Jason Furman slides on President Obama's economic record and the challenges ahead

President Obama’s Economic Record and the Challenges Ahead

Jason FurmanChairman, Council of Economic Advisers

Resolution FoundationLondon, United Kingdom

November 17, 2016

Table of Contents

2

1. The Recent Good…

2. …But the Longer-Term Bad

3. Effects of Selected Obama Administration Policies

4. The Worldwide Productivity Growth Slowdown

5. The Especially Large Increase in U.S. Inequality

6. The Unique U.S. Challenge of Labor Force Participation

7. Next Steps for U.S. Policy

Table of Contents

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U.S. Recovery Comparatively Strong

4Note: Population data for euro area and United Kingdom are quarterly interpolations of annual data.Source: National sources via Haver Analytics; CEA calculations.

Euro Area

United States

Japan

2016:Q3

United Kingdom

90

92

94

96

98

100

102

104

106

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Real Gross Domestic Product per CapitaIndex (Pre-Crisis Peak = 100)

U.S. Unemployment Rate Has Consistently Fallen Below Expectations

5Note: Annual forecasts are current as of March of the stated year. Shading denotes recession.Source: Blue Chip Economic Indicators; Bureau of Labor Statistics, Current Population Survey.

4

5

6

7

8

9

10

11

2008 2010 2012 2014 2016 2018 2020

Unemployment Rate and Consensus Forecasts

2012 Forecast

2013 Forecast

2014 Forecast

2011 Forecast

2010 Forecast

Percent of Labor Force

2015 Forecast

Since the End of 2012, Real Wages Have Grown Nearly 20 Times Faster than Between 1980 and 2007

6Note: Shading denotes recession.Source: Bureau of Labor Statistics; CEA calculations.

17.50

18.00

18.50

19.00

19.50

20.00

20.50

21.00

21.50

22.00

1980 1985 1990 1995 2000 2005 2010 2015

Real Hourly Earnings for Private Production and Nonsupervisory Employees, 1980-2016

2015 Dollars

1980-2007 Pace:+0.1% Per Year

Pace Since End of 2012:

+1.4% Per Year

Oct-16

Real Wages Have Grown Faster Over the Current Business Cycle Than in Any Cycle Since the Early 1970s

7Note: Wages for private production and nonsupervisory workers.Source: National Bureau of Economic Research; Bureau of Labor Statistics, Real Earnings; CEA calculations.

-1.4

-2.1

-0.2

0.5 0.3

0.9

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Start DateEnd Date

Nov-1973Jan-1980

Jan-1980Jul-1981

Jul-1981Jul-1990

Jul-1990Mar-2001

Mar-2001Dec-2007

Dec-2007Oct-2016

Percent Change, Annual Rate

Real Hourly Wage Growth Over Business Cycles(Cycle Peak to Cycle Peak)

In 2015, Income Increased for Households Across Distribution, With Largest Gains at Bottom and Middle

8Source: Census Bureau; CEA calculations.

7.9

6.35.5 5.2 5.4

4.1

2.9

0

1

2

3

4

5

6

7

8

9

10th 20th 40th 50th(Median)

60th 80th 90th

Growth in Real Household Income by Percentile, 2014-2015Percent

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Middle-Class Income Growth Has Slowed in Recent Decades

10

Note: Income levels from the Census Bureau are deflated with the CPI-U-RS price index, and income levels from the Congressional Budget Office (CBO) are deflated with the personal consumption expenditures price index. CBO median income is extended before 1979 and after 2013 with the growth rate of Census median household income.Source: World Wealth and Income Database; Census Bureau; Congressional Budget Office; CEA calculations.

1948-1973 1973-2015Median Family Income

(Census Bureau)3.0% 0.4%

Median Household Income with Benefits (CBO, adj. for household size)

N/A 0.5%

Median Household Income with Gov't Transfers/Taxes

(CBO, adj. for household size)N/A 1.0%

Annual Real Middle-Class Income Growth

Drivers of Income Growth: Productivity, Inequality, and Participation

11Source: Bureau of Labor Statistics, Productivity and Costs; World Wealth and Income Database; Bureau of Labor Statistics, Current Population Survey; CEA calculations.

