In Conversation Archives - Page 4 of 5

In conversation with Michael Strain

Posted on June 14, 2018September 24, 2018 by Emilie Openchowski

In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks with Michael R. Strain, the John G. Searle Scholar and the director of economic policy studies at the American Enterprise Institute, about the importance of government data collection for our democracy and our understanding of the U.S. economy over time and into the future.

[Editor’s note: This conversation took place on April 30, 2018.]

Heather Boushey: Michael Strain, thank you so much for being here today. This is just great.

Michael Strain: I’m very happy to be here.

Boushey: I want to get right into the questions I want to ask you today. You write a lot about about government data collection with Diane Schanzenbach, the director of the Institute for Policy Research and Margaret Walker Alexander Professor of Human Development and Social Policy at Northwestern University. And you say that working on data together is a small investment with a big payoff. Can you explain that? What’s the payoff of government data? Who’s using it? What are they getting out of it? Explain to me why you and Diane think it’s a big bang for the buck.

Strain: It’s a big bang for the buck for two reasons. One is the cost of mistakes. Think about what government data are used for by policymakers. The Federal Reserve, for example, looks at information on unemployment, looks at information on price inflation, and then tries to decide what to do with interest rates. Or consider Social Security benefits, which are adjusted by policymakers based on a price index that the government produces. If the price index or if the unemployment rate are measured with a little bit of error, then Social Security benefits could be too low, or they could be too high, or the Fed could tighten too early, or the Fed could tighten too late.

When you consider how large a check the federal government writes for Social Security benefits every month, when you figure how important interest rate decisions are to private businesses, those small errors really add up. And they really result in big expenditures for Social Security, big macroeconomic effects. So, when you compare the cost of producing those statistics to the cost of errors—even small errors—then the cost-benefit really works out such that you want those data to be as accurate as possible.

The other big bang for the buck is that businesses use government data to decide what items to put on the shelves by using information about the demography of their local customer base. Businesses use government data to decide where to open distribution centers, where to open warehouses, and where to open new stores, and where to do all sorts of things. Businesses are just constantly relying on data. So, relative to a lot of things the government does, data are pretty cheap to produce, and we might as well do it right.

Boushey: I understand you wrote that the amount of money that the federal government spends on government statistical agencies is about one-fifth of 1 percent of the federal budget. That’s not a lot. Is that your understanding of what the number is?

Strain: Yes, it’s not a lot.

Boushey: It’s really small. I often think of the weather services, right? All of the data that we have on what’s going on with the weather is coming from government data and satellites. We are getting it through all of these private entities that are, maybe, presenting it in prettier graphics or ways that we can understand, but you need to have that data accurate for us to make good decisions about what to wear in the morning.

Strain: Yes, and that’s a good example of how much government data kind of intersect with our day-to-day lives in ways that we may not even know. A lot of people pull up an app on their phone every morning to see what the weather’s going to be. But not that many people who are doing that really understand that the Federal Statistical System is what’s allowing that information to be possible.

Boushey: So, my next question. Why should this be a government function rather than a private-sector function? After all, the private sector produces a lot of data from the club card at the grocery store or the drug store when it tracks all of your purchases or your bank or whatnot. And there’s some overlap with what private-sector entities do and what government statistical agencies do and what academics do. So, why is it that having government data is so important?

Strain: Certainly, the data revolution from private-sector businesses is great. And all that data is a really important complement to the data that are produced by the government—a positive development for both researchers and businesses especially. But I think looking at data that are generated by private businesses as a complement to government statistics, rather than as a substitute for government statistics, is the right way to look at it.

The data that government produces are designed to be nationally representative. You want to know what the unemployment rate is for the U.S. economy as a whole. You want to know what’s happening to the prices that a representative consumer is facing in the aggregate. That’s not what private businesses are doing. They want to know about their customer base; they want to know about their potential customer base. The data they’re gathering are often gathered as a part of doing business, and so they are just not directly comparable.

In addition, part of the design of some of these government datasets is based on the desire to be able to make comparisons over long periods of time. You want to be able to ask, “What is the median income in 2018?” and then be able to compare that to median income in 1998. And to be able to have that comparison be meaningful, you need to make sure you’re measuring the same thing over time. Private businesses just aren’t in a position to have that as a goal, and that wouldn’t be a good goal for them, for the most part.

So, there are important functions that government data serve that are not well-served by the kind of efforts that private businesses engage in when they’re kind of creating all this data. But, again, they’re complementary. And they’re both important.

Boushey: If the president made you data czar for a day, give me a couple of places where you would focus to make government data collection better, more comprehensive?

Strain: I think the most immediate need right now is making sure that the 2020 decennial census is adequately funded and is as successful as we need it to be, which may seem like a weird answer when you’re thinking about immediate need since it’s now 2018. But it really does take many years of planning and preparation to execute a successful decennial census. The census is not a standard government survey, where you pick 20,000 or 200,000 households. This is an exercise that requires everybody to be counted. If you don’t fill out the form online or fill out the pencil-and-paper form and mail it back in, then the government has to send somebody to your house with a clipboard. That’s the extent to which the government takes this seriously.

And it should be taken seriously because it’s required by the Constitution. It’s how we apportion seats in the U.S. House of Representatives across the states, among other functions. Because it’s an enumeration, because everybody’s counted, the decennial census is used as a benchmark for many, many, many other government data products. And so, if there are errors in the decennial census, we live with those for 10 more years. Because we benchmark other government surveys against the census data, if the census data are wrong, then the benchmark’s wrong—and the other surveys are wrong, too.

So, we have to make sure this is adequately funded. We have to make sure the census has the resources it needs. If part of being a data czar means I get to appoint a head of the Census Bureau, I would do that, too. Because, currently, there is not a head of the Census Bureau.

Boushey: I could not agree with you more that this is just absolutely mission critical. You wrote a piece on this, and in your very first paragraph, you talk about how it’s required by the Constitution, Article I, Section 2.

Strain: That’s right.

Boushey: And that data are used for so many things. How can you know how many people should be in House districts, or other state and local districts, if you don’t have a good count of the people? Every year, hundreds of billions of dollars of federal funding is given to the states based on population. And those population estimates come from the decennial census.

Strain: Even in addition to all of that—which is, obviously, critically important to the functioning of our democracy—there are just all sorts of downstream ramifications to making sure that the 2020 census is as accurate as it can be. And it’s not receiving the amount of attention that I think it should. And in part that’s because it’s two years away, and in Washington anything that’s more than three days away is in the distant future. But this really is such a big undertaking that it really does require years and years of planning.

Boushey: A big part of this undertaking is going out into the field and making sure that the technology works, and that people know how to ask the right questions. But because of funding issues this year, they were supposed to do four tests but they’re only going to do one. Which, as a researcher, makes me a little anxious. And I understand they’re using new technology this year—they’re going totally online.

Strain: That’s one of the reasons why we need those end-to-end tests, to see if people are actually comfortable doing that. If the Census Bureau decides, “OK, this group of people, for whatever reason, are going to be more likely to respond online, so we’re going to send them the online-only version” and half of them don’t respond, then the bureau can’t just say, “Oh, OK, we tried.” The bureau has to send the paper-and-pencil version; it has to send somebody to these people’s houses. And that’s when you start racking up the expenses and the amount of taxpayer dollars you need. If we spend a little more money now, we’ll probably save money on the total cost conducting the census.

Boushey: That’s the second time you’ve mentioned that part of what we’re looking at with the data issues is making smart investments and doing the right thing up front so that we’re not paying more in the end. I think that’s a really important theme. I would also note that the previous time we did the census in 2010, it was in the middle of the Great Recession. And so a lot of people needed jobs, so it was easier, probably, to find census-takers than it would be now, when we’re closer to full employment. I don’t know if they’ll have to pay more for that, but I would imagine that getting people to go out there with pen and paper is going to be more expensive or harder to find people than before.

Strain: Yes, that could be the case.

Boushey: Another thing that could drag down the number of people who are responding is this new addition that the Department of Commerce decided to add, a question asking respondents if they’re citizens. You’ve written that this would damage the accuracy of the census. I want you to walk us through that argument. But first, I would like to preface it with a story about why my housemate in NewYork City in 2000 refused to fill out the census form because he was concerned about privacy. At the time, I was a researcher and I was using census data, so I asked, “What are you talking about? Why are you so anxious about doing this?” He had a college degree, had a good job, was not an immigrant, so there was no reason for him to be afraid, and yet he was. And it really struck me how hard it is to communicate to people that they should hand over their information to the government.

Strain: The best place to start is with what’s actually on the form. It’s very basic information. It’s a very short form, basic questions such as “How many people live in this home? What are their ages? What are their sexes?” Very, very basic stuff that your neighbors probably know about you just by observing you. The point is to count the population and make sure that we know how many people there are in the United States.

Even given how simple and basic that is, every 10 years, members of immigrant communities and members of certain minority communities get a little spooked by the prospect of handing over this basic information to the government—especially when the information is requested in person, which is what happens when you don’t fill out the initial form. And when the Census Bureau was out conducting some interviews trying to prepare for the 2020 census, it discovered that although during a typical year there’s some anxiety those communities, in 2017, there was much, much more anxiety among immigrants and among certain minority communities. It’s not hard to understand why. There’s a lot of really ugly rhetoric coming out of D.C. about immigrants, including from the president of the United States, both after he took office and, of course, while he was was a candidate. And so there’s this kind of atmosphere out there that makes people reluctant to fill out the form.

