Will the U.S. Cease to be a Middle-Class Country?

April 24, 2012 Global Interdependence Center, Philadelphia

Will the U.S. Cease to be a Middle-Class Country?

Technology, Demographics and the Coming Political Storm

Peter Berezin

Managing Editor Bank Credit Analyst 1

INCOME SHARE OF TOP 1% HAS DOUBLED SINCE THE 1970s %

%

U.S. TOP 1% (INCOME ABOVE $368,000 IN 2008)

25

25

20

20

15

15

10

10 © BCA Research 2012

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2

A TALE OF TWO INEQUALITIES

• Well known fact: Incomes at the top of the distribution have surged. • Less well known fact: Workers in the middle of the income distribution have lost ground to both those at the top and the bottom.

3

MIDDLE-CLASS WAGE EARNINGS ARE BEING SQUEEZED

2.4

U.S. RELATIVE WAGES FOR MALE WORKERS, AT DIFFERENT PERCENTILES OF INCOME DISTRIBUTION 50/10 90/50

2.2

2.2

2.0

2.0 WORKERS AT THE 50TH PERCENTILE OF THE WAGE DISTRIBUTION HAVE LOST GROUND AGAINST THE 90TH PERCENTILE AS WELL AS THE 10TH PERCENTILE.

1.8

© BCA Research 2012

1979 4

2.4

1984

1989

1994

SOURCE: CONGRESSIONAL BUDGET OFFICE.

1999

2004

2009

1.8

AUTOMATION AND OUTSOURCING OF ROUTINE JOBS IS NO LONGER A PROBLEM JUST FOR LOW-SKILLED WORKERS • It is useful to break down the skill distribution of the workforce into three categories:  A low-skill group of workers doing manual work (landscapers, restaurant workers, truck drivers).  A middle-skill group of workers doing routine cognitive work (bookkeepers, legal clerks, certain types of computer programmers). A high-skill group doing non-routine cognitive work (CEOs, professors, doctors, lawyers).

• Increasingly, the middle group is being pressured by outsourcing and automation (legal discovery now being done by computer, radiology being outsourced to India, etc).

5

TEST SCORES OF U.S. STUDENTS ARE BELOW THE OECD AVERAGE 2009 OECD PISA SCORES*

540 520 500 480 460 440 420

*AVERAGE SCORE ON MATH, READING AND SCIENCE.

MEXICO

GREECE

SPAIN

ITALY

PORTUGAL

SWEDEN

U.S.

FRANCE

IRELAND

DENMARK

U.K.

NORWAY

BELGIUM

GERMANY

SWITZERLAND

NETHERLANDS

AUSTRALIA

CANADA

JAPAN

NEW ZEALAND

6

KOREA

FINLAND

© BCA Research 2012

7 *AVERAGE SCORE ON MATH, READING AND SCIENCE.

MEXICO

U.S. (BLACKS)

U.S. (HISPANICS)

GREECE

ITALY SPAIN

PORTUGAL

SWEDEN

U.S.

FRANCE

IRELAND

DENMARK

U.K.

NORWAY

BELGIUM

GERMANY

SWITZERLAND

NETHERLANDS

540

AUSTRALIA

U.S. (WHITES)

NEW ZEALAND

CANADA

JAPAN

U.S. ( ASIANS)

KOREA

FINLAND

SIGNIFICANT VARIATION IN STUDENT PERFORMANCE BASED ON ETHNICITY 2009 OECD PISA SCORES*

520

500

480

460

440

420 © BCA Research 2012

NON-ASIAN MINORITIES WILL ACCOUNT FOR OVER 100% OF THE GROWTH IN THE U.S. WORKING-AGE POPULATION OVER THE NEXT 40 YEARS

U.S. WORKING-AGE POPULATION, CHANGE IN MILLIONS

(Million)

40 30

PROJECTED CHANGE IN WORKING-AGE POPULATION HISPANIC ASIAN BLACK NON-HISPANIC WHITE

+43

20 +10

10

-

+8

0 -10

-13 © BCA Research 2012

2010 2015 2020 2025 2030 2035 2040 2045 2050 8

NAEP AVERAGE SC ALE SCORE – MATH 17 YEARS OLD

NO CLEAR PROGRESS IN NARROWING THE ACHIEVEMENT GAP SINCE THE EARLY-1990s 320

300 280 260

NAEP AVERAGE SCALE SCORE – READING 17 YEARS OLD

MATH

300

WHITE BLACK

HISPANIC ASIAN

1978 1982 1986 1990 1992 1994 1996 1999 2004 2008 READING

280 260 240

WHITE BLACK

HISPANIC ASIAN

© BCA Research 2012

1980 1984 1988 1990 1992 1994 1996 1999 2004 2008 9

SOURCE: U.S. DEPARTMENT OF EDUCATION, BREAK IN 2004 REFLECTS SHIFT TO REVISED ASSESSMENT FORMAT.

HISPANIC EDUCATIONAL ATTAINMENT STALLS AFTER THE SECOND GENERATION % OF TOTAL

U.S. COLLEGE - COMPLETION RATE

30

SECOND GENERATION HISPANIC IMMIGRANTS MAKE SIGNIFICANT GAINS OVER FIRST GENERATION IMMIGRANTS, BUT PROGRESS STALLS THEREAFTER

25 20 15 10 5

© BCA Research 2012

NON-HISPANIC WHITE NATIVE-BORN

HISPANIC (1ST GENERATION)

HISPANIC (2ND GENERATION)

SOURCE: 2006 CURRENT POPULATION SURVEY.