1948-1973 1973-2015

Income Shares

Top 1 Percent 11% → 8% 8% → 18%

Bottom 90 Percent 66% → 68% 68% → 52%Labor Force Participation Rate

Men, 16 and Older 87% → 79% 79% → 69%Women, 16 and Older 33% → 45% 45% → 57%

Determinants of Middle-Class Income Growth

Labor Productivity Growth (Annual Average) 2.8% 1.8%

Some Thought Experiments

12

Note: These thought experiments are intended to demonstrate the importance of these three factors for middle-class incomes. They do not consider second-order effects or interactive effects. The first thought experiment assumes that an increase in productivity is associated with an equal increase in the Census Bureau’s mean household income. The second thought experiment uses the Census Bureau’s mean income of the middle quintile as a proxy for median income. The third thought experiment assumes that newly-participating women will have the same average earnings as today’s working women. The first and third thought experiments assume that income gains are distributed proportionally such that mean and median incomes grow at the same rate. Dollar gains are calculated off a base of the Census Bureau’s median household income in 2013. The fourth thought experiment compounds the effects of the first three.Source: World Top Incomes Database; Census Bureau; Congressional Budget Office; Bureau of Labor Statistics, Current Population Survey; Bureau of Economic Analysis; CEA calculations.

Thought Experiment Factor Base PeriodPercentage Impact on 2015 Average

Income

Income Gain to 2015 Typical Household

Productivity Total Factor Productivity Growth

1948-1973 65% $37,000

Inequality Share of Income Earned by Middle 20%

1973 19% $10,000

Participation Female Labor Force Participation Rate

1948-1995 6% $4,000

Combined Impact All of the Above 108% $61,000

Counterfactual Scenarios for Productivity, Equality, and Participation

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Fiscal Response to the Great Recession Was Larger and More Sustained Than Just the Recovery Act

14

0

1

2

3

4

5

6

7

8

2009 2010 2011 2012

Recovery Act Subsequent Fiscal Measures Automatic Stabilizers

Program Year

Fiscal Expansion as a Percentage of GDP in Each Program Year, United States

Percent

Source: Congressional Budget Office (2014); Bureau of Economic Analysis, National Income and Product Accounts; CEA calculations.

Fiscal Situation Has Improved, But Debt-to-GDP Ratio Still Rising

15Source: Office of Management and Budget.

9.8

8.7 8.5

6.8

4.1

2.8 2.53.2

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015 2016

Federal Budget DeficitPercent of Fiscal Year GDP

2017 Continuation of Current Policies

2011 Continuation of Current Policies

0

30

60

90

120

150

180

2000 2005 2010 2015 2020 2025 2030 2035 2040

Comparison of Publicly Held DebtPercent of GDP

The Affordable Care Act Has Driven the Uninsured Rate Below 10 Percent For the First Time Ever

16Source: CEA analysis of NHIS and supplemental data described in CEA (2014)Note: Data are annual back to 1989 and generally bi-annual before that. Estimates for 2016 reflect only the first quarter.

0

5

10

15

20

25

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Share of Population Without Health InsurancePercent

ACA 1st Open Enrollment

Creation of Medicare &

Medicaid

2016Q1

5.2

4.14.4

2.4

1.1

-0.6

-2

-1

0

1

2

3

4

5

6

7

Private Insurance Medicare

2000-2007

2007-2010

2010-2014

Growth in Real Per-Enrollee Spending by PayerAverage annual percent growth

Health Care Spending Per Enrollee Has Grown Exceptionally Slowly in Both the Public and Private Sectors

17Source: Centers for Medicare and Medicaid Services; Bureau of Economic Analysis; CEA calculations.Note: Medicare spending growth for the 2000-2007 period has been adjusted to remove the effect of the creation of Medicare Part D.

Higher State and Local Minimum Wages Have Driven Bottom-End Wage Growth

18

Note: Bars show percent changes from 2012:Q2 to 2016:Q2 using not-seasonally-adjusted average weekly earnings; the category of States that have increased minimum wages since 2013 excludes those that only index their minimum wage to inflation.Source: Bureau of Labor Statistics, Current Employment Statistics; CEA calculations.