For people who use government data all the time for their research, that reaction may seem odd. But I think there’s no denying that it’s the case. Add on a really sensitive question about whether you’re a citizen, and the concern that I have—and that many others have—is that that’s going to really spike the anxiety level. Some members of these immigrant communities and these minority communities are already feeling more reluctant to answer the questions, or will answer the questions inadequately out of concern for their privacy, or whatever. But because of the way that immigrants have been discussed by top elected leaders, including the president, it’s understandable why it would be even more of an issue this time around.

Boushey: So, if it does turn out that the citizenship question depresses response rates among certain groups, what are the practical implications?

Strain: Well, it’ll end up costing more money because it means more people have to be hired to go and knock on doors.

Boushey: Last question. One of the things that we do here at Equitable Growth is that we are a grantmaking institution. We’ve funded about 130 scholars nationwide at universities and given away almost $3 million now, over the past almost-five years. As you’re thinking about these issues around data and data collection, what advice would you have for us? Is there any particular issue areas or kinds of data that you think we should be investigating or spending more of our resources to understand or work on?

Strain: We have a statistical system that’s kind of built around a 20th century economy. So, to the extent that you are figuring out ways to update this statistical system to account for the way that we live and work now would be important. But more importantly, to account for the ways that we might live and work 20 years from now, to really have a plan to have statistically valid surveys that capture the information that we want to capture is, I think, a very worthy research program.

Boushey: Thank you. This has been just illuminating. I really appreciate your time.

Strain: Thank you.

In conversation with Richard Reeves

Posted on December 26, 2017September 24, 2018 by Emilie Openchowski

In this installment, Equitable Growth’s Senior Director for Family Economic Security and Senior Fellow Elisabeth Jacobs talks with Richard Reeves, senior fellow in Economic Studies and co-director of the Center on Children and Families at The Brookings Institution and most recently the author of Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It (2017).

[Editor’s note: This conversation took place on October 11, 2017.]

Elisabeth Jacobs: Let’s jump right in, Richard. Who are the dream hoarders?

Richard Reeves: I define them in two ways. One, they are the people at the top of the income distribution who are essentially the winners of the inequality divide in our country, who have risen to the top over the past three or four decades. They are, in my view, the top 20 percent roughly of the income distribution. That means they earn healthy six-figure household incomes, with average incomes of about $200,000 a year.

This is where I see the divide between the bottom 80 percent and the top 20 percent. But then, more specifically, I identify some behaviors among those at the top of the distribution that I think amount to kind of a form of hoarding. In other words, they are kind of overconsuming, or unfairly consuming, some goods or services that actually give them a leg up or give their kids a leg up in a way that perpetuates the inequality that they are currently benefiting from.

Jacobs: What kinds of goods and services?

Reeves: Education and housing are at the top of my list, and the way that they kind of interact with each other. Think about the way the geography of our cities now reflects economic inequality. There has been a slight drop in racial segregation from very high levels but an increase in economic segregation between neighborhoods, between different areas. I think that’s true at the top, as well as the bottom of the income distribution too. So, we are seeing those who are affluent, the top 20 percent and above, separate themselves off into different neighborhoods, which means they can access education resources such as Kindergarten through grade 12 education, and then use local zoning laws to protect the neighborhoods and the land in those neighborhoods from incursions by those who are of more modest economic backgrounds.

That’s all subsidized through the federal mortgage interest deduction. If you want to think about the way in which money buys opportunity and therefore perpetuates inequality, the interaction between the income trends and earning trends, the residential segregation of neighborhoods, the way that education is provided and local zoning laws and regulation of land—they all interact with each other in a way that effectively means the federal government subsidizes me in an expensive neighborhood in an area with great schools. I can then defend against anybody else using unfair exclusionary zoning laws. And my kids therefore get to go to a good public high school and live in a relatively affluent neighborhood.

Jacobs: Why do you think this happened?

Reeves: It’s the combination of millions of small decisions. I think that what happened was that we’ve seen growing labor-market inequality, which combined with inequalities in family formation and family structure and, using a stunningly unromantic phrase, assortative mating, has led to even greater household income inequality. That money, in a society where money matters so much, has been able to be readily transferred into other kinds of advantages, including wealth, including housing, and including access to education.

So, you can see the how. The question then is why, and I think you have to talk about incentives, and the particular incentives of those who are doing well to protect their own position and to protect the position of their children. And I think there is inequality and class perpetuation that really speak to each other.

One of the things I think more strongly now than when I even wrote the book is that actually it’s a long way down from the upper-middle class. It’s a long way down. And the stakes are higher because actually dropping from the 90th to the 50th percentile of income doesn’t look very good down there.

Jacobs: Right.

Reeves: So, being in the middle or lower than that in the United States has dramatic consequences for other things such as access to health care, access to housing, and access to your kids’ education. So it’s both farther to fall and a harder landing, which means the upper 20 percent are highly incentivized to use every means at their disposal to protect their position and the position of their children, and if there are tools available to do that, even if they become exclusionary and unfair, they are highly incentivized at an individual level to use everything, every tool at their disposal. And individually that’s kind of rational, and in some ways sort of justifiable because of this fear of falling, as [author and activist] Barbara Ehrenreich phrases it.

Fear of falling is a really great phrase. The worse inequality gets, the greater the incentives among upper-middle class households to prevent downward mobility and protect their position. The more successfully they do that, the worse inequality gets. I think one other thing that’s important as to why it happens is the more separate these households become, the more their reference point for what counts as rich or affluent changes. It gets distorted because they tend to use local reference points. And it’s much easier to convince yourself you’re not very rich, even if you are in the 95th percentile, if everyone who you know is in the 98th percentile.

This “I’m not rich” problem is getting worse because they are seeing people who are segregated by neighborhood, by institution, by occupation, by marriage, and essentially spending their time more and more with people like themselves or wealthier than themselves. And that actually increases the fear of failure because you don’t see yourself as the winner because you’re always looking up.

This creates real problems as a political way of thinking because it does encourage those who are maybe not quite in the top 1 percent, earning $400,000 or more, to say “I’m not rich. I’m not rich.” Everyone wants to tax the rich, and no one thinks they are rich. And that’s another side effect of economic inequality when it becomes physical, becomes corporal, is incorporated into our neighborhoods and our institutions—so incorporated that it has these huge effects of reference point bias and insulation from what’s really going on. This institutionalization of inequality in the various ways that I’ve talked about speaks to this class divide, and that most troubles me. To me, this speaks to the kind of infantilized debate about inequality, where it’s much easier to stop eating avocado toast than it is to talk about the fundamental problems of the wage distribution.

Jacobs: Part of the problem, too, is the connection between this “I’m not rich” effect and the provision of public services and public goods. Underlying your argument about the separation of classes is that society today doesn’t actually have a unified sense of public goods and have a floor for the quality of public goods in this country.

Reeves: One argument for public goods is it de-risks downward mobility, it lowers the stakes about your own position and the position of your children, and therefore somewhat blunts the incentives to do absolutely everything in your power to protect your position. You can’t get that desperate because the stakes are little bit lower. Therefore, people in the upper-middle class will pull back a bit, be persuaded that actually they need to give up a little bit, and it’s not the end of the world.

Still, for the top 20 percent of households, it does feel like a long way down. When people in the upper-income neighborhood I live in obsess about their kids getting into a good college, and I tend to say, “Relax already,” and they say, “No, it’s different now.” And what they say, it’s because the Chinese are coming, or robots, or whatever—they point to this much more competitive world. But actually I think it is different now, but in a different way. It’s different now because the stakes are higher—that actually failing to get a good start in the labor market will have kind of tougher consequences.

The other thing it speaks to, and you’ve written about this yourself, is the growing importance of human capital of various forms in terms of the labor market. It means you’ve got to do better earlier now. It doesn’t feel as if, well, if you don’t do so well now, then maybe you don’t do so well in college, but you can catch up later. I think the labor market can still do that, but my sense is that it doesn’t do it as effectively as it did before. Unless you hit the labor market with a decent running start in the labor market—and that means increasingly certain qualifications, credentials, human capital, and so on—it’s just tougher to succeed than it was before.

I am making it personal because I think inequality is more personal, that some people are willing to accept as a necessary first step toward saying, “Oh, well, in that case, maybe we do need to do more redistribution. Maybe things aren’t as fair. Maybe actually I could give up a bit more as a necessary first step towards doing that.”

Jacobs: You say in your book that you believe in meritocracy for adults but not for kids. Which is like halfway there, right, but like you still believe in meritocracy for adults?

Reeves: Well, I still basically believe in the market for adults. That invites some criticism from the left, too, because I think the other things being equal, a sort of reasonably freely functioning labor market tends to be relatively meritocratic. I think it has helped to overcome historic prejudices of various kinds, based on gender and race, though there’s still a long way to go. It’s like the alternative to democracy, it’s better than the alternatives.

The idea that social engineers can start deciding that person A is worth more than person B, I think, flies in the face of the evidence of human capital skills. The things that are rewarded in the market tend to be rewarded in the market. It doesn’t mean you can’t then do more to distribute market rewards, but I quite like that. What I don’t like is the fact that the preparation for the market is so uneven. Once the market starts to kick in, it does its thing. So, broadly, the reason why kids of the upper-middle class go on to do so well is not because, by and large, the labor market discriminates wildly in their favor. It does discriminate, but not wildly. It’s because they are chock-full of human capital and skills and credentials, soft skills, hard skills, you name it. They are pretty awesome in the labor market.

