The U.S. Economy After the Great : America’s Deleveraging and Recovery Experience

Sherle R. Schwenninger and Samuel Sherraden Program

March 2014 Introduction

The bursting of the housing bubble in 2008 plunged the U.S economy into a serious crisis, leaving American households with a huge overhang and the economy with a large gap in output and employment. This Report reviews the economy’s deleveraging and recovery experience more than five years after the crash. It explores the following questions:

• How far has the economy come in the deleveraging process? Is private sector debt now at a sustainable level or do households and the financial sector continue to need to pay down debt?

• To what extent has the U.S. economy recovered from the large plunge in output and employment? How close is the economy to full employment?

• What kind of recovery has the U.S economy had? What has driven the recovery and has it become self-sustaining?

• How has the recovery affected the long-term growth potential of the U.S. economy? Has it made U.S. economic growth less dependent on debt-financed and wealth-driven consumption?

• To what extent does policy explain the kind of recovery the U.S. economy has had? What were the main shortcomings of policy?

2 Part I: The Deleveraging Experience: Has America Fully De-Levered?

Part II: The Recovery: What Kind of Recovery?

Part III: Policy: Explaining the Deleveraging and Recovery We Got

3 Total debt has declined only modesty

Total debt in the economy has While total debt has declined, declined from 375% of GDP in nonfinancial debt remains elevated

April of 2009 to 343% in the third 400% quarter of 2013. The decline was 350% due mostly to a decline in debt in the financial sector. 300% 250% Excluding the financial sector, 200% combined private and public sector debt of % GDP 150% has fallen from 247% to 244%. 100%

50%

Private non-financial sector debt as a 0% share of GDP is 156% today, compared 1950 1960 1970 1980 1990 2000 2010 to 109% in 1985, the year before the Total debt Nonfinancial debt bubbles of the past two decades began. Source: , Bureau of Economic Analysis

4 Household debt has fallen to 2003 levels, but remains elevated

Debt in the household sector has Household debt as a percent of fallen from a peak of 95% of GDP GDP… 100% in March 2009 to 77% of GDP in

80% September 2013. 60%

40% % of % GDP In the 1980s, household debt averaged 20% 50% of GDP and in the 1990s it 0% averaged 61%. 1950 1960 1970 1980 1990 2000 2010

… and as a percent of income

140% As a percent of household disposable 120% income, household debt has fallen from 100% a peak of 130% in Q4 2007 to 104% 80% today. 60% 40% 1950 1960 1970 1980 1990 2000 2010

% of % disposable income Source: Federal Reserve, Bureau of Economic Analysis 5 Other measures of deleveraging: low debt service burden and delinquency

Debt service has fallen from 13.2% Household debt service burden of disposable income in 2007 to 9.9% today, due to low interest 14% rates.

Mortgage delinquency rates (loans 30+ 12% days past due) increased from 2% at the beginning of 2007 to 11.3% in the first quarter of 2010. Since then, they have 10% fallen to 8.6%.

Only 2.5% of credit cards are today 8% considered delinquent, the lowest rate 1990 1995 2000 2005 2010 on record. By these measures, the worst of the deleveraging is over. Source: Federal Reserve, Bureau of Economic Analysis

6 New credit growth for households, led by student loans

Household debt increased $127B Household debt by instrument in the third quarter of 2013 and 14.0 $241B in the fourth quarter, the largest increase since the third quarter of 2007. 12.0

Other While household mortgage debt has

Student Loan 10.0 declined, student debt has soared from $T Credit Card $548B in the fourth quarter of 2007 to $1.08T, an increase of $533B. Auto Loan 8.0 HE Revolving Credit card loans have remained flat at Mortgage around $700B since 2010, while auto 6.0 loans have rebounded from $711B in the 2007 2009 2011 2013 fourth quarter of 2010 to $863B today. Source: Federal Reserve Board of New York

7 Private sector deleveraging was made possible by an increase in public debt

The decline in private debt from Government leveraging, private 279% of GDP to 238% of GDP since sector deleveraging 2007 was made possible by an 120% increase in . 110%