0

3

6

9

12

15

18

Earnings Growth Job Growth

States that have raised the minimum wage since 2013Have not raised the minimum wage since 2013

Earnings and Job Growth in Leisure & Hospitality Since the President's 2013 Call to Raise the Minimum Wage

Percent Change, 2012:Q2–2016:Q2

Historic Investments in Higher Education

19Source: College Board (2015).

Total Pell Expenditures

(left axis)

Number of Recipients (right axis)

0

1

2

3

4

5

6

7

8

9

10

0

5

10

15

20

25

30

35

40

45

50

1980 1984 1988 1992 1996 2000 2004 2008 2012

Pell Expenditures Over TimeBillions of 2014 Dollars Millions of Recipients

A Historic Reduction in Income Inequality

20Source: Department of the Treasury, Office of Tax Analysis.

-15

-10

-5

0

5

10

15

20

Change in After-Tax Income by Income Percentile: Changes in Tax Policy Since 2009

and ACA Coverage Provisions, 2017Percent Change in After-Tax Income

The Financial Sector is More Resilient, With Higher Minimum Capital Ratios for Banks

21Note: Includes data for banks and bank holding companies (BHCs).Source: Federal Reserve Bank of New York.

Less than $50bn Assets

$50-500bn Assets

Greater than $500bn Assets

2016:Q2

4

6

8

10

12

14

2001 2003 2005 2007 2009 2011 2013 2015

Tier 1 Common Equity Ratios by Bank SizePercent of Risk-Weighted Assets

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Average Annual Productivity Growth Has Slowed in All of the G-7 Economies

23Source: Conference Board, Total Economy Database; CEA calculations.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

UnitedStates

Canada Japan Germany France UnitedKingdom

Italy

1995-2005 2005-2015

Labor Productivity Growth, G-7 CountriesPercent, Annual Rate

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The United States Has Seen Faster Growth and Higher Levels of Income Inequality Than Other Major Advanced Economies

25Source: World Wealth and Income Database.

2015

4

6

8

10

12

14

16

18

20

1975 1980 1985 1990 1995 2000 2005 2010 2015

United States United KingdomCanada FranceItaly JapanGermany

Share of Income Earned by Top 1 Percent, 1975-2015Percent

Competitive Explanation: Increased Demand for Skills

26

Note: Ratio of median annual earnings of full-time, full-year workers over age 25 with a bachelor’s degree only to median annual earnings of full-time, full-year workers over age 25 with a high school degree only. Prior to 1992, bachelor’s degree is defined as four years of college.Source: Bureau of Labor Statistics, Current Population Survey (Annual Social and Economic Supplement); CEA calculations.

2015

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1975 1980 1985 1990 1995 2000 2005 2010 2015

College Earnings Premium, 1975-2015Earnings Ratio

Competitive Explanation: Slowdown in the Growth of the Supply of Skills

27Source: Calculations by Claudia Goldin and Lawrence Katz.

1982

6789

1011121314151617

1875 1890 1905 1920 1935 1950 1965 1980

Mean Years of Schooling at Age 30, U.S. Native-Born, by Year of Birth, 1876-1982

Mean Years of Schooling Completed

Year of Birth

1876-1951Trend

1951-1982 Trend

Noncompetitive Explanation: Worker Bargaining Power Has Been Reduced

28

Note: Total employment from 1901 to 1947 is derived from estimates in Weir (1992). For 1948 to 2015, employment data are annual averages from the monthly Current Population Survey. Minimum wage adjusted for inflation using the CPI-U-RS.Source: Troy and Sheflin (1985); Bureau of Labor Statistics, Current Population Survey; Weir (1992); World Wealth and Income Database; Department of Labor; Bureau of Labor Statistics, Consumer Prices; CEA calculations.

2015

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

1960 1970 1980 1990 2000 2010

Real Value of the Federal Minimum Wage, 1960–20152015 Dollars

Troy and Sheflin (1985) CPS:

Membership

0

10

20

30

40

50

60

70

80

1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Union Membership as a Share of Total Employment and Bottom 90 Percent Income Share, 1915-2015

Percent

Bottom 90 Percent Share of Income

2015

Noncompetitive Explanation: Increasing Dispersion in Returns to Invested Capital Across Firms

29

Note: The return on invested capital definition is based on Koller, Goedhart, and Wessels (2015), and the data presented here are updated and augmented versions of the figures presented in Chapter 6 of that volume. The McKinsey data includes McKinsey analysis of Standard & Poor’s data and exclude financial firms from the analysis because of the practical complexities of computing returns on invested capital for such firms.Source: Koller, Goedhart, and Wessels (2015); McKinsey & Company; Furman and Orszag (2015).

