Inforum Economic Outlook

Jeff Werling University of Maryland

December 12, 2013

The Newest Generation of LIFT: IDLIFT2 Interindustry structure and information derived from BEA benchmark 2002 IO and 1998-2010 annual IO tables.

Time series of REAL IO Tables from 1998.

Industry and commodity definitions harmonized with BEA NAICS IO and industry data.

Consistent industry definitions for investment, employment and value added.

Industry data integrated and reconciled to latest version of NIPA in real and nominal terms.

Built partly with generous support of Center for Medicare and Medicaid Services (CMS).

LIFT Interindustry Macro Model Schematic

Private Consumption

Government Consumption

Fixed Investment

Inventory change

Exports (Table 4)

Imports (Table 4)

Supply BlockReal Gross Output DemandedImports of Goods and Services

Labor ProductivityHours WorkedEmployment

Unemployment

Input-Output Output Identity

Labor CompensationIndirect Taxes and Subsidies

Capital Income and Depreciation

Product and Service PricesConsumption PricesInvestment Prices

Export Prices

Monetary Policy / Interest Rates

Exogenous

Population ProfileLabor Force*

Government Spend Tax Rates*

Global DemandGlobal Oil Prices

Global Trade PricesExchange Rates*

Real Incomes

PersonalNational

Demand Block (Table 1)Private Consumption

Government Expenditures

Equipment Investment

Structures Investment (NR)

Residential Investment

Inventory change

Exports of Goods and Services

Final Demand Block

Factor Income Block

Input-OutputPrice Identity

Price Block

National Accounts: GDP = C + I + G + X – M = W + P + THousehold Balance: S = PDI – CGovernment Balance: NB = TR – (G + Tr + Int)Current Account Balance: CA = X – M + NFI + NTrfNational Income: GNI = GDP + NFI

Accountant BlockPersonal

Disposable Income

Government TaxesOther Revenue

Transfer Payments

Net Foreign Income and Transfers

Private Consumption

Government Consumption

Fixed Investment

Inventory change

Exports (Table 4)

Imports (Table 4)

Supply BlockReal Gross Output DemandedImports of Goods and Services

Labor ProductivityHours WorkedEmployment

Unemployment

Input-Output Output Identity

Labor CompensationIndirect Taxes and Subsidies

Capital Income and Depreciation

Product and Service PricesConsumption PricesInvestment Prices

Export Prices

Monetary Policy / Interest Rates

Exogenous

Population ProfileLabor Force*

Government Spend Tax Rates*

Global DemandGlobal Oil Prices

Global Trade PricesExchange Rates*

Real Incomes

PersonalNational

Demand Block (Table 1)Private Consumption

Government Expenditures

Equipment Investment

Structures Investment (NR)

Residential Investment

Inventory change

Exports of Goods and Services

Final Demand Block

Factor Income Block

Input-OutputPrice Identity

Price Block

National Accounts: GDP = C + I + G + X – M = W + P + THousehold Balance: S = PDI – CGovernment Balance: NB = TR – (G + Tr + Int)Current Account Balance: CA = X – M + NFI + NTrfNational Income: GNI = GDP + NFI

Accountant BlockPersonal

Disposable Income

Government TaxesOther Revenue

Transfer Payments

Net Foreign Income and Transfers

Employment: More of the Same Employment year-on-year percentage growth

Source: Bureau of Labor Statistics

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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

U.S. Economy in 3 Graphs: The GDP Gap

Real GDP – CBO Potential (% of Potential)

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Lowest since 1982

U.S. in 3 Graphs: Labor Force Participation Civilian labor force participation rate (%)

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Lowest since 1978

U.S. in 3 Graphs: Inflation and Interest Rates

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Effective Federal Funds Rate

Core Consumer Inflation

Lowest since loans invented

The Good News Deleveraging easing, especially for non-financial businesses.

Private business sitting on lots of cash. Non-financials wait for firmer expansion of demand.

Pent-Up demand for housing, rising home prices.

Energy production increases.

In 2014-15 exports accelerate again.

Moderation of sequester. For the moment, political winds improved.

Fiscal Stimulus? Infrastructure deserves a big new spend.