100%

Total government debt increased from 90%

54% in the fourth quarter of 2007 to 80% 90% in the first quarter of 2013. Since % of % GDP 70% then, it has fallen to 88% of GDP. 60%

50%

State and local government debt, not 40% including pension obligations, peaked 1990 1995 2000 2005 2010 in the first quarter of 2010 at 20.4% and Government Households has since declined to 17.5% of GDP. Financial business Non-financial business Source: Federal Reserve, Bureau of Economic Analysis

8 US public debt is below that of many other advanced economies

Net federal government debt in Net government debt, 2012 the US increased from 46% of GDP in 2007 to 84% of GDP in 2012. 180 160 140 Net federal government debt excludes

120 securities held by the public sector, such 100 Advanced economy average = 76% as government debt held by the Social 80

Security Trust Fund. of % GDP 60 40 US federal government debt is slightly 20 above the average for advanced 0 economies of 76%. But it is well below its immediate post-war high of 113% of GDP in 1945. Note: IMF figures differ from Federal Reserve Source: IMF

9 The middle class remains burdened with debt

The bottom 95% have two times Debt-to-income more debt than the top 5% of households. 180% 160% 140% The debt-to-income levels of the bottom Bottom 95% of households increased from 84% 120% 95% of disposable income in 1989 to 156% in 100% 80% 2007. The debt to income levels of the Top 5% top 5% increased from 56% to 62%. 60% 40% From 2007 to 2010, the bottom 95% of 20% households have been forced to pay 0% down debt and cut consumption, while the top 5% have taken on slightly more debt and increased consumption. Source: Cynamon and Fazzari, “Inequality, the , and Slow Recovery”

10 More private sector deleveraging is needed

Household debt is still higher than Debt is high compared to the the pre-tech and housing bubble 1990s norm, and is only sustainable if 100% interest rates remain low, housing 90% prices continue to rise, and wages 80%

70% and incomes grow. 60% 50% 40%

% of % GDP 1996 To get back to debt levels in 1996: 30% 20% 2013 • Households would have to reduce debt 10% by $2.5T, or 15% of GDP 0% • The financial sector would have to reduce by $4.5T, or 26% of GDP • And the non-financial business sector would have to reduce debt by $4.1T, or 24% of GDP Source: Federal Reserve

11 Part I: The Deleveraging Experience: Has America Fully De-Levered?

Part II: The Recovery: What Kind of Recovery

Part III: Policy: Explaining the Deleveraging and Recovery We Got

12 Real GDP growth has been weak, weighed down by deleveraging

The economy returned to its 2007 The current recovery has been peak of real output in the second slow by historical standards quarter of 2011, and is currently 6.5% above its 2007 peak. 125 120 Recent growth has been slower than 115 1980 during previous recoveries. In the four 110 1991 and a half years since the recession 105 2001 ended, real GDP growth has averaged 2007 2.4%. 100 100= peak 95 In the four and half years following the 90 1 3 5 7 9 11 13 15 17 19 21 23 25 in 1982 and 1990, the Quarters after business cycle peak average growth rate was 5% and 3.2%, respectively. Source: Bureau of Economic Analysis

13 A still sizable output gap means the recovery is incomplete

The output gap—which is the Output gap difference between potential GDP 20 and actual GDP—was 4.4% of GDP in the fourth quarter of 2013 18 ($740B), down from 7.4% in the third quarter of 2009. 16

$T Premature fiscal consolidation 14 beginning in 2010 has kept the output 2009 gap larger than it would otherwise have 12 been, costing the economy over this 10 time hundreds of billions of dollars in 2007 2010 2013 2016 2019 lost income and millions of jobs. Actual GDP Projected GDP Potential GDP

Source: Congressional Budget Office

14 The rate has fallen, in part due to lower participation in the labor force

The official unemployment rate Unemployment rate declined from a peak of 10% in 20% October 2009 to 6.6% in January 2014. 15% Including workers that are marginally U-6* attached to the workforce and those that are employed part-time for economic 10% reasons, the U-6 unemployment rate is Official rate 12.7%, down from a peak of 17.2% in 5% April 2010.