The problem is, the idea of meritocracy creeps into childhood. There is selection into our education institutions, even selection into our high schools. That leads to thinking that, well, the brighter kids should get the greater resources, they should get more opportunities. So, the idea of meritocracy kicks in quite early. And if anything, education should be antimeritocratic. If the goal is to equalize the contest, then we need to think about it completely differently and then have the contest.

The other criticism from the left is the top 1 percent. But if one looks at how much real income growth has gone to the 1 percent, and if one uses the share of growth and income accruing to the 1 percent to illustrate the point, then one can produce this amazing chart and say, “This is wrong.” But it’s not just that 1 percent. Some people say, “No, that’s ridiculous, it’s not the top 20 percent, it’s much more like 15 percent, maybe 10 percent.” I say, “Fine, okay, great, big deal.” I’ll take it. I would like to cut the upper-middle income distribution a little bit broader, but I’ll take 10 percent or 15 percent because at least that level is just the 1 percent.

Some people do genuinely still think it is just the top 1 percent who define inequality in the United States. They still have to deal with the fact that individuals and families are moving in and out of the 1 percent quite a lot, but they do still think that that’s the real fracture. There are two kinds of inequality here. There’s a kind of plutocratic inequality and a bourgeois inequality. I think both can be true. You can have the kind of pulling away, not just among the top 1 percent but also the top 0.1 percent. I think within the top 1 percent, there are many who get upset about the 0.1 percent. The 0.1 percent get upset at the 0.01 percent. Every time you add the zero, you just move the class wall a few notches up. The people who fly commercial versus the people who fly first class, and the people who fly on private jets versus the ones who have got their own planes. No matter how high you go, you can always kind of find a class fracture. I don’t think we can just do it on the basis of the top 1 percent.

But in my book, I also examine the danger of the classic “born on third-base thinking you’ve hit a triple” problem. I choose a few examples that get into problems such as legacy preferences in education or the way neighborhoods are zoned or how internships are secured. Because all of that looks like cheating to me. I’m trying to interrupt what I think is a complacent narrative that’s there on the conservative right, which is just, well, they are just amazing people and they are not doing anything wrong.

Jacobs: You talk a lot about legacy admissions, internships, occupational licensing, and exclusionary zoning. Say a little bit more about that and about why you highlighted those.

Reeves: Some of my suggestions about restructuring the financing of higher education, more access to health care, family planning, restructuring K–12, are all highly important and totally unoriginal. There is a vast literature on all of those. We know what need to do. The problem is that we can’t do it. And the reason we can’t do it is because the upper-middle class has convinced themselves that they don’t need to give anything up and that things are hunky-dory, basically. Or they have subcontracted it all out to more distant institutions. They don’t have to do anything personally. I’m trying to interrupt that narrative.

Take the most trivial problem—legacy preferences—and there’s a trivial objection to that, which is made all the time. People say, oh, it won’t make any difference. Great, let’s do it then. So, let’s do that and move on. If it really won’t make any difference, then why are you so worried about it? Why is everyone so troubled about it if it won’t make any difference?

I think the conversation about inequality has to be uncomfortable, and legacy preference is one example of that. It’s outrageous, it’s racist, it’s outdated, it’s a national embarrassment. So you might say, well, if you win that, so what? I would say, if I can’t convince the top of the upper-middle class, these affluent, well-educated liberal Americans that it’s unfair to have a hereditary principle operating in college admissions, then I think the chance of radically transforming the financing of higher education basically is zero.

Jacobs: I’m going to ask one more question. I think the relationship between inequality and mobility is at the heart of what you are getting at. But I think in the American story, race and class are fundamentally interwoven. So, I’m curious how you reflect on that, why you spent so little time on it in the book, whether that was an intentional choice.

Reeves: One of the reasons why that is not a big part of this book is because I am focused on the upper-middle class, the top 20 percent, who remain predominantly white, and are actually whiter than the general population today than they were a few years ago. However, I do think, and I wish now in retrospect that I had said more about the tools that are used to perpetuate class inequality—tools that are racist in origin and remain racist in practice, even if not legally sanctioned.

So, that’s why I’m doing more work now on exclusionary zoning. If you live in a relatively affluent neighborhood, then you don’t have to do that much to change the zoning rules. The status quo favors you anyway. It’s much harder to change things than it is just keep things as they are. And one of the reasons things are the way they are is because of the legacy of racist zoning laws and redlining and so on, which is now being sort of repurposed, I think, to perpetuate class, which again still has racist consequences, even if it is not on its face racist.

I now think there is more to the interaction between the two than I thought. The hardest question, and I think we should stop on the hardest question, is from Hispanic or African American upper-middle class families who ask me, “Do you think that if I am black or Hispanic and I have made it to the upper-middle class, I shouldn’t do everything to help my kids remain there?” That’s one of the hardest questions I’ve had to answer. Because the honest answer is, well, no, I don’t think it is the same. There is a different salience there, and there is a much greater risk of downward mobility for black kids anyway.

Jacobs: We could keep on talking until tomorrow, but you’re right to end on the hardest question.

Reeves: All great questions. Thank you.

In conversation with Kimberly Clausing

Posted on October 18, 2017September 24, 2018 by Emilie Openchowski

In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks with Kimberly A. Clausing, the Thormund A. Miller and Walter Mintz Professor of Economics at Reed College. They discuss tax reform, changes to the corporate income tax, and who gains when taxes on capital are cut.

[Editor’s note: This conversation took place on Monday, September 25, 2017.]

Heather Boushey: Hi, Kim. Welcome! This is so great to have you here today.

Kimberly Clausing: I’m happy to be here.

Boushey: I’m going to get right into it. The White House recently released some more guidance [previews of the Administration’s Unified Framework] on its tax plans but not really anything specific. The ball is now with Congress, so I’m going to try and keep this conversation at a high level.

Often here in Washington, D.C., when the economic policymaking community talks about taxes, it’ll say that the federal government needs to change the tax rate and broaden the base, increasing the amount of income that is taxed. So, when it comes to the corporate tax, what in your view actually needs to be fixed? Is it the tax rate or is it the base?

Clausing: I think the tax rate is important for some companies, but companies in the United States pay a lot of different tax rates, and for some of them, effective tax rates are very low. For the big multinational companies, the federal statutory rate [of 35 percent] bears little resemblance to what they’re actually paying. And many of those big companies have even gone on the record in saying that they don’t care primarily about the statutory tax rate; they care more about other things. But many smaller companies that pay closer to the statutory rate do care a lot about the rate.

One of the really interesting features of our business landscape today is that there’s a lot of concentration of activity and profit at the very top of business ladder, just like there’s a concentration of income at the very top of our income distribution. If you look at the top 1 percent of corporate returns, big corporations account for the vast majority of all the profit, more than 90 percent. And those firms are disproportionally multinational, and they’re disproportionately likely to have profits derived from intangibles assets. And these companies are able to reduce their tax burdens in part by shifting income out of the United States toward other countries. And my work suggests such profit shifting is presently costing the U.S. government more than $100 billion each year in lost tax revenue.

So, I think good corporate-tax reform could both lower the tax rate and increase the tax base, and that would please economists and policy wonks. But it’s not clear that the corporate community is driven by both of those objectives.

Boushey: Tell me a little bit more of why so many of those firms at the top of distribution do not pay the statutory rate.

Clausing: Some of the base narrowing comes from simple things such as the research and experimentation tax credit, the production activities deduction, and other various provisions that lower the tax rate. But the biggest driver is international profit shifting.

Companies such as General Electric Co., for instance, have used the rules of our tax system to move income that really should be in the U.S. tax base to other jurisdictions—often in tax-havens. As a consequence, their effective tax rates are often in the single-digits. In General Electric’s case, its effective rate is nearly zero over the past decade or so here in the United States. Yet the company is still earning billions of dollars over that period throughout the world. It’s just that most of the income is being artificially moved offshore. And so, when you look at its taxes paid on U.S. income, it’s quite low.

Boushey: As we broaden the base, are there ways to do this so that we get around that problem?

Clausing: Yes. There are a couple of things that policymakers could do. For instance, one of the largest tax expenditures in the business area is deferral, which is this idea that you don’t have to pay U.S. tax on your foreign income until it’s repatriated. The companies that benefit from this want to remove that repatriation tax entirely and create a super-highway of tax avoidance where there’s no speed limit and you can simply shift profits to the islands [tax havens such as the Cayman Islands or Bermuda] and never worry about the U.S. government taxing it.

But a more effective way to proceed would be to still tax that income. We can combine taxation of foreign income with a lower rate (and a tax credit for foreign taxes paid), but we’ll actually collect the tax due at that lower rate. On a revenue-neutral basis, policymakers could probably lower the corporate tax rate to about 25 or 26 percent, get rid of deferral, and end up with the same amount of revenue. Basically, what would happen is that tax revenue would go up for the multinational firms that are shifting their income out of the U.S. tax base, and tax revenue would fall for domestic companies that aren’t using these techniques, and those two effects would cancel out.

Now, that approach is extremely unpopular with the multinational business community. One option short of that idea, but still moving in that direction, would be a per-country minimum tax, where you basically limit U.S. taxation of foreign income to countries with very low tax rates. So, if a multinational firm earns income in a tax-haven jurisdiction such as Switzerland or Luxembourg, then the United States applies a minimum tax as the income is earned. If these big firms’ profits haven’t been taxed substantially abroad, then the U.S. federal government reserves the right to tax it at some other rate.