Outlook Overview Real (Inflation-Adjusted) Quantities, Average Annual Growth Rates, Percent

00-11 11-12 12-13 13-14 14-15 15-16 16-20 20-30 30-40Demand

Gross domestic product 1.7 2.8 1.7 2.6 2.9 2.8 2.7 2.4 2.3

Personal consumption 2.1 2.2 1.8 2.4 2.9 2.7 2.5 2.2 2.1

Nonresidential structures -3.2 12.7 2.8 5.1 7.3 10.9 6.1 2.3 2.2Equipment investment 1.7 7.2 2.5 5.1 5.1 4.3 3.7 3.3 2.9Residential investment -5.1 13.5 13.9 14.1 10.6 3.8 4.0 2.1 1.8

Exports 3.7 3.5 2.1 2.4 4.4 5.2 5.3 4.9 4.2Imports 2.6 2.2 1.3 1.8 4.2 4.5 4.0 3.3 3.0

Government 1.7 -1.0 -2.0 -0.3 -0.3 0.6 1.0 1.2 1.0

PricesGDP deflator 2.1 1.7 1.4 1.6 2.1 2.0 2.4 2.3 2.3Consumption deflator 2.1 1.8 1.6 1.9 2.1 2.2 2.6 2.4 2.5

Outlook Overview 00-11 11-12 12-13 13-14 14-15 15-16 16-20 20-30 30-40

Supply (Percent Growth)Population 0.9 1.0 1.0 1.0 1.0 1.0 0.9 0.9 0.8Labor force 0.7 0.9 0.8 1.0 1.0 0.8 0.9 1.0 0.8Employment -0.1 1.6 1.4 1.7 1.5 1.2 1.0 1.0 0.8Labor productivity 1.8 0.9 0.3 0.5 0.9 1.3 1.5 1.3 1.3Potential GDP (Real) 2.6 1.7 1.8 1.9 2.1 2.3 2.4 2.3 2.3

2011 2012 2013 2014 2015 2016 2020 2030 2040Unemployment Rate (%) 8.9 8.1 7.5 6.9 6.3 5.9 5.5 5.2 5.2

Interest RatesTreasury Bills, 3-month 0.1 0.1 0.1 0.1 0.5 1.5 3.5 3.8 4.0Yield, 10 yr. Treasury bond 2.8 1.8 2.4 3.0 3.5 4.3 5.2 5.3 5.3

Nominal Quantities, Billions of DollarsCurrent account -457.0 -438.9 -479.8 -500.2 -560.8 -644.7 -738.7 -572.6 -379.7

(% of GDP) -2.9 -2.7 -2.9 -2.9 -3.1 -3.4 -3.1 -1.5 -0.6

Federal net borrowing -1400.1 -1214.8 -971.4 -856.2 -793.1 -814.8 -839.0 -675.3 -1205.8(% of GDP) -9.0 -7.5 -5.8 -4.9 -4.3 -4.2 -3.6 -1.8 -2.1

Is monetary policy effective? Money multiplier (m2/mbase) and velocity (gdp/m2)

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Money multiplier (left scale)

Velocity (right scale)

Is quantitative easing blowing bubbles?

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Price-Earnings Ratio

Long-Term Interest Rates

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25.081966

Shiller P/E Ratio and Long Term Interest Rates

Source: Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, updated

The Perils of Tapering Most dangerous potential effects in emerging markets.

Presumably, “tapering” means a gradual adjustment to bond prices. What is the chance of that? (refinance)

Mortgage rates will rise, but pent-up demand should keep housing buoyant.

Fed will be prepared to reverse drawdown of QE if growth falters.

Fed stresses the importance of “communication,” but a lack of “understanding” on the part of market commentators, the media, and congress-persons complicates their task.

Is Fiscal Policy Is More Effective? Real Total Fed + S&L Spending After Recessions

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Quarters After Recession Trough

1982q4 1991q1 2001q4 2009q2

GDP Recovery After Recessions

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Quarters After Recession Trough

1982q4 1991q1 2001q4 2009q2

Employment Recovery after Recessions

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Quarters After Recession Trough

1982q4 1991q1 2001q4 2009q2

Good Short Term Policy Options Monetary

Provide clear guidance on QE taper and Fed rate. If needed, extraordinary policy still available: Create temporarily high inflation to aid deleveraging. Price level targeting, GDP targeting.