0% The labor force participation rate has 1990 1995 2000 2005 2010 declined from 66% before the recession *Total unemployed, plus all marginally attached workers plus total employed to 63% today. part time for economic reasons Source: Bureau of Labor Statistics

15 A decline in public employment has undercut job growth

Since 2009, local governments have Increase in private employment cut 551,000 jobs, states have and fall in government eliminated 153,000 jobs, and the employment 140 24 federal government has cut 62,000

jobs, partly offsetting the 4.3 million jobs created in the private * sector during the same period. 136 23

Government jobs as a share of total 132 22 employment have fallen from 17.2% in July 2009 to 15.9% in December 2013. Total employment M Government employment M 128 21 If the government had maintained its 2009 2010 2011 2012 2013 share of employment, there would be 1.9 Total (left) Government (right) million more jobs and the unemployment * Spike due to temporary hiring for the 2010 Census rate would be 5.4% instead of 6.6%. Source: Bureau of Labor Statistics

16 Private-sector job growth has been mostly in low-wage jobs

According to Daniel Alpert, 54% of Employment growth 2012-2022, the jobs created in 2013 were low- and 2012 median annual wage wage jobs, well above the 120,000 percentage of low-wage jobs in the 100,000 General economy at the start of the year. managers Software developers The BLS projects that many of the 80,000 Registered fastest growing categories of jobs in the 60,000 nurses period 2012-2022 will be in low-wage sectors like retail, food service, and 40,000 Home health aides

personal care. 2012 median income $ Retail Personal care 20,000 aides Food service For example, the number of software 0 developers in the higher wage tech 0 200 400 600 800 sector is expected to increase by 140K, ‘000s of jobs created 2012-2022 compared to 580K personal care aides. Source: Bureau of Labor Statistics

17

Many unemployed workers have left the labor force

The drop in the unemployment rate Average duration of has been the result of private sector unemployment job creation (in mostly low-wage 45.0 jobs) and workers leaving the labor 40.0 force. 35.0

The average unemployed worker has been 30.0 unemployed for 35 weeks—far above 25.0 other recoveries. 20.0 15.0

The labor force participation rate is 63%, 10.0 down from a peak of 67% in the late 5.0 1990s. Some of the decline is due to the 0.0 aging of the population, but prolonged 1990 1995 2000 2005 2010 periods of unemployment can also cause people to give up looking for a job. Source: Bureau of Labor Statistics

18 Unemployment disproportionately impacts the younger generation

The unemployment rate for 16-19 year Youth unemployment olds has fallen from a peak of 27.2% in 30% October 2009 to 20.7% today. The rate for 20-24 year olds has fallen from 25% 17.2% in April 2010 to 11.9% today. 20% In 1996, the unemployment rates for 16-19 year olds and 20-24 year olds were 16.7% and 15%

9.3%, respectively. 10%

According to the Center for American 5% Progress, long-term unemployment will result 0% in $22,000 in lost earnings during the next 1990 1995 2000 2005 2010 decade for each of the million young workers who have experienced long-term 16-19 20-24 25+ unemployment. Source: Bureau of Labor Statistics

19 Real wages have been essentially flat

Real wages have not increased Real wages in the private sector during the recovery because of 25.000 high levels of unemployment and because of the increase in the 24.500 proportion of low-wage jobs.

24.000 Real wages increased 3.9% in 2008, mostly due to a 3.5% decline in prices. Since then, wages have declined by 1%. 23.500

Since the end of the recession, retail 23.000 trade employment increased by 734K but wages declined 1%. During the same 22.500 period, leisure and hospitality jobs increased 962K, but wages fell 3.7%. Source: Bureau of Labor Statistics

20 Median household income has fallen, even with the recovery

Median income declined during Median household income the recovery from $53,285 in 2009 58,000 to $51,017 in 2012. 56,000 Today median household income is 9% 54,000 lower than it was at its peak of $56,080

in 1999. 52,000

50,000

Households income: 2012 $ th • At the 20 percentile was $20,599 48,000 • At the 40th percentile was $39,764 • At the 60th percentile was $64,582 46,000 th • And at the 80 percentile was 44,000 $104,096 1990 1995 2000 2005 2010