The Obama administration championed this sort of per-country minimum tax regime, suggesting a minimum tax rate of 19 percent, but it wasn’t very popular with the business community. From its perspective, whatever tax rate is chosen for the minimum tax, it will still be a lot higher than zero. So, there are going to be political problems getting that idea through Congress. Still, it is a promising approach.

Boushey: Walk us through this kind of international profit shifting. What’s the scale? Is this the biggest problem we need to solve? Are there other problems that are just as big or is this one above and beyond any other?

Clausing: I think that this is the biggest tax base problem on the corporate side. My estimates suggest this costs the U.S. government about $100 billion a year, which is pretty big.

Boushey: You could invest in a lot of infrastructure with that.

Clausing: Yes, and there are other ways that our corporate tax base has eroded. Look at the interest deductibility provisions, for instance. Those imply that many companies actually face a negative corporate tax rate on debt financed investments, which also lowers tax revenues in the business sector. Also, there is the lost tax revenue from pass-through income, which also is calculated to cost about $100 billion from the domestic side of business income. There’s a nice study by eight economists, five from the U.S. Treasury Department, that shows that the average tax rate paid by pass-throughs is 19 percent, which is far lower than the statutory corporate rate.

Boushey: One of the arguments that you hear time and time again for why Congress needs to reduce the corporate tax rate is that doing so will boost investment in overall economic growth. Tell us a little bit about how strongly investment would react to a reduction in the tax rate at the corporate side?

Clausing: On the corporate side, there are a couple of considerations to keep in mind. One is that the distribution of corporate income within the tax base is highly skewed, with about three-quarters of it due to excess profits or rents. What are excess profits or rents? Well, there’s a normal return of capital, which enables a company to pay the interest costs or the equity costs of raising capital, but any income earned above that normal return is an excess profit.

For those firms that have a lot of excess profits—the Googles and Apples and General Electrics of the world—they are earning more than we normally expect for business activity. It’s not clear that giving them a windfall is going to lead to new investments. They already have more than enough after-tax profits from which to make investments.

If policymakers believe more after-tax profits are the way to suddenly spur investment, we might ask why it hasn’t already happened, since these kinds of firms are sitting on piles of cash. It’s unclear that giving them a bigger pile of cash is going to spur investment. We need companies to have desirable investments. And often what’s stopping them is not the absence of funds, but the absence of viable investments they want to make. If policymakers really think after-tax profits are what’s needed to drive investment, then we should already be in an investment nirvana, since lately we’ve had much higher profits than we’ve ever had in the past 50 years of our history.

Boushey: And yet our investment rate is quite low right now.

Clausing: Right. That’s why I don’t think after-tax profits are the answer.

Boushey: When talking to business owners, there is a wide range of things that drive their investment decisions—everything from consumer demand or where they sit in the supply chain or the quality of infrastructure around them that makes it possible to leverage their investment. Is there anything that you want to add to that list?

Clausing: When you get into tax reform debates, the business community acts as if tax is the only thing that drives its competitiveness, whereas investment decisions and competitiveness are really driven by a lot of other factors. Infrastructure, the education of the workforce, the health of the middle class—these are all crucial things for business success and competitive businesses. And, from a policy perspective, it is likely more important to focus on these factors than on making after-tax profits that are already historically high even higher. And funding education and infrastructure requires government revenue.

So, at a minimum, policymakers should pursue revenue-neutral reform, but there’s actually a case for revenue-gaining reform right now. If you look in the next decade, we are going to have 2 percentage points of GDP in additional deficits because of our commitments to the baby boomer generation’s Medicare and Social Security benefits. Also, to expand business investment opportunities, the federal government needs to make investments in infrastructure and education and in a healthy middle class.

Also, right now the U.S. economy is amid a historically long expansion, which means we’re due for a recession before long. That in itself will drive up deficits, so this seems like a particularly poor time to reduce the revenue stream for all those reasons.

Boushey: If a tax reduction in the statutory rate isn’t going to do much to boost investment, explain to us how it will actually boost the wage of the workers. President Trump and the Republican leaders in Congress claim that tax reform will boost the middle class.

Clausing: They are relying on this idea that corporate tax cuts raise investments, which raise worker productivity, and then higher worker productivity translates into higher wages. You’ll notice several things have to happen for corporate tax cuts to cause a wage increase, and each step entails some faith and some luck.

Start with the fact that the corporate tax base is mostly excess profits, so we’re not sure that extra profits are going to stir extra investment. But even if it did serve to boost investment, that would still have to translate into a wage increase for workers. The evidence on this point is pretty thin on the ground. There is some evidence from Europe that if companies with excess profits receive tax cuts, they’ll share those with their workers, but that’s not the same as causing a wage increase for workers as a whole. If policymakers give Google a big tax cut and Google employees get paid more, that’s nice for the Google employees but it’s not necessarily helping the workers in the economy as a whole.

And we have so many easier ways to help workers directly that it seems odd to rely on such an indirect mechanism. Extending the earned income tax credit is a great way to target the employment and wages at the bottom of the income distribution. Or how about giving the middle class a tax cut by lopping a couple of percentage points off the payroll tax? All of those would go straight to the workers. We have mechanisms in place already that target workers directly, so it seems odd to rely on this very indirect mechanism.

Boushey: So, it doesn’t seem like lowering the statutory tax rate is actually going to spur the kinds of investments that are going to get us to that point where productivity gains translate into higher wages for workers.

Clausing: There are better ways to target worker productivity structured around R&D investments, infrastructure investments, and education investments.

Boushey: My last questions. What’s a piece of research on this topic that doesn’t exist today that you would like to see, and what’s the question on business taxation you really wish we had more evidence on?

Clausing: I’d like to see a lot more research on the excess profits question. How important are excess profits in the modern picture of business activity? A lot of anecodotal data suggests this is a very important issue in today’s global economy, but I don’t think we have a clear picture of just how important.

I also think that there’s some promise in getting a better picture of profit-shifting behavior if we get access to better data on these questions. One of the things that the OECD [Organisation for Economic Co-operation and Development] and the G-20 [Group of Twenty] has worked on is a “Base Erosion and Profit Shfiting” initiative. And one of their items for action is to improve the public access to data on profit shifting. For example, if there were more researcher access to tax data of multinational company earnings, we could get closer to figuring out what’s happening inside the multinational firms.

Also, another one of the recommendations of that OECD group is for country by country reporting, where firms would have to tell each country government where they are earning off their profits. And just by shedding light on what’s going on, this helps curtail some of the profit-shifting activities. And if we made that reporting public as well, it shines a light on the activities of the company. The companies themselves don’t want it—they make the argument that this will basically give away some of their business secrets. But you have to ask, why is how much income you’re booking in the Caymans a business secret? Isn’t that itself a problem?

And if you are really too embarrassed to admit to the public that 90 percent of the company’s income is being booked on an island, then don’t do that in the first place. So, I think there are ways to use corporate social responsibility motives and transparency. More information will help harness the power of consumers and workers and shareholders so that we can better allocate our purchasing and investment and employment decisions. So, I think that would be a minor step forward.

Boushey: To clarify something: So, all that money that’s sitting on those islands—is it literally just sitting there? Or is it being loaned out and invested in boosting economic capacity somewhere?

Clausing: It is being invested—in fact if you look at the data, about 50 percent of it is back in U.S. financial markets—so, you’re certainly allowed to make types of investments with this money. You’re not allowed to return it to your shareholders as dividends or share repurchases, but you can invest it in a financial institution, and that often makes the funds available to U.S. capital markets.

This repatriation issue is an important one because we are distorting repatriation decisions by having this repatriation tax. But I don’t think we’re dramatically changing the investments found in the United States. The companies that have profits abroad can borrow against them to finance any desired investment. And some of the money isn’t really truly abroad—it’s invested in U.S. assets. To the extent that U.S. investment opportunities are high, we will draw more of the capital into the United States regardless.

Boushey: Interesting.

Clausing: But there are still good reasons to get rid of that distortion—I think either ending deferral or the per-country minimum tax would be an important move in that direction. Of course, the territorial system gets rid of this distortion too, but then you run the risk of exacerbating our large profit-shifting problem unless you’re serious about base protection.

Boushey: I think we’re probably out of time. Thank you so much, Kim.

Clausing: You’re welcome. It was a pleasure talking with you.

In conversation with Joan Williams

Posted on September 28, 2017September 24, 2018 by Emilie Openchowski

In this installment, Equitable Growth’s Research Director Elisabeth Jacobs talks to Joan Williams, distinguished professor of law, the University of California, Hastings Foundation chair, and director of the Center for WorkLife Law at the University of California, Hastings College of the Law. They talk about Williams’ book on the white working class.

Elisabeth Jacobs: I’m delighted to be here today with Joan Williams. Joan is one of the first academic grantees co-funded by Equitable Growth for her work with University of Chicago professor Susan Lambert on the business-side impacts of scheduling stability. But we are not here to talk about that today. We are instead here to talk about Joan’s new book, White Working Class: Overcoming Class Cluelessness in America, released by Harvard Business Review Press recently. I’d like to kick off the conversation with the question: Why did you write this book, knowing you are a work-life scholar?

