015

20. SEPTEMBER 2015 CURRENT ANNUAL INFLATION RATE = 0.0% CURRENT ANNUAL CORE INFLATION RATE = 1.9% (omits food and energy prices) October, 2015

21. AGGREGATE DEMAND C+I+G+X CONSUMER SPENDING INVESTMENT SPENDING GOVERNMENT SPENDING NET EXPORTS – EXPORTS-IMPORTS October, 2015

22. PENT UP DEMAND – RECORD CAR & TRUCK SALES SLOWLY STARTING TO SPEND GAS SAVINGS NET WORTH OF HOUSEHOLDS AT RECORD LEVEL CONFIDENCE UP & DOWN REAL WAGES STILL STAGNANT FOR MANY October, 2015

23. HOUSING MARKET IS STABILIZING CONSTRUCTION IS PICKING UP BUSINESSES HAVE LOTS OF CASH TO SPEND $2 TRILLION IN CASH ABROAD BUSINESS CONFIDENCE IS STAGNANT UNCERTAINTY IS A MAJOR PROBLEM October, 2015

24. EXPORTS ARE SLOWING DOWN Strong dollar Slow global growth EXPORTS ACCOUNT FOR 14% OF OUR GDP October, 2015

25. Trade deficit growing - drag on our economy U.S. Trade Deficit (exports-imports) billions 2013 -$478.394b 2014 -$508.324b 2015 Jan. – Aug -$345.450b Why? Strong dollar – more imports – fewer exports Weak global economy – fewer exports October, 2015

26. ANNUAL BUDGET DEFICIT 2009 $1.4 TRILLION 2010 $1.3 TRILLION 2011 $1.3 TRILLION 2012 $1.1 TRILLION 2013 $ 680 BILLION 2014 $ 483 BILLION 2015 $435 BILLION TOTAL DEBT = $18.4 TRILLION October, 2015

27. GOOD NEWS DEFICIT AS A PERCENT OF GDP IS SHRINKING DECEMBER 2009 10.1% GDP DECEMBER 2010 9.0% GDP DECEMBER 2011 8.7% GDP DECEMBER 2012 7.0% GDP DECEMBER 2013 4.1% GDP DECEMBER 2014 2.8% GDP DECEMBER 2015 2.4% GDP October, 2015

28. FACT Fiscal 2015 Tax revenues are up 8.0% Government spending up 5.2% October, 2015

29. SEQUESTRATION Year Share of GDP Current dollars ( trillions ) 2009 24.4% $3.52 2010 23.4% 3.46 2011 23.4% 3.60 2012 22.0% 3.54 2013 20.8% 3.45 2014 20.3% 3.51 2015 20.6%* 3.68* * Estimate October, 2015

30. Total National Debt 2007 $ 8.506 trillion 2008 $10.024 trillion 2009 $11.909 trillion 2010 $13.561 trillion 2011 $14.790 trillion 2012 $16.066 trillion 2013 $16.738 trillion 2014 $17.824 trillion 2015 $18.397 trillion 2007 - 2015 $9.891 trillion increase October, 2015

31. YR Avg. interest rate INTEREST ON DEBT 2015 2.074% $381.6 billion 2014 2.013% 430.8 billion 2013 1.975% 415.7 billion 2012 2.365% 359.8 billion 2002 4.373% $332.5 billion 2001 5.283% 359.5 billion 2000 6.665%* 361.9 billion *This used to be the average rate October, 2015

32. 2000 Avg. interest on debt = 6.665% 2015 national debt = $18.397 trillion 6.665% X $18,397 trillion = $1.226 trillion Actual interest paid 2015 = $381.6 billion $844.4 billion in additional interest expense if average rate returned to 2000 level. October, 2015

33. Interest rates have been at zero since December 2008 – Approx. 7 years The last time the Federal Reserve Bank raised interest rates was July 2006, more than 9 years ago October, 2015

34. Why is the Federal Reserve Bank reluctant to raise interest rates? 1. Our economy is too weak. 2. Dollar is already too strong. 3. Inflation is too low. 4. Increased cost of servicing national debt. 5. The International Monetary Fund and the European Central Bank say “don’t do it now!” 6. FRB can’t find the Phillips Curve. I October, 2015

35. The Federal Reserve stopped quantitative easing in October 2014. The European Central Bank started quantitative easing in January 2015. October, 2015

36. BANKS CURRENTLY STILL HAVE LOTS OF EXCESS RESERVES $2.5 TRILLION BANKS STILL HAVE HIGH LENDING STANDARDS NOT OVERLY ANXIOUS TO MAKE LONG-TERM LOANS AT LOW INTEREST RATES October, 2015

37. HEADWINDS FOR 2015 1. SLOW GROWTH IN EUROPE 2. SLOW GROWTH IN CHINA/ASIA 3. U.S. STRUCTURAL UNEMPLOYMENT PROBLEM 4. ISIS IS STILL ALIVE AND WELL 5. FRACTIOUS AND DYSFUNCTIONAL POLITICS 6. GROWING DIVIDE IN OUR INCOME DISTRIBUTION 7. MOTHER NATURE NEW NORMAL OUR FUTURE GROWTH NOW DEPENDS GREATLY ON THE WORLD ECONOMY. October, 2015

38. Reality Easy money is really only a lubricant for growth. It can’t be the underlying driver of growth. Central Banks are pushing on a string The world is currently awash with cash –yet world growth is subpar. October, 2015

39. REASONS TO BE SLIGHTLY OPTIMISTIC 1. HOUSEHOLD NET WORTH AT RECORD LEVEL 2. INFLATION NON-EXISTANT 3. WE ARE GROWING FASTER THAN MOST OF OUR COMETITORS 4. GAS IS CHEAP AND WILL REMAIN CHEAP THE REST OF THE YEAR 5. OUR GLASS IS MORE THAN HALF FULL October, 2015