Source: US Census Bureau

21 Still too dependent on consumption

Personal consumption as a share of Personal consumption as a GDP has fallen from 69.1% in the share of GDP first quarter of 2011 to 68.1% in the 70% fourth quarter of 2013, a sign that the economy is slightly less 68% dependent on consumption. 66% During the early years of the recession, an increase in transfer payments and tax 64% cuts propped up consumption. 62% Investment has accounted for 42% of the 60% growth since 2010, consumption for 64%, 1990 1995 2000 2005 2010 and net exports have subtracted from growth. Source: Bureau of Economic Analysis

22 A modest improvement in the savings rate, but savings remain too low

The savings rate hit an all-time Personal Saving Rate low at 2% in July 2005 after falling 18% from 6.7% in the 1990s. After the 16% recession the savings rate hovered round 6% until 2011 before falling 14% to approximately 4% in 2013. 12% 10% In 2013, higher personal consumption 8% was made possible by a run-down in 6% savings and and higher household 4% borrowing. 2% 0% In the third quarter, households added 1960 1970 1980 1990 2000 2010 $393B in debt including $180B in consumer loans and $87B in mortgages. Source: Bureau of Labor Statistics

23 Credit intensity is again rising

The three-year credit intensity— 3-year credit intensity

or the increase in debt in the 4.00 domestic nonfinancial sectors required to generate one dollar of 3.50 GDP growth over a three-year 3.00 $2.78 period—is lower than it was $2.40 2.50 during the 2000s, but higher than during the 1990s: 2.00 $1.79

1.50 • In the 1990s the credit intensity was 1.00 $1.79

• From 2000 to the fourth quarter of 0.50 $ credit $ credit growth $ / nominal GDP growth 2007, it was $2.80 0.00 1990 2000 2010 • From 2012 to the third quarter of 2013, it was $2.40 Source: Federal Reserve, Bureau of Economic Analysis

Note: Q4 2007 – Q1 2012 excluded because they include recession dates and outlier values. 24 A weak recovery in investment and capital expenditure

Fixed investment was $2.5T (2009 Gross fixed investment dollars) in the fourth quarter of 2013. This is $200B below the 2,700 peak in the first quarter of 2006.

2,500 Fixed investment growth has slowed since the years immediately after the 2,300 recession, growing 4.5% from 2012 to 2,100

2013. Business investment in 2009 $B equipment and software increased 3.1%. 1,900

Companies are sitting on cash rather 1,700 than investing. The ratio of cash to net 1,500 assets among U.S. non-financial non- 2007 2008 2009 2010 2011 2012 2013 utility companies is approximately 12%, double the rate during the 1990s. Source: Bureau of Economic Analysis

25 Government investment has fallen

Net government investment has Net government investment fallen from 1.4% of GDP in 2009 to

0.8% of GDP in 2012. State and 2.5% local governments invested 0.6% of GDP in 2012, the lowest 2.0%

investment share since 1947. 1.5%

1.0%

Gross government investment, before % of % GDP accounting for depreciation, is currently 0.5% 3.8% of GDP, the lowest rate since 1948. 0.0%

The government invests 0.6% of GDP in -0.5%

1992

1994

1996

1982

1984 1986 1998

2012

1990

1988

1980

2010

2002

2004

2006 2008 structures, 0.1% of GDP in equipment, 2000 and 0.1% in intellectual property. State & Local Federal defense Federal nondefense

Source: Bureau of Economic Analysis

26 Private investment has only modestly rebounded

Net private nonresidential Private nonresidential net investment in fixed assets investment declined to 0.6% of GDP in 2009, 6.0% its lowest level in six decades. 5.0% Since 2009, investment has rebounded 4.0% to 1.8% of GDP, which is still lower than any level seen since World War II. 3.0%

of % GDP As a result of systemic under- 2.0% investment in the economy, the age of 1.0% private fixed assets has risen to 21.7 years, the highest rate since the late 0.0% 1950s. 1980 1985 1990 1995 2000 2005 2010