Fiscal

More fiscal stimulus to fill AD hole: Bond yields remain low, education and infrastructure provide “bang for the buck.” Stimulus combined with deal on raising revenue with tax reform and reducing future entitlements would be most effective.

Structural

Tax reform (eliminate loopholes, reduce rates). Relax regulations and other restrictions. New labor market measures (job matching, increase mobility).

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1980 1985 1990 1995 2000 2005 2010 net_worth home_equity net_financial

Household Net Worth (Multiple of GDP)

Source: Federal Reserve Board

Net worth

Net financial and other assets

Home equity

Household Debt Service Percent of Household Disposable Income

Source: Federal Reserve Board

Percen

tage (

%)

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1980 1985 1990 1995 2000 2005 2010 DebtService

Europe will grow again, slowly Annual percent change in GDP (2005 dollars)

Sources: Inforum, OECD Economic Outlook, Consensus Forecasts, Blue Chip Economic Indicators, IMF WEO

2010 00-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 15-20World (IMF) 34483 3.8 3.9 3.1 2.8 3.6 3.9 4.1 4.1 4.0 United States 13063 1.5 1.8 2.1 1.7 2.6 2.9 2.9 2.9 2.8 Canada 1092 1.8 2.5 1.7 1.7 2.2 3.1 2.4 1.4 1.9 Mexico 764 2.6 4.0 3.6 1.2 3.3 4.3 5.8 5.4 5.5 North America 14919 1.6 2.0 2.1 1.7 2.6 3.0 3.0 2.9 2.9

France 1815 1.0 2.0 0.0 0.2 1.0 1.4 1.3 1.1 1.3 Germany 2979 1.1 3.4 0.9 0.5 1.7 2.0 1.1 1.4 1.2 Italy 1740 0.1 0.6 0.6 -2.6 -1.9 0.3 1.7 0.7 0.8 Spain 1136 1.8 0.1 -1.6 -1.3 0.9 0.9 2.7 2.2 2.0 United Kingdom 1982 1.4 1.1 0.1 1.4 2.3 2.5 1.5 1.4 1.0

Japan 4426 -0.3 -0.6 1.9 1.8 1.4 1.0 1.2 1.5 1.0 Korea 1073 3.2 3.7 2.0 2.7 3.8 4.0 5.4 4.5 3.5 China 3706 10.4 9.3 7.7 7.3 7.0 6.0 5.2 5.0 6.0

U.S. remains very competitive

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Canada Germany Japan Mexico United States

Unit labor costs 1995 = 100

Source: OECD

Health Care Expenditures Have Grown Slowly Since 2007

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National Health Expenditure

Gross Domestic Product

Both Excess Inflation and Excess Expenditure are Down

1960-2012

1960-2000

2000-2012

2009-2012

Annual Percent ChangeGross Domestic Product (GDP) 6.5 7.3 3.8 3.8National Health Expenditures 8.9 9.8 5.9 3.6 NHE as percent of GDP 2.4 2.4 2.1 -0.2

GDP Deflator 3.5 3.9 2.2 1.7Health Care Price Deflator 4.7 5.3 2.9 2.0

Real GDP 3.0 3.4 1.6 2.1Real Health Care Expenditure 4.2 4.5 3.0 1.5

Decompostion of "Excess Cost" of Health Care Excess Health Care Cost 2.4 2.4 2.1 -0.2 Excess Health Care Inflation 1.2 1.4 0.7 0.3 Excess Real Expenditure 1.2 1.1 1.4 -0.6

Why? Have We Bent the Curve?

Recession (loss of income and job-base insurance)

Significant increase in cost-Sharing

Generic prescriptions

Structural changes in private market (ACA and non ACA)

Medicare/Medicaid Changes (independent of ACA)

Medicare/Medicaid Changes (because of ACA)

Coming ACA: Provider MFP Fix

ACA Penalizes Hospital Readmissions

Health Care Reform

My Platform: If you have an insurance plan, and you like it, that has to stop. Economics of insurance reform is a Classic Insider-Outsider game.