Median

90th Percentile

2014

75th Percentile

25th Percentile0

20

40

60

80

100

120

1965 1975 1985 1995 2005 2015

Return on Invested Capital Excluding Goodwill, U.S. Publicly-Traded Nonfinancial Firms

Percent

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A Troubling Trend: Declining Prime-Age Labor Force Participation

31Source: Bureau of Labor Statistics, Current Population Survey; CEA calculations.

86

88

90

92

94

96

98

100

1948 1958 1968 1978 1988 1998 2008

Percent

1948-2007Trend

Oct-16

Prime-Age Male Labor Force Participation Rate

30

40

50

60

70

80

90

100

1948 1958 1968 1978 1988 1998 2008

Percent

1948-2007Trend

2000-2007Trend

Oct-16

Prime-Age Female Labor Force Participation Rate

Declining Prime-Age Male Participation Has Been Concentrated Among Men with Less Educational Attainment

32Source: Bureau of Labor Statistics, Current Population Survey (Annual Social and Economic Supplement); CEA calculations.

High School or Less Some College

Bachelor's or Higher2016

80

82

84

86

88

90

92

94

96

98

100

1964 1974 1984 1994 2004 2014

Prime-Age Male Labor Force Participation Rate by Educational Attainment, 1964-2016

Percent

Recent U.S. Experience Diverges from the United Kingdom

33

United Kingdom

United States

60

61

62

63

64

65

66

67

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Labor Force Participation, 2007-2016Percent, Centered Three-Month Moving Average

Aug-16

Sep-16

Source: U.S. Bureau of Labor Statistics, Current Population Survey; U.K. Office of National Statistics, Labour Force Survey.

Despite Flexible Labor Markets, the United States Ranks Towards the Bottom of the OECD in the Share of Prime-Age Men and Women in the Labor Force

34Source: Organisation for Economic Co-operation and Development.

70

75

80

85

90

95

100

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2015 1990

Prime-Age Male Labor Force Participation RatePercent of Population

30

40

50

60

70

80

90

100

Slov

enia

Swed

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2015 1990

Prime-Age Female Labor Force Participation RatePercent of Population

U.S. Labor Market Has High Flexibility But Low Supportiveness According to OECD’s Going for Growth Indicators

35Source: Organisation for Economic Co-operation and Development, Going for Growth 2016; CEA calculations.

Percentile Rank (100 = Most Flexible/Most

Supportive)Measures of Labor Market Flexibility

Overall Labor Market Regulation (2014) 100Employment Protection for Regular Employment (2013) 100Minimum Cost of Labor (2014) 96Coverage of Collective Bargaining Agreements (2013) 94

Measures of Institutional Labor Market SupportExpenditure on Active Labor Market Policies per Unemployed (2013) 6Net Childcare Costs, Couples (2012) 10Implicit Tax on Returning to Work, Second Earner (2012) 10

OECD Going for Growth Indicators

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Selected Policies for Inclusive, Sustainable Growth

37

Productivity• Investing in infrastructure, research, and education• Expanding trade and immigration• Reforming the business tax code

Inequality and Participation• Raising the minimum wage and expanding collective bargaining• Reducing concentration of market power and rent-seeking via competition policy• Deepening “connective tissue” in labor markets and expanding workplace flexibility• Reforming the criminal justice system

Sustainability• Continuing to implement Wall Street Reform• Improving automatic stabilizers and making more active use of fiscal policy• Reducing the long-run deficit with a combination of reforms to entitlements and

increased revenue• Addressing climate change

President Obama’s Economic Record and the Challenges Ahead

Jason FurmanChairman, Council of Economic Advisers

Resolution FoundationLondon, United Kingdom

November 17, 2016

News & Politics

Jason Furman slides on President Obama's economic record and the challenges ahead