Source: Bureau of Economic Analysis

27 Productivity growth has declined

Annual labor productivity growth Productivity growth was 1.7% at year-end 2013, 0.9% in 6.0%

2012, and 0.4% in 2011. 5.0% productivity 4.0% growth During the current recovery, 3.0% post-2007 productivity growth has averaged 1.8% 2.0% (red), while after the 1982 recession and post-2001 1.0%

2001 recession productivity averaged Annual % change 0.0% 2.5% and 3.1%, respectively. post-1982 -1.0% 2008 2009 2010 2011 2012 2013

Source: Bureau of Labor Statistics

The slow recovery has depressed the pace of capital accumulation, and it may also have hindered new business formation and innovation, developments that would have an adverse effect on structural productivity. - Janet Yellen, Chair, Federal Reserve

28 Manufacturing employment and output remains below 2007 levels

Despite talk of a manufacturing Manufacturing employment and renaissance, manufacturing output real output is still 3.6% below its 2007 peak. 24 140

22 120

Manufacturing employment has only 20 100

increased by 500K above its trough.

Much of the increase has come from an 18 80 improvement in energy-intensive 16 60

industries and some re-shoring. 14 40 output (2009=100)

employment M 12 20

According to a study by the Boston 10 0 Consulting Group, the share of executives 1990 1995 2000 2005 2010 considering re-shoring production to the Employment Real output U.S. from China increased from 37% in Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor 2012 to 54% in 2013. Statistics

29 A modest improvement in net exports

The trade deficit shrunk from 5.1% Net export share of GDP of GDP in 2008 to 2.6% of GDP 0.0% today.

-1.0% From the fourth quarter of 2007 to the -2.0%

fourth quarter of 2014, exports grew from 12.0% to 13.6% of GDP, while imports fell from 16.7% to 16.2% of -3.0% GDP. of % GDP -4.0%

The decline in the trade deficit -5.0% contributed to an increase in GDP in -6.0% 2008-2009, but since has not 2007 2008 2009 2010 2011 2012 2013 contributed much. Source: Bureau of Economic Analysis

30 From 2007 to 2013 the goods trade deficit fell from 5.8% to 4.3% of GDP

From 2007 to 2012 net imports of Trade balance by category energy fell from 2.3% of GDP to 1.8% of GDP, accounting for nearly 2007 2012 1.0% half the reduction in the goods Materials 0.33% 0.0% trade deficit. Foods 0.13%

-1.0% -2.26% Energy -1.77% Net exports of industrial supplies and -2.0% Capital goods -0.15% -0.11% materials went from 0.0% of GDP to net Autos -0.94% exports of 0.33% of GDP. -3.0% -0.95% Consumer non-durable -0.98 -4.0% -1.05% The trade deficit in consumer durable Consumer durable -1.10% goods fell from 1.26% of GDP in 2007 to -5.0% -1.26% Other -0.1% -0.06% 0.98% in 2012. Non-durables improved -6.0% from -1.05% to -0.98% of GDP during the same period. Source: Bureau of Economic Analysis

31 Energy has been a bright spot in the economic recovery

The oil and gas boom has lowered the Index of employment in oil and cost of energy and increased gas extraction and support activities American competitiveness in sectors from energy to manufacturing. 140

130

The domestic energy boom is also inherently 120 supportive of middle-class prosperity because it creates good-paying middle-class 110 jobs and strengthens the tradable sector. 100 Dec = 2007 100 90 While total nonfarm employment has not surpassed its pre-recession levels, 80 2007 2008 2009 2010 2011 2012 2013 employment in oil and gas extraction Extraction Support activities increased 34% from 2007 to 2014 and Total employment support activities have increased 37%. Source: Bureau of Labor Statistics