ObamaCare: Did Something Go Wrong? The Uninsured Population - As a Share of the

Nonelderly Population and by Poverty Levels, 2012

Medicaid/Other Public, 20.8%

Employer-Sponsored,55.7%

Uninsured, 17.7%

Private Non-Group,5.8%

10%

14%

37%

38%

>400% FPL

251-400% FPL

100-250% FPL

<100% FPL

47.3 M Uninsured

266.9 M Nonelderly

Tax subsidies for health are unfair and boost (wasteful?) expenditures

Insurance Employer Provided IndividualPerson A B CPremium Cost 12000 12000 12000(including employers)

Income 150,000 50,000 50,000

Tax bracket 30% 15% 15%

Tax subsidy 3600 1800 0

Net cost 8400 10200 12000

What would “alternative” reform look like? Separate employment from health insurance and defragment market by removing tax bias for employer-provided insurance.*

Promote more market-orientated and “patient-centered” approaches (national exchanges, FSA, etc.)

Increase cost-sharing (even more). Higher-deductible plans.

Allow premiums to vary based on health “status,” age, gender, etc. Federal determination of income and health based premium supports.

Increase information and transparency.

Transition Medicaid recipients into the market exchanges.

Break monopoly certification rules and rationalize tort system. * Note: Tax deductibility of employer provided health premiums is quite possibly the stupidest law of the land.

Further Reading On health care cost trends: Trends in Health Care cost Growth and the ACA http://www.whitehouse.gov/sites/default/files/docs/healthcostreport_final_noembargo_v2.pdf Analysis of Factors Leading to Changes in Projected 2019 National Health Expenditure Estimates: A Comparison of April 2010 Projections and September 2013 Projections http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and- reports/National Health ExpendData/Downloads/ProjectionsRevisionAnalysis.pdf On alternative programs: “Best of Both Worlds: Uniting Universal Coverage and Personal Choice in Health Care, http://www.aei.org/policy/health/healthcare-reform/ The American Health Care System: Principles For Successful Reform, http://mercatus.org/publication/american-health-care-system-principles-successful-reform Uwe Reinhardt: http://economix.blogs.nytimes.com/2013/11/22/a-conservative-alternative-to-obamacare/

Long Term Issues Potential GDP: How much hysteresis from the Great Recession? Can we reach “full” employment? Hysteresis - Intercept Change Secular Stagnation – Chronic Operation Below Potential (Summers) Technological Stagnation - Slope Change (Gordon) Factors:

Federal Debt – Do high rates slow growth? Increasingly Unequal Income Distribution Entrepreneurial Crisis Political Dysfunction – Rent seeking and Olsonian Decline (great upheaval can reset society)

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2000 2005 2010 2015 2020 2025 2030 fpotgdp a.potgdp a.gdpR

Potential GDP and GDP 2000-2030

Current GDP forecast

Potential GDP, Dec. 2007

Billions of 2005 dollars

Potential GDP, Dec 2013

GDP Gaps: Did we permanently lose 6% of income?

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2000 2005 2010 2015 2020 2025 2030 gdpgap_hysteresis gdpgap_slope

GDP – GDP potential (% of potential)

hysteresis

secular stagnation

For further discussion see: Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy, Reifschneider, et. al. (FRB)

Debt Check! Federal Net and Gross Debt

Accrued Debt Held by the Public plus Trust Funds (09/30/13)

Source: U.S. Treasury Department and Inforum Calculations

1,178 1,1781,294 1,294

3,181 3,181

6,323 6,323

4,762

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Debt Held by the Public Debt Held by the Public+ Trust Funds

Billio

n Doll

ars

Japan China Others U.S. Residents Trust Funds

$11,97670.9% of GDP

$16,73899.1% of GDP

Foreign Holdings

U.S. Resident Holdings

SS, Medicare and Pension Trust Funds

…do not cover future obligations. Federal Debt + Trust Funds + Unfunded Obligations

Source: U.S. Treasury Department and Inforum Calculations

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Debt Held by the Public Debt Held by the Public+ Trust Funds

Debt Held by the Public +Trust Funds + Unfunded

Liabilities

Other Unfunded Liabilities

NPV of Social Security Liabilities

NPV of Medicare Liabilities

Trust Funds

U.S. Residents

Others

China

Japan

Notional Net Present Value of Unfunded Liabilities to 2087 under Current Law

~ $62 trillion!!!!!

