Education, the Economy, and the Changing World

Richard G. Sims, Ph.D., NEA Chief EconomistMarch 4, 2010

The economic number for today is:

• DJI passes 10,000—highest level in 12 months

• Unemployment rate passes 10%—highest level since 1983

• Number of people employed—below the number 10 years ago.

• Unemployment due to the recession—likely to last 10 years.

10

All of the job gains since 1999 have been lost

Six million plus jobs have been lost

Job losses continued for two years after end of the last recession

Source: Employment data from Bureau of Labor Statistics; Recession dating from National Bureau of Economic Research.

In spite of adding 3.5 million people to the population since 2009

•2008 •2009 •2010 •2011 •2012 •2013 •2014 •2015 •2016

The long road back to NormalIf the bottom is now (December 2009) and the recovery rate is the average rate of the previous

recessions, we well get back to the pre-recession employment level in December 2016.

Source: Employment data from Bureau of Labor Statistics; Recession recovery information from “This Time is Different,” by Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.

•2008 •2009 •2010 •2011 •2012 •2013 •2014 •2015 •2016

The even longer road back to NormalIf the bottom is now (December 2009) and the recovery rate is the average rate of the previous

FINANCIAL RECESSIONS, the recovery rate is only around half as fast.

Source: Employment data from Bureau of Labor Statistics; Recession recovery information from “This Time is Different,” by Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.

•2008 •2009 •2010 •2011 •2012 •2013 •2014 •2015 •2016

…And still further?Unfortunately, unemployment levels have not reached bottom, and probably won’t until mid-2010

or later. And a “W”-shaped recession cannot be ruled out.

Source: Employment data from Bureau of Labor Statistics; Recession recovery information from “This Time is Different,” by Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.

•2008 •2009 •2010 •2011 •2012 •2013 •2014 •2015 •2016

…or maybe even a half recovery?Growth stalls before lost jobs are fully replaced. This scenario could occur if, for example:

consumers lose confidence in future growth, credit becomes more difficult or interest rates rise sharply, energy prices spike, or the dollar exchange rate falls

Source: Employment data from Bureau of Labor Statistics; Recession recovery information from “This Time is Different,” by Carmen Reinhart and Kenneth Rogoff, Princeton University Press, 2009.

A half-recovery

Source: Employment data from BLS and employment growth projections from previous charts; The assumed monthly job growth beginning January of 2010 is 94,000; The estimate for tax revenue is$21 billion per million employed workers and is based on U.S. tax data reported by the OECD and calibrated by the author to reflect employment income. The lost income is assumed to grow at 3% for 2010 and in subsequent years.

Projection of public revenues lost due to jobless since the start of the recession

year billions

2008 -$17

2009 -$127

2010 -$140

2011 -$122

2012 -$103

2013 -$82

2014 -$60

2015 -$37

2016 -$11

-$700

The recession will have permanent affects on the economy

recession

GDP per capita

Years

In every future year the output of the economy will be less because of the output lost in the recession

Long-term trend

A similar permanent downward shift applies to any cuts in education funding

recession

Funding per pupil

Years

Any education funding cuts represent a permanent reduction in education investment—lowering future earnings, productivity, competitiveness, etc.

Long-term trend for education funding

And there is no guarantee that funding will return to its long-term growth trend

recession

Funding per pupil

Years

And if property tax or other revenue limitations constrain the annual rate of revenue growth, per pupil investment will grow even more slowly

Long-term trend for education funding

Stepping back for a longer view

We have almost matched our all time high in income concentrated at the top

23.9% 23.5%

Does rising inequality matter for economic growth?

Ineq

uality

has

rise

n sh

arpl

y

Source: Thomas Piketty and Emmanual Saez, based on IRS data.

Growth in family income over the last half-centuryThose were the days, my friend,

(we thought they would never end)

Growth “Then”

(’47-’73)

Growth “Now”

(’73-’05)

Will high debt and deficits be deadly for the future?

It may not be pretty—

but we have lived through it before

And finally: Guess who is not going to be buying a house anytime over the next seven years?(Hint: a foreclosure does not help your credit score)

Source: CalculatedRisk.com, based on delinquent and foreclosure data from the Mortgage Bankers Association.

1 of 4 is currently “underwater”

Labor’s share of business activity

Profits as a share of business activity

Some characteristics of the post-stimulus economy and beyond

• States and local governments in perpetual crisis and in need of substantial restructuring

• The employment growth at below historic averages

• Wages and personal income growing more slowly

• Consumer spending, currently stalled, will grow at lower rates in the future

• Housing is unlikely to re-gain its “investment grade” status (Thank goodness!)

• Business investment is presently at extremely low levels and will only come back gradually and cautiously. Longer term, there will be ever increasing pressure for efficiency and for substituting capital for labor.

• Taxes at all levels are likely to rise

State and Local Operating Balance Measure, as a Percentage of Gross Domestic Product

Notes: The operating balance is a measure of the sector’s ability to cover its current expenditures out of current receipts. Simulations are based on current policy.