32 An uneven and not yet sustainable housing recovery

Housing prices have rebounded Case-Shiller Index 24% from the post-recession lows in March 2012, according to the 250 Case-Shiller index. 200 Since reaching a high in November 2013 150 at 1.1M, housing starts have fallen to 880,000. The number of homes for 100 sale, or inventories, has declined from a peak of 3.5M in 2007 to 1.9M in 2013. 50

The housing recovery has been held 0

back by lack of first-time home buyers

2011

2013

2012

2001 2010

2007

2005

2003

2002

2004 2006 2009 2008 owing to high levels of unemployment 2000 and low rates of household formation. Source: S&P

33 This has been a wealth-driven recovery

Household net worth increased Household net worth

$21.5T from $55.7T in the first 90,000 quarter of 2009 to $77.3T in the third quarter of 2013. 80,000 70,000 $2.7T of the increase was due to the 60,000

increase in real estate, while $18T, or 50,000

84% of the increase, was due to a rise in $B the value of financial assets, including 40,000 deposits, stocks, and pensions. 30,000 20,000

The S&P peaked at 1565 in October 2007 10,000 and fell to 677 in March 2009. Since then, 0 it has risen to 1859—170% above the 1990 2000 2010 trough and 17% above its previous peak. Source: Federal Reserve

34 Stock market recovery: multiple expansion, Fed Policy, and share buybacks

In 2013, expansion of the trailing S&P share buybacks P/E multiple from 16.5x to 19.6x $450 accounted for two thirds of the $400 increase in the S&P. $350

$300 Higher stock prices will boost consumer wealth and help increase confidence, $250 which can also spur spending. $200 - Ben Bernanke $150 $100 Low interest rates enable corporations to $50 borrow cheaply and buy back shares. S&P $0 500 companies did $346B of buybacks in 2009 2010 2011 2012 Q1 to Q3 2013 the first three quarters of 2013, effectively paying out 3% to shareholders. Source: Standard & Poor’s

35 Inequality has increased

Income inequality is at all-time Income share of top earners highs: 60 • Top 10% earn 48.2% of total income • Top 1% earn 19.3% of total income 50

• Top 0.1% earn 8.8% of income 40

Top 10% From 2009 to 2012, the top 1% has 30 captured 95% of the increase in national Top 1% income. 20 Top 0.1% 10 In other words, the top 1% of incomes Top 0.01% grew by 31.4% while bottom 99% 0 incomes increased by 0.4%. 1922 1937 1952 1967 1982 1997 2012 Source: Piketty and Saez

36 The rise of the American plutonomy: an economy driven by high-end consumption

Consumption growth by top- Consumption share of the top 5% earners has driven the recovery: 40% consumption for households in the top 5% of incomes increased 35% 16% from 2007 to 2012, while 30% consumption by the bottom 95% 25% fell by 2%. 20% In 2012 the top 5% of earners were 15% responsible for 38% of domestic 10% consumption, up from 28% in 1995 and 34% in 2007. 5% 0% 1989 1994 1999 2004 2009

Source: Cynamon and Fazzari, “Inequality, the Great Recession, and Slow Recovery”

37 With wages flat, more income has gone to capital owners

From the 4th quarter of 2007 to the 3rd Labor share of national quarter of 2013, the labor income is declining (compensation) share of national 70% income declined from 64% to 61%. 65% If the compensation share of national income 60% had remained at the 64% level, workers would have earned $520B more in 2013. 55%

The manufacturing and traded sectors 50% account for 6.7% of the decline in labor share of national income since 1987, while 45% 1990 1995 2000 2005 2010 professional and business services increased the labor share by 3.6%, according to a study Compensation share Wage share from the Brookings Institution. Source: Bureau of Economic Analysis

38 A tough start for younger Americans

Households with a head of Households with head of household 25 years or younger household 25 years or younger declined from 6.6M in 2006 to 6.1M in 2012. 6.5%

The 500,000 decline in households with 6.0% heads of households 25 or younger indicates that many youth have moved 5.5% back in with their parents. 5.0%

In part due to the weak labor market, Households ‘000s many youth have gone back to school. 4.5% This and high tuition costs have burdened youth with $1.2T in student 4.0% loans. 1990 1995 2000 2005 2010 Source: US Census

39 Part I: The Deleveraging Experience: Has America Fully De-Levered?

Part II: The Recovery: What Kind of Recovery?