Joan Williams: Well, I basically think of myself as a social inequality scholar. I’m chiefly known for my work on gender, but I have also done a lot of work on how the experience of gender bias differs by race. And I have studied social class for 40 years. I married into a white working-class family in 1978, so I have been thinking a lot about how to bridge what I call the class culture gap between the professional, managerial elite and the white working class.

Jacobs: You’ve chosen to write this book about the white working class for all kinds of reasons. But how many of the things in your book do you think are about the white working class per se, and how many of them are actually more broadly applicable to a very diverse working class? African American families have struggled with many of the challenges.

Williams: There are so many overlaps between the white working class and the working class of color. The need and intense desire for stable jobs that will yield a modest middle-class standard of living is not a white working-class thing, it’s something that appeals to nonelites of all races. That’s why it should be such a central concern for both political parties.

The culture wars reflect that there exist a very different set of cultural dispositions among elites and nonelites. Elites value artisanal coffee. Gender roles. Spiritualities. You name it. Among nonelites, the search is less for novelty than for stability, so nonelites of all races put a high value on institutions that anchor stability, including the military, religion, and family values.

All that produces cultural conflict, but it’s not between the elite and the white working class. It’s between the elite and everybody who’s not elite—poor and middle class of all races. The elites often talk disrespectfully of the cultural truths of nonelites—that’s one of things that’s coming back to bite society.

Jacobs: You talk a lot about how, for white working-class people, their social networks, their kin structures, their lives are very much place-based in a way that means that the expectation that people just move to better jobs and the sort of head-scratching by economists about “why don’t people just move to where the jobs are” doesn’t make a lot of sense, if you think about it in the context of people’s social-cultural lives.

From an economic perspective, it doesn’t make much sense, and I think your work is kind of answering why this decline in labor mobility and decline in economic dynamism in the United States might be an economic puzzle, but in some ways, the sociology of it answers the questions.

Williams: Elites have what are called entrepreneurial networks—wide circles of acquaintances that are often national, or even global. And that’s how 70 percent to 90 percent of professionals get jobs. Working-class and poor people typically have place-based clique networks of family, neighbors, and friends they’ve known forever. Nonelites rely on these clique networks to protect them from their disadvantaged market position, by providing childcare, elder care, and help with things such as home repairs.

So, for moving to make sense, nonelites need not only to find a better job; they need to find one that’s so much better that they come out ahead, despite the fact they now have to pay for childcare and elder care because no family is close enough to help out. Another reason nonelites are reluctant to move is that their social honor is not portable. I was just living in the Netherlands; all I had to do is say I am a law professor teaching at one of the leading Dutch universities for people to want to get to know me. I tell the story in my book about going back to a high school reunion in a working-class town, and having someone ask a former classmate what he did for a living. The classmate got very red and snapped, “I sell toilets!” If your job is inglorious, you want to stick around people who know you, and know that you’re a person to be reckoned with—not just a guy who sells toilets.

Another important point: If you’re working class, the people in the communities you’re moving to have the same kind of dense place-based networks you have—and they’re going to make sure that good jobs go to people in their networks, not to you. This is just the kind of erasure of the realities of people’s lives on the ground that, if I can say this respectfully, economists are so good at.

Jacobs: So, what do you do about that? You often speak about the need for upskilling through non-college-based credentialing and vocational education. But what do you do if people are in places where there aren’t jobs? You can upskill all you want, but if the jobs aren’t there, there’s still the question of how do you make the jobs show up?

Williams: We need a new education-to-employment system that builds alliances between community colleges, local universities, and unions that set up alliances with local businesses, some of them existing, some of them attracting new businesses, so that the businesses can depend on a steady supply of certificate-trained workers with the specific job skills that are needed for their jobs. The goal should be certificate programs that are far shorter than a four-year degree, offered on family-friendly schedules because workers will need to retrain not once, but often several times, for new jobs, as old jobs morph or disappear. This idea and many others come from a very important book out of a Markle Foundation working group, and the book is called America’s Moment, and the initiative is called Rework America. Part of the reason American politics has turned so bitter is that America did globalization wrong, resulting in the loss of many middle-class jobs. We need to do automation right.

Jacobs: That seems like a good note to wrap on. Thank you so much.

Williams: Thanks a lot. I appreciate it.

In conversation with Robert Solow

Posted on July 20, 2017September 24, 2018 by Nick Bunker

In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks with Robert Solow, institute professor, emeritus, and professor of economics, emeritus, at the Massachusetts Institute of Technology; Nobel laureate in economics; and a member of Equitable Growth’s Steering Committee.

Boushey: Thanks so much for joining this conversation, Robert. My first question is: What do you see as the three most important issues for the U.S. economy right now?

Solow: I think that the first two are the inequality issue, and I say two because there’s the numerical inequality, meaning the inequality of size and distribution of income, and then there’s the size and distribution of wealth and what to do about that. Is there any prayer for a more progressive tax system? Our current system is becoming less progressive as we sit here and eat, and so, could we make the tax system more progressive?

The second issue, I think, is the broader concept of equality. One of the things I’ve learned from the election is the sheer disaffection of so many, so many people. And I think part of that is that a lot of people feel that they’re being treated like dirt and they’re disaffected. They feel no responsibility for the enterprise they work for. I saw a New Yorker cartoon, maybe 15 years ago, of a man behind a desk obviously interviewing a possible hire, and the man behind the desk says, “We offer no loyalty at all, but we don’t expect any.”

And that is one of the things, I think, we need to think about. I don’t know whether policymakers can think about this, but they ought to be thinking about it. How do we restore some kind of representation of labor in firms?

Do you recall what Clark Kerr said?

Boushey: A name I’ve heard, yes.

Solow: Clark Kerr used to speak of the main product of collective bargaining not being wages but being what he called a web of rules. Standards of behavior. Who could do what to whom and who couldn’t do what to whom. I’d like to find some way of enlarging and improving the way workers, wage earners, are represented in their firms. Unions used to do that, but even with the best will in the world, you could not restore the trade union movement. If it’s true, what we all think, that the nature of workers changed, that people who work for many employers in different industries, and different occupations, really have changed, then neither the craft union nor the industrial union is the right policy vehicle.

But of course, the online workers that everybody talks about are the prize case in this. They never have contacts with their employers, who change from day to day, and they have no contact with the other people who work for that employer.

Boushey: Yes. It’s hard to organize these kinds of workers.

Solow: There’s no shop floor, but for the online worker, it’s clear who the boss is. The boss is the one who pays, as usual.

So what’s the correct, valid form of representation they could have? How could we do something about their voice and about the web of rules in which they operate? Or something about retirement for people who don’t have a single employer for any length of time? What is the right form of representation? I don’t really think it’s having someone on the board of a corporation. It might matter, but it can’t be the whole thing. I think that you need some kind of substitute. Maybe you need a substitute for the shop floor. How can you be part of a group that you never see, never communicate with or anything like that?

It’s that part of the inequality issue that I think doesn’t attract enough thought, and I don’t know how to go about encouraging that. Who would be good at it? Or what happens in other countries?

Boushey: I think it would be interesting to see how economists think about a labor market in the absence of unions. Is there any way to really make the argument for why this is important? It would be interesting to see more research that helps set that stage.

Solow: Maybe. But maybe it’s sociologists or social psychologists, though I do think the economics of this is important because the object here is not merely to make people feel good but to make them feel effective and be effective in pursuing their own interests.

So that, to me, is part of the inequality issue. It’s not so much a quantitative inequality, it’s a fact that the relationship between the boss and the bossed is getting more and more biased toward the boss, and that makes people feel unhappy.

Boushey: The test is really whether or not you are forced to laugh at the boss’s joke.

(LAUGHTER)

Solow: That’s good.

Boushey: Right?

Solow: That’s sort of the test about whether or not you have any freedom.

Boushey: Yes. It kind of sums up how I think people feel. If you don’t even have the right to not laugh at the boss’s jokes, it’s because you just don’t have any power.

Solow: And you have no status. You’re a replaceable object and, of course, the laws and statutes are now full of regulations and legislation that work against the organization of workers in firms. And the other thing that makes me think this is important is that business firms react or overreact to the possibility of union organization. You may remember a couple of years ago, the UAW proposed to try to organize a Volkswagen plant in Kentucky. And the Volkswagen people said, “Well, we won’t resist. Go ahead and see what you can do.” And you could hear a sharp intake of breath all over the business world in this country. What are these people saying?

I was once on the board of a for-profit organization, and when the possibility of a union came up, they panicked. They absolutely panicked. They thought that two days later they would lose all control of the firm, which can’t be right because we lived for some years with unions in this country, and companies made pretty good profits through much of that time.

Boushey: People still got rich.

Solow: So I think that there’s a real problem here, but maybe it’s more of an intellectual problem than a policy problem at the moment. But policymakers could at least relax some of the ridiculous regulations that stand in the way of employees acting on their own and in their own interests that would be worth trying.

Boushey: What’s the third most important issue for the U.S. economy right now?

Solow: Well, those are the two that really engage me. I think the third thing is nothing new. I think we’re simply ignoring the climate change issue too much. It’s so silly talking about this since it’s all going the other way, you know?

Boushey: The politics?

Solow: The politics. Not only the politics, but the policy. I read in The New York Times this morning—I don’t have a cell phone, so I don’t get my news that way—that the Environmental Protection Agency is firing scientists from its Science Advisory Committee and proposes to replace them with representatives of the industries being regulated.

Boushey: States need to just keep working at it. California, New York, they have to be at the forefront.