Perspective: This is 6.6% of Notional PV of GDP, 2013-2087

Entitlement Reform: Social Security

Increase cap on payroll taxes. Change COLA to better reflect inflation. Increase retirement age. Cover new S&L workers. Reduce benefits for richest, strengthen safety nets for poorest. (What is meant by “means-testing”?) Little sentiment for privatization of SS accounts. Politically implausible Since most boomers have insignificant savings, do these entitlement cuts make sense?

Tax Reform: How can we tax labor and capital less and consumption more?

Reduce/Eliminate tax expenditures, especially: 1. Convert health care premium income exclusion to tax

credit (voucher). (~$160 billion in FY2010) 2. Phase out mortgage interest deduction (~$110 bill in

2010).

Use proceeds to lower and flatten rates.

Lower Corporate tax rates (phase out eventually)

Unify rates across earned, dividends, capital.

Best time ever for Higher energy taxes/Carbon tax!

National Sales (RD) or Value Added Tax.

Do we Have an Entrepreneurship Crisis?

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Net Business Creation(thousands)

Private sector establishment births and deaths, seasonally adjusted. Total private. Levels in thousands. BLS.

Most “net” new jobs created from new firms.

Source: Davis, Faberman and Haltiwanger (2010)

U.S. Income Distribution became skewed in the last thirty years.

Source:CBO

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Cumulative Growth in Before Tax Income (2010 dollars)

1st Quintile Second-Fourth Quintiles81st to 99th Top 1 Percent

Especially in Education

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0.140.17

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Fraction of students completing college by income quartile and birth year

1979-1982 birth cohorts

1961-1964 birth cohorts

Source: Martha J. Bailey and Susan M. Dynarski, "Inequality in Postsecondary Education." In Greg J. Duncan and Richard J Murnane, eds. Whither Opportunity? Rising Inequality, Schools, and Children's Life Chances (New York: Russel Sage Foundation, 2011).

And in health status and life expectancy

Does Income Inequality Discourage Growth ?

Stiglitz, Deaton, Solow, Saez, Podesta

It appears that both Inequality and Immobility are rising.

Potential Mechanisms: Lower consumer spending Leads to credit bubbles and crisis Underinvestment in education and health Government capture: Rent-seeking behavior Reduce risk-taking and entrepreneurs

Further reading: Journal of Economic Perspectives—Vol 27, No. 3—Summer 2013

Robert Gordon Stagnation Thesis

Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, Robert J. Gordon NBER Working Paper No. 18315 August 2012

Recent innovation (ICT) does not stack up well vis-à-vis mid-20th century innovations, especially electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum.

Headwinds will subtract from MFP growth: demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.

Marxian Optimism Marx was first to place technology at center of economics growth -- just when the situation seems darkest for capitalism, technology bails it out. Technologies coming down the pike:

Cheaper, environmental friendly energy (NG) Self-driving cars Additive (3D printers) manufacturing) Robotics Big data Genetically modified crops and animals Translation technologies

Longer term forecast (to 2040): Potential GDP growth ~ 2.4%

Forecast assumes gradual rebalancing of private, government and external accounts.

Weaker dollar, rapid technological growth in manufacturing, and rising savings rate changes economic structure toward exports and away from consumption.

Nonetheless, government services and transfers will expand. Health care spending (with/without reform) will dominant future of government spending and domestic production growth.

All roads lead to tax reform. To pay for entitlements, education and infrastructure, government revenues will have to rise. How this is accomplished is important.

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1980 1990 2000 2010 2020 2030 2040 dlgdpN dlvhrs dlprodhrs

Long term potential growth is almost 2.4% Difference in logs, 5-year moving average

GDP

Productivity

Labor Force

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Current account deficit: soft landing Billions of dollars

Current account

Net income

Net trade

Net Transfers

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Federal expenditures, revenues and deficit

Revenue

Expenditure

Deficit

Percent of GDP

Federal Debt as percent of GDP (Debt held by the Public)

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Inforum Economic Outlook

Thank you!