Part III: Policy: Explaining the Deleveraging and Recovery We Got

40 Outcomes reflect policy decisions

Policy Choice Result

Monetary reflation and Recovery of financial assets Wall Street bailout and profits

Tax cuts and (Temporary) support of unemployment consumer spending insurance

Modest infrastructure Weak job creation and and public works stagnant wages spending

Policy gridlock and Weak private investment and weak demand slower productivity growth

41 Monetary reflation and the wealth effect: QE is the ultimate trickle down

The Fed has expanded its balance QE pushes stocks up more than sheet to more than $4 trillion (or housing and housing more than 24% of GDP) by buying Treasuries wages

and Mortgage-Backed Securities. 200 5.0

180 4.5

Quantitative easing is the ultimate 160 4.0 trickle-down economic policy: it has 140 3.5 caused huge gains in the stock market $T and boosted housing. But it has done 120 3.0

little to create real wage growth. 100 2.5 Index Index (July 2009=100) 80 2.0 2009 2010 2011 2012 2013 Since the recession ended in 2009, the Federal Reserve assets (right) S&P500 (left) S&P has increased 90%, housing has Case-Shiller 20-city (left) gained 16%, and real wages have Real Wages (left) increased only 0.5%. Source: Federal Reserve, Bureau of Labor Statistics, Standard and Poor’s

42 Transfer payments temporarily supported household income and consumption

Transfer payments temporarily Government Benefits supported household income 900 during the recession, but unemployment insurance and 800 Social other benefits have fallen $102B 700 Medicare and $30B in real terms since the 600 beginning of 2010. Medicaid

500

$B 400 Unemployment The decline in temporary benefits has 300 insurance hit working-age and middle-class 200 Veterans' benefits populations the hardest. 100 Other 0 Transfer payments as a share of income 2000 2004 2008 2012 have declined from 18.1% in the first quarter of 2010 to 17.0% today. Source: Bureau of Economic Analysis

43 Weak public and private investment has resulted in weak job and wage growth

Public net investment and private Private and public net non-residential net investment investment were 2.6% of GDP in 2012, near multi-decade lows. 7.0% 6.0% 5.0% Weak public and private investment have constrained the supply side of the 4.0%

economy and resulted in lower job and 3.0% % of % GDP wage growth. 2.0% 1.0% If the private sector is reluctant to 0.0% invest, government investment becomes 1990 1995 2000 2005 2010 Private nonresidential net investment more critical to “crowding in” private Government net investment investment. But government investment Total has declined. Source: Bureau of Economic Analysis

44 Weak capital investment has also meant slower productivity growth

Weak investment has resulted in Age of private fixed assets slower productivity growth, reducing the economy’s longer 22 term growth potential. 21

The average age of fixed assets in the

United States is 21.7 years—11% higher 20 than the average during the 1990s.

19 Age Age in years If workers have permanently left the labor force and the capital stock has 18 deteriorated and not been replaced by new investment, the supply side of the 17 economy will be a constraint on growth 1980 1985 1990 1995 2000 2005 2010 when demand increases. Source: Bureau of Economic Analysis 45 Weak global growth has meant limited improvement in net exports

The rest of the world has made it Trade balance with the EU and more difficult for the United China

States to adjust away from 2001 2004 2007 2010 2013 consumption toward greater 0.00% investment and production.

-0.50% The trade deficit with the euro area has recently expanded to 0.42% of GDP, -1.00% from 0.2% of GDP in 2009 because the euro area has grown slowly and moved of % US GDP to a large current account surplus. -1.50%

-2.00% The trade deficit with China is 1.8% of GDP, and has begun to widen again to EU China near its all-time high. Source: Bureau of Economic Analysis

46 Visit New America’s Economic Growth Program online: growth.newamerica.org

For media inquiries, contact Jenny Mallamo at: [email protected]

47