Solow: Changing the subject, economists are now having discussions every day about whether we’re at full employment in the economy now. When is the last time you ever saw a really tight labor market, where employers were scrambling to get workers rather than workers scrambling to get jobs? I do not know what the distribution consequences would be if we had a seller’s labor market. Now, I’m as alert as anybody to all the possible inflationary consequences and what-not, but there could be a good couple of years in there anyhow of more full employment.

Boushey: Yes. What we saw in the late 1990s. Incomes rose at the bottom. And we didn’t have inflation.

Solow: We were lucky in the ‘90s. There were a lot of accidental things helping to keep down inflation, such as health maintenance organizations that were holding down health costs and some other costs as well. But today, it would be so interesting to try for real full employment again. But it’s so amazing to me, the asymmetry of it. As soon as any firm says, “We’re having trouble finding skilled machinists,” that hits the newspapers. But if a skilled machinist says, “I’m having trouble finding a job,” that doesn’t seem newsworthy at all.

Boushey: That’s a very good point. I was on an email thread this week about full employment with a bunch of economists debating whether we’re there and how close we are, and yet the employment rate is still low. It’s great to be having this debate. Are we there yet? How close?

Solow: Yes, except that I’m afraid the answer will be “yes.”

Boushey: Bob, thanks so much for sharing lunch with me and covering all of these topics today. It was very stimulating.

Solow: You’re welcome, Heather, and thanks for lunch.

In conversation with David Weil

Posted on June 22, 2017September 24, 2018 by Nick Bunker

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability. In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks to David Weil, currently the Peter and Deborah Wexler professor of management at Boston University’s Questrom School of Business. Weil will become the dean of the Heller School for Social Policy and Management at Brandeis University in the fall. They talk about Weil’s research on the “fissured workplace,” the influence of monopsony power, the rise of interfirm inequality, and his experience in government.

Heather Boushey: Thank you so much for taking the time to do this interview. Your research and writing on the fissured workplace has been so important for understanding what’s happening to the U.S. labor market over the past several decades. I want to run through your ideas, but I also want to tap into your experience as a policymaker. You just spent three years working for the Obama administration, putting your ideas into action, and I’d like to hear a little bit about that.

We can come back to that in the end, though.

I had the pleasure of co-editing “After Piketty: The Agenda for Economics and Inequality,” which of course is a volume you contributed to. And your chapter was on the fissured workplace. I’d like to start off this conversation by asking you to explain what you mean by that. Not everyone who’s listening to this or reading this will have heard your argument. What does a fissured labor market look like?

David Weil: The whole idea of the fissured workplace grew out of thinking about a bunch of phenomena that had been happening to the labor market, with business organizations outsourcing, subcontracting, and third-party management. I had been studying in various projects the changes in business organizations and thinking about some of their impacts on compliance with workplace standards and other labor market outcomes. And at a certain point, it started to strike me that there were common elements about these different activities.

First of all, public and private capital markets were pushing businesses throughout the 1980s to talk about what’s their core competencies and to kind of focus increasingly on what were they delivering to their customers? And what were they delivering to investors in terms of the value they’re creating. Living in a business school has made this sort of something I hear a lot as well. And as you know in economics, there’s nothing inherently wrong with specialization. It has been a driver in so much of economic history and business development. But the pressure over the past decade seemed to be at an almost laser focus.

So you started to have companies really shedding anything that wasn’t core to their definition of value creation. And that led to the second element you see in fissuring, which is this desire to shed anything that doesn’t contribute to the perceived core competency. If you look at different businesses and industries, the process of shedding plays out somewhat differently, but the basic evolution is they start by shedding things like payroll, accounting, information technology, publications, things that they can find other players to provide, usually at a lower cost.

But then you start seeing that the activities they’re shedding continues. It’s like businesses started to say, “Hey, this is actually kind of cool. I can get this stuff done, and instead of paying, let’s say a wage, to a person to do something, I am paying a price to get the same activity.” And so that shedding starts moving inward to more and more activities that are pretty central to what that business does.

So, for example, in the hotel industry in the 1980s, the branded hotel industry got out of the business of actually owning properties. Instead, they came to define their core competency as managing portfolios of brands. And so you married a strategy of franchising the property to a strategy of simply owning the brand and making sure that the brand was being delivered by these properties. The property owners would pay you revenue for the use of the brand name or the brand affiliation through royalties, advertising, and licensing fees. The franchise owners get the benefits of the brand recognition but now face the problem of managing the property and hiring the workforce. We can talk about any number of industries where this process also started to happen. The pathways differ, but in each case, they’re shedding activities as almost a complement to pursuit of the chosen core competency.

But the third piece, which is really important in my mind to understand both the fissuring phenomenon and its public policy implications, is that companies needed some kind of glue to hold the first two elements together—like the hotel brand’s standards in the above example. Why? Because if I’m trying to maximize the value of my core competency but I’m shedding activities to other players, those businesses can undermine my core competency. So the third piece is creating some kind of organizational glue to make sure those other entities don’t stray, that they keep to task, that their incentives are aligned with the main company’s in a way that you still have the product delivered to quality or technical or time specifications, or all of the above.

This is why I think franchising started to spread to lots of sectors. It’s a form of business organization that allows you to shed and yet control. That’s the nature of a franchise agreement.

I think information technology facilitated this because you have lower-cost mechanisms to monitor subsidiary organizations or the networks of organizations that make up a fissured workplace. I think Uber is an example of exactly this, in probably the most technologically advanced form out there. But years ago I had studied the evolution of the supply chain in the retail industry, and the standards that came with those business arrangements are also about the glue. So you can find this glue manifesting itself in different places. That’s the key third element.

The idea of fissuring is really the combination of those three things applied in different settings that has the net effect of breaking apart the employee-employer relationship. Take the hotel example. Once the property was franchised, the owners of the property had limited knowledge about running a hotel. So you’ve got third-party managers running the hotel owned by a different entity under the specifications of the brand. And those third-party managers typically started hiring staffing agencies. They didn’t want to be the employers either. And so you have this deepening of the fissures. Subcontracting begets subcontracting.

Fissures like this also spread. They spread to other industries. They spread to other parts of the occupational distribution of a given industry. And the end result is you have broken apart the employment relationships. Sometimes this reflects employers trying to avoid their own liability under workplace laws and regulations. And that’s an important part of it.

But I think another part of the phenomenon that I’ve always been trying to emphasize is that it goes beyond avoidance of liability. Because if you think this is just about employers trying to weasel out of their responsibilities, you miss this more fundamental change, in my mind, that’s happening in business organization. And if you’re trying to ultimately deal with the consequences of that, then you’re underestimating the difficulty of unwinding that behavior or changing that behavior in some way to deal with the consequences in the labor market.

Boushey: So part of what firms got rid of are the management problems with all the subcontracting because managing humans is difficult, and nobody wants that piece, and so they want to separate that from all of the actually profitable parts of the enterprise. But they’re paying a price rather than a wage, right, which of course is what Uber does. Yet there are all these rules, which means the company is still in control. Traditionally, we’d have this distinction between a contract and being an employee. But it seems like you’re suggesting that there’s something more to the management problem than just the responsibility.

Weil: No, I think you’re exactly right about both elements. Managing people is messy. And businesses, if they can push that to someone else who can do that problem for them more effectively, they’re going to do it.

There’s a really interesting guy in capital markets. You’ve probably met this guy, in the financial services industry, Steven Berkenfeld, who’s at Barclays Bank. Steve has been thinking a lot about the future of work, and I’ve appeared in some of these future-work seminars with him. He likes to quote Henry Ford, who asked why he had to get the rest of the worker when all he wanted was his hands. Steve has talked about this insight in the financial services industry after the financial collapse, when there was a scrambling to cut costs as much as possible. Some of that was accomplished by companies shifting work out of financial services industries to contractors.

This vignette from that industry, which I think is suggestive of what you’re talking about, is once they did it, they suddenly said, “Oh my gosh, so much better. We don’t have to deal with messy humans. We can just pay for this other company to deal with it. And we don’t have to look into that box anymore.”

But I think this is a public policy fallacy because they are still setting so many of the terms about what that box does. In terms of how we think about this in terms of public policies, what I sometimes call the lead company is still dictating outcomes, performance goals, and very specific things that they want those entities to do. In so many ways, their hands are still all over matters that are still about the employment relationship. But they have created this market distinction between their activities and those of the subsidiary.

I think the management piece is a big part of it, but again, with the caveat that they have created a glue to make sure they follow what is required to achieve core outcomes for the lead business.

But another critical impact of fissuring that you noted is its impact on the setting of wages. This is what I wrote about in my chapter for “After Piketty” that you edited. The wage-setting process is transformed by shifting out work. Why is it that companies set single wages for a job? Why do they set standard wages rather than be a price discriminator and set a wage so that each worker gets only their marginal product of labor? It’s because people are working within the four walls of the same entity. We are social animals, and equity norms come up. And people compare their wages, whether they are allowed to or not.

Boushey: Yes, they do.

Weil: People know. People know. They are very aware. And because people are aware, employers are aware. And so you have more uniform wage policies. You have standard wages.

There was a big literature in the 1990s about why did large firms pay more to certain workers than otherwise equal workers in smaller firms? And the answer, to me the most compelling answer, is things like fairness and equity. That if you’re in the structure, if you are a janitor working at a GM facility, you know what the people on the assembly line are earning. And that tends to pull up your pay.