10

HISPANIC (3RD GENERATION & HIGHER)

THE ELDERLY RECEIVE MORE THAN TWO-THIRDS OF FEDERAL GOVERNMENT TRANSFERS % 70

U.S. SHARE OF FEDERAL GOVERNMENT HOUSEHOLD TRANSFERS, BY AGE AND FAMILY TYPE

60 50

HOUSEHOLDS WITH CHILDREN ELDERLY CHILDLESS HOUSEHOLDS

40 30 20 10

© BCA Research 2012

1980

11

1985

1990

1995

2000

2005

OLD AGE DEPENDENCY RATIO SET TO SURGE % 36

U.S. POPULATION AGE 65 OR OLDER AS A PERCENTAGE OF THE POPULATION AGES 20 TO 64

34 32 30 28 26 24 22

20 © BCA Research 2012

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 12

SOURCE: CBO LONG-TERM BUDGET OUTLOOK (2011).

SPENDING ON THE ELDERLY IS SET TO INCREASE SIGNIFICANTLY % OF GDP

16 14

MEDICAID, CHIP AND EXCHANGE SUBSIDIES MEDICARE SOCIAL SECURITY

Up 1.3%

12 10 Up 2.2%

8

6 Up 1.6%

4 2

SOURCE: CBO LONG-TERM BUDGET OUTLOOK (2011).

13

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

© BCA Research 2012

THE RISK OF A FISCAL CRISIS IS GROWING

U.S. FEDERAL DEBT HELD BY THE PUBLIC

180 160 140 120 100 80

SOURCE: CBO LONG-TERM BUDGET OUTLOOK (2011).

14

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

© BCA Research 2012

THE REPUBLICANS ARE IN TROUBLE % 70

% 70

PERCENTAGE VOTE FOR: DEMOCRATS REPUBLICANS

NON-HISPANIC WHITES

60

60

50

50

40

40

30 % 70

30 % 70

60

60

50

50

HISPANICS*

40

40

30

30 © BCA Research 2012

1972 15

1976 1980

1984 1988 1992

1996 2000 2004

SOURCE: POPULATION DIVISION, U.S. CENSUS BUREAU. * GAP DUE TO MISSING EXIT POLL DATA FOR 1976.

2008

PROPORTION OF MINORITY VOTERS WILL INCREASE STEADILY %

%

80

80

60

60

SHARE OF VOTES CAST BY ETHNICITY: NON-HISPANIC WHITES HISPANICS AFRICAN AMERICANS ASIANS

40

40

20

20

© BCA Research 2012

2010 16

2015

2020

2025

2030

SOURCE: POPULATION DIVISION, U.S. CENSUS BUREAU.

2035

2040

2045

2050

DEMOGRAPHICS ALONE WILL GENERATE A 10-POINT SWING FOR DEMOCRATS OVER THE NEXT 40 YEARS %

%

ESTIMATED SWING IN FAVOR OF:

4

4

DEMOCRATS REPUBLICANS

2

2

0

0

-2

-2

-4

-4 © BCA Research 2012

2010 17

2015

2020

2025

2030

SOURCE: POPULATION DIVISION, U.S. CENSUS BUREAU.

2035

2040

2045

2050

TEXAS TO TURN DEMOCRATIC? IT’S ALREADY HAPPENING!

18

WILL A MORE IMMIGRATION-FRIENDLY PLATFORM SAVE THE GOP?

60

% OF HISPANIC REGISTERED VOTERS WHO SAY THE FOLLOWING ISSUE IS "EXTREMELY IMPORTANT" TO THEM: 58

54

50

51

40

35 31

30

29

27

20 10

19

SOURCE: PEW RESEARCH CENTER, 2010 NATIONAL SURVEY OF LATINOS.

WAR IN AFGHANISTAN

ENVIRONMENT

IMMIGRATION

FEDERAL BUDGET DEFICIT

HEALTH CARE

JOBS

EDUCATION

© BCA Research 2012

U.S. MEDIAN HOUSEHOLD NET WORTH $

$168,103

160,000 140,000 120,000

$134,992

2005 2009 $113,149

100,000 $78,066

80,000 60,000 40,000

$18,359

20,000

$6,325

© BCA Research 2012

WHITES 20

ASIANS

HISPANICS

$12,124 $5,677

BLACKS

HISPANIC VOTE IN 2010 CONGRESSIONAL ELECTIONS %

DEMOCRAT

REPUBLICAN

SPREAD

MALE

65

22

43

FEMALE

62

23

39

18-29

63

24

39

30-49

62

23

39

50-64

70

18

52

65+

66

26

40

LESS THAN HIGH SCHOOL

61

20

41

HIGH SCHOOL GRADUATE

63

23

40

SOME COLLEGE OR MORE

67

24

43

LESS THAN $30,000

69

18

51

$30,000 - $74,000

63

24

39

$75,000 OR MORE

62

24

38

NATIVE BORN

61

25

36

FOREIGN BORN

73

16

57

ENGLISH DOMINANT

56

30

26

BILINGUAL

71

19

52

SPANISH DOMINANT

68

17

51

GENDER

AGE

EDUCATIONAL ATTAINMENT

HOUSEHOLD INCOME

NATIVITY

LANGUAGE

21

CONCLUSIONS • Globalization and technological change is exacerbating inequality.

• All the growth of the U.S. labor force over the next half-century will come from minority groups that have traditionally lagged behind in educational achievement. In the absence of a significantly improvement in educational outcomes, the U.S. is likely to experience weaker productivity growth and a further increase in income inequality.

• American politics is at risk of becoming polarized by age and ethnicity. If this trend continues, it will undermine democratic institutions as we know them.

• The best hope is that policymakers will have the sense to adopt policies that encourage people to think of themselves as Americans, first and foremost, rather than members of specific identity groups.

22