And we know from the work of [University of Massachusetts-Amherst economist] Arindrajit Dube and [Boston University economist] Johannes Schmieder that there is a premium for being in-house versus broken away from the mothership. Once work is being paid for by a price as opposed to a wage, then it’s no longer a wage-setting problem, and so a lot of those equity norms change.

From an employer’s point of view, they can breathe a sigh of relief. They don’t have to deal with that anymore. They don’t have to deal with the fact that it’s complicated to think about “What should I be paying the folks who are doing the landscaping because they’re no longer my employees? They’re just this thing I outsource.”

I think that has consequences. What’s driving inequality, to me, comes back to the fissured workplace. It comes from the consequence of shifting the wage-setting problem to all these other entities and kind of getting out of that fairness bind that employers otherwise have to deal with differently.

Boushey: Exactly. Saying that a janitor is going to be paid a higher wage in a larger firm means that labor markets aren’t perfectly competitive, right? So one of the questions we’ve become a little obsessed with at Equitable Growth is market structure and competition and monopoly and monopsonies. Talk to us for a little bit about the role of monopsony in the fissuring of the workplace.

Weil: Part of the way I view fissuring is as a way to deal with the problem of setting monopsony wages. It’s hard to do that if they’re your employees. It’s much easier to do if I am setting prices for a bunch of janitorial firms in different facilities. Then I have a bunch of prices and I put it out to competition. And if the janitor in Facility A is being paid differently than the janitor in Facility B, that’s not my problem. I’ve just hired two different firms. And once you break out of the problem of having a single price, what do you do? You do price discrimination.

In my mind, by fissuring, you are able to do essentially wage discrimination without having to set wages. You’re doing it through the pricing mechanism. I think this has had a big effect, in particular, on lower-wage work. You are pushing that kind of work to a set of firms who are in higher levels of competition with each other. Studying the labor market from my perspective would certainly lead me to believe that labor markets are far from perfect, but I think companies are pushing wages closer and closer to what we would think of as marginal productivity. And some of the rents that used to be collected by workers because they were inside a firm, even a nonunion firm and certainly in a unionized setting, are now going back to the companies because the companies are playing close to what they actually need to pay to entice people to do that work.

At the same time, you have these firms that are shedding activities but also are rapidly moving up. So if you are lucky enough to be in the Google mothership, you soar up with that wage structure. You’re moving up because your company is moving up. And wherever you are, whether you’re an engineer or an executive, the whole pay structure’s moving up. And then you have these businesses in the shedded parts of the economy where those pay structures are being pushed downward, closer to the marginal productivity of labor. And even the executives in those businesses who are providing these services for the lead companies in the economy are not doing nearly as well because they’ve been separated from the same kind of mothership relationship. I think we really need to better understand how a wage is determined in those enterprises.

Boushey: So this leads to the issue around who captures the rents. There’s a body of research showing that the distribution between the amount of national income going to labor versus going to capital has been changing over time. Increasingly, it seems like one of the big research questions out there is “What is the connection between the two?” Where do you think some of the research questions are that you think are most pressing for us to start investigating?

Weil: There’s this paper right now that [Massachusetts Institute of Technology economist David] Autor and [Harvard University economist Lawrence] Katz and [MIT economist John] Van Reenan have about the diminishing labor share tied to essentially increased concentration of firms, or those industries with higher concentration ratios on the product market side are also ones where you see diminished share of income going to labor. I think that is a phenomenon very consistent with what I’m talking about, about the separation and the rushing apart of businesses from those that are still able to capture the value and capture the rents. And at the end of the day, they might have a lower labor share because of the part of the work they’re doing.

If you are a major hotel chain right now, a hotel brand, a big part of what you do has to do with creating and sustaining brands. It’s not employing people who are cleaning rooms anymore. That’s going to other entities. This is the mechanism that actually allows or enables that separation to exist. And what I think we don’t know enough about is whether the wage-setting policies in both the entities are moving down in the distribution of businesses and the entities that are quickly moving up the distribution.

You know, I think in one sense the entities that—and here I’m thinking about this interesting experimental literature that I associate with people like Ernst Fehr, who has studied equity norms and fairness norms inside businesses, inside firms. I think a lot of that probably still holds. That you still are very cognizant of pay differentials.

You were joking before about everyone in firms knowing what other people are being paid, and therefore employers want to keep everyone happy because they don’t want to lose people. But I think we need to know more about the moment when employers say, “You know what, wouldn’t it be nicer if we shifted them out?”

I don’t think the shifting out has stopped. I am fascinated and concerned by the increasing number of higher-education jobs that are being shifted out. And I think that again becomes the operative question. It isn’t so much “How do I set salaries of all of those in the mothership?” It’s “Who am I deciding to jettison next?” And if you look at the structure of law firms, they’ve been transformed too. More and more of the mundane, day-to-day legal work has been shifted out to contract kinds of operations in the legal field. And you’ve had this separation of earnings. If you are a lawyer but no longer in one of these decreasingly common big law firms, then your returns as a lawyer have gone down substantially.

I’ve always found it very interesting when I talk about some of these things with journalists. They quickly say, “Oh yes, you’ve just described my life.” You know, “I would have been a full-time reporter.”

Boushey: Now they’re doing freelance.

Weil: Yes. Everyone’s freelance. A lot of the underlying logic of the fissured workplace I think has now spread to lead companies and caused them to think more and more about “Who else can I shed?” That, to me, is part of what the research agenda needs to continue to look at. What are noncompete agreements about? Why are noncompete agreements becoming so common? There’s the absurd noncompete agreement that Jimmy John’s hourly employees had to sign. It would not surprise me a bit that we’re going to see more and more of that work of people with higher educations also being affected by these trends.

Boushey: Are there any other research questions that you think are really pressing? And I ask in part because Equitable Growth is a grantmaking entity. We are looking for scholarship to support, and we’re trying to entice people to ask research questions that are really important to policymakers. Your advice would be super helpful.

Weil: I think we don’t understand enough about wage norms. I’m primarily now thinking about those labor markets where people are more subjected to the brutal pressure of the market. We still don’t know enough about where referent wages are and how you can affect those, and what people look to, and how that might vary. How important are social networks to the propagation of wage norms? How do they work out? How geographically focused are they? How do they play out in labor markets where ethnicity is important?

I think all this is important for its own sake in understanding the dynamics of this increasingly fissured workplace. But I also think from a public policy point of view, our policies don’t pay enough attention to how wage norms are set and then as a matter of policy to how to move those upward. I would offer as an anecdote the “Fight for $15,” which I would cast as a really successful social movement. By trying to affect the wage norm, that $15 becomes salient. I think it’d be fascinating to know where you have labor markets that feed, let’s say the fast food industry, where you’ve seen that change in the reservation wage because of the impact of that social movement.

Boushey: In an era where so few workers are unionized, to what extent does that become the marker of a good firm? A personal anecdote before you answer the question. I’m working with someone, and we’re looking for a venue for an event. But it’s in a place where there are no unionized hotels. And so one question we have is “Could we use $15 as the demarcation that takes into account some sort of labor standards?”

Weil: Right. Right. Right. Yes, and I think that’s a great example. I think I’ve always been somewhat of a skeptic of corporate codes of conduct and things like that. I think I’ve been more skeptical because I find often that people who are promoting those codes don’t seem to have an understanding of some of the issues of wage norms and how what they’re trying to do might fit into that. That being said, I think if we did have a better understanding, you could see how the decisions of private players and other innovative forms might be able to ultimately affect things that we care about in a public policy consequence.

Right now, in a world where we don’t know what the federal government’s going to be doing in terms of protecting basic labor standards, it seems to me that’s even more important because you need to then act on those wage norms, to try to do what we would normally do through minimum wage or basic labor standards policies.

Boushey: Well, so let’s use that as a segue to you just coming out of surveying for three years in [the U.S. Labor Department’s] Wage and Hour [Division], making decisions around policy. Is there an example of something where your research influenced what you and other policymakers did?

Is there a good example of something where you were studying something and then made something happen or tried to make it happen?

Weil: I came into Wage and Hour having had the wonderful opportunity of advising it for a number of years. I was lucky enough to think about some of these issues before coming into it. I think one of the hardest things walking into an agency like that is if you don’t have an agenda, the day-to-day problems that come across the desk can completely swamp you. And if you don’t have a vision about what you’re trying to do as an agency, or as a leader in an agency, it’s very difficult to chart a course.

I came in very much with having had an opportunity already to think about and, in some sense, engage with the department on what kind of changes you needed to make to deal with the fissured workplace. I really thought about my job in terms of two huge external pressures.

One was the fissured workplace and the complexities it creates for a labor standards agency. Who’s the employer and who should we be worried about compliance is a very complicated thing to deal with. That problem overlays on a long-standing problem, which is a resources allocation problem. The Wage and Hour Division oversees laws that cover 135 million workers in 7.3 million workplaces. President Barack Obama had increased the size of our investigation force from its all-time low to 1,000 investigators. So we had 1,000 investigators to oversee 7.3 million workplaces. And those workplaces were increasingly fissured.

My obsession was how do we move more and more of our resources to a proactive approach on enforcement where you’re explicitly trying really to change behavior. Not just to recover back wages for workers. That’s obviously really important. But in my view, given those two forces, what you really have to be thinking about is changing the behavior of organizations so they comply in the future. And using every tool you have available to you, which starts with enforcement.

We had not historically used all of our enforcement tools. We had tools in the tool chest we had neglected to use. So we started to aggressively recover liquidated damages along with back wages. We started to use civil monetary penalties much more aggressively. We started to dust off what the law gave us and use those tools more effectively. We changed the relationship with our solicitor’s office so that our investigators were often thinking about “What or how can this translate into something that will really have greater effect through a litigation-based strategy?” Those are all tools of trying to use your enforcement tools to greater effect.

Secondly, we shifted away from being an agency where 75 percent of our investigations came out of complaints, which is typical for most enforcement agencies. Our view was that if you do that, you’re inherently reactive. And even more so, we wanted to focus on low-wage, vulnerable workers, who are obviously the ones most affected by violations. If you just follow complaints, you’re kind of thinking that the people who complain are those people, and they’re not. And so we had a lot of statistical analysis done.

And this was one of the projects I’d worked on years before, to show that industries with the highest levels of problems, objectively measured, were some of the ones with the lowest complaint rates. So you have to move an agency away from a complaint-driven culture toward one that’s using more of its resources for proactive, essentially agency-initiated investigations.

And by the time I left, almost 50 percent of our investigations were directed proactive ones. And the 50 percent that remained, complaints, we had changed the mechanism used for triaging. We were triaging incoming complaints so that it was no longer first in, first out but rather evaluating the incoming complaint and asking questions like “Does this complaint suggest a bigger problem? Is this a complaint that maps onto our larger proactive initiatives?”

And then another major element we focused on, and this goes to the fissured workplace, is where the back wages are owed because those workers are usually living on the bottom of some fissured structure, such as at the subcontractor level. And if you think about it, that subcontractor’s CEO, so-called CEO, is probably a small-time operator who’s got a very thin margin because the price they’re being paid is being set by someone up the chain, and so on. We really took a lot of heat from saying, “Well, the statute says there’s joint employer responsibility.” But we had a major initiative on joint employment so that we could make sure that pressure was applied to all relevant parties that contributed to the violation.

We put a lot of energy into misclassification of workers because, again, I think that misclassifying someone as an independent contractor rather than an employee is often something that happens at the bottom of a fissured structure. We wanted to say, “Look, you can’t just call people independent contractors because you don’t want to have to bother with all of the things associated with an employment relationship.”

Whether through the mechanism of joint employment, or simply the mechanism of saying “Look, you might not be the employer of record but if you are sitting as a key player in this whole structure, then you are setting standards. You are hiring staffing agencies. And therefore, we want you at the table.” And we did a lot of different initiatives to pursue this broader approach to enforcement and outreach.

One of the best examples, I think, is in the summer of 2016, when I signed an agreement with president and CEO Suzanne Greco of Subway sandwiches to create a voluntary compliance arrangement across that company’s franchise system. Subway understood and acknowledged their interest in improving compliance among their 13,000 franchised outlets and the tens of thousands of employees who worked for them. The company had a history of years and years of problems and violations. The agreement was built on my agency’s and the company’s mutual interest in addressing those problems in a more systemic fashion. That was the kind of agreement I was happy to sign partly because I wanted to see if that kind of thing could also work and partly because it was another way of bringing in a higher level of a fissured structure to the table and figuring out “How can you move compliance in that way?”

All of those ways and many other efforts were the long game we were trying to play. And I think we really did move the needle in a lot of those areas.

Boushey: Well, it also just shows the importance of government spending if you’re asking resource questions that are important in the real world, and thinking about how we’re going to apply them so that when you have that opportunity, you’re really able to take that depth of knowledge and make it into something real. It’s very impressive.

Thank you so much for the interview. But mostly, thank you for your service and all the work you’ve done to make workplaces better for millions of Americans.

Weil: Thank you.

In conversation with Sandra Black

Posted on May 24, 2017March 8, 2019 by Nick Bunker

In this installment, John Schmitt, then Equitable Growth’s research director, talks to Sandra Black, the Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs and professor of economics at The University of Texas at Austin. They talk about Black’s experience as a member of former President Barack Obama’s Council of Economic Advisers, her transition from academia to the policymaking world, and what she’ll take away from her time on the CEA.

John Schmitt: So you studied economics as an undergrad at the University of California, Berkeley, you got your Ph.D. in economics at Harvard. You went from assistant to full professor at the University of California, Los Angeles, before getting named a chair at UT-Austin. It’s, I think, fair to say that you are very steeped in academia and very successful as an academic economist! What made you decide to take a break from that world and come to Washington to work on economic policy on the Council of Economic Advisers?

Sandra Black: It was an unexpected change. I had been asked in the past if I was interested in working for the Department of Labor. But at that time I wasn’t interested, I think in part because I was really focused on the academic track and my research, and I didn’t feel like I could afford the time off. So this time, I got an email from [member of the CEA] Betsey Stevenson saying, “Do you have a minute to chat?” When we talked, she said, “I’m leaving the Council of Economic Advisers; might this be something that you were interested in?” And I had that moment of “Well, I’ve said ‘no’ in the past, but maybe now.”

It was actually not something that I had always thought I wanted to do. I really like doing research. I really like being a professor. I was quite happy with what I was doing. This seemed very scary in a lot of ways because it was so different and unfamiliar to me, having not done anything like this before. It felt like being thrown into the ocean and trying to learn to swim, not even the swimming pool. This is the ocean.

I decided to visit the CEA. I was going to give a talk in New York and decided to fly to DC to meet Jason Furman and other people at the CEA. I remember walking up to the Eisenhower Executive Office Building, wearing a suit that I had to buy for this very purpose and thinking that this was such a strange life that I could not imagine at all. And at the time, I met with [former Director of the National Economic Council] Jeff Zients; I met with [former Senior Adviser to the President] Valerie Jarrett; and I did not realize how influential they were because I was not part of that world at all. But it seemed so different, and it seemed like an opportunity that I couldn’t pass up. It felt really important.

So I said yes, and all of a sudden my life totally changed.

Schmitt: How so?

Black: It was really a shock, coming here. The whole transition was really overwhelming. There’s no sense of privacy. Someone is scheduling you every 15 minutes, and there are no bathroom breaks unless you ask them to schedule in a bathroom break. The tasks that you perform, even the lifestyle, are very different. Even the way you think is very different—you are thinking about 20 different projects all within one day, so you don’t get to think deeply about things. As an academic, we spend a lot of time focusing on one topic and try to become an expert on that topic. At the CEA, you don’t have the luxury to spend so much time on one topic. Instead, you have a more superficial knowledge about a lot of things. I would work late at night or in the early morning to try to expand my knowledge and process an issue so that I would be better prepared for a meeting the next day.

That’s a skill that I think academics may have, but we don’t exercise that muscle very much. It took me a while before I was comfortable going into a meeting without a deeper understanding of the topic, with only a basic understanding. A lot of policy involves basic economic principles or basic research. Interestingly, the transition back to academia has required undoing all that. And I found that hard. At the beginning, just sitting and thinking about one project for a whole day, it was hard for me to focus on one topic for so long. And it used to be that I was really good at that! That’s what I could do, and that’s what I liked. I was joking that it’s only been in the last three weeks that I can really sit for a day and just do research on one project.

So it’s been a really interesting transition in and transition out.

Schmitt: You described having a kind of broad set of things that you had to do each day and not the same depth that you might do in academics. But for people who are unfamiliar with the CEA, what is it that you do as an economist there? What kind of questions do you get asked? How much time do you have to answer them? And how do you answer them?

Black: There are a number of different tasks that we perform on the Council of Economic Advisers. One is if there is a policy process, where we discuss the pros and cons of different policy options. In this case, there would be meetings, and the CEA would have representatives at these meetings. And so someone like Greg Lieserson [then a senior economist at the CEA, now at Equitable Growth], who had been to a number of meetings on a topic, would come and talk to me and say, “This is where we are, this is what I think, here’s what you need to know,” and then I would go and represent the CEA at a meeting. Sometimes it would be a big picture meeting, where we were talking about the big picture of “What do we think about this policy?”, and other times it would be very detail-oriented on a specific policy.

Often, I was briefed by people on our staff who knew a lot of the details so that I would go in there knowing about the topic. This was really different from my life as an academic, where I do my own research and is something that I really like about being an academic. I like to look at the data so I know what’s going on, and then I feel comfortable standing up and talking about it. In the world of the CEA, someone is telling you “This is the research.” And sometimes you have time to actually look at the research, but a lot of times things are time-sensitive and you’re taking what they tell you and saying “Okay.” So you count on having good colleagues you can count on, which is really important and something I valued very much about being at the CEA.

So that’s the policy process. Another aspect of my job was representing the CEA on public panels, talking about the policies that we were promoting. And that, to me, again involved a very different set of skills because that’s very public-facing. At the CEA, I was representing the Obama administration, not just Sandy Black. I needed to be prepped in terms of how to respond to questions, which was very strange to me because, as an academic, you’re very used to just kind of saying whatever’s on your mind. You can see that that might not always be a good strategy if you are representing the administration.

When I started at the CEA, my first presentation was at the Brookings Institution on the research the CEA had done surrounding the updating of the College Scorecard. I was presenting a paper that the CEA had produced, and it was an excellent document, but I was actually not there when they had done most of the work. Going and presenting something that was not my own work was really challenging. And again, I think I got better over time, but these are all skills that you don’t go in necessarily having.

We also would do internal analysis, keeping the administration up to date on what the research is saying, or what’s going on with the economy, writing memos for the president or for the other principals. I think this was something I was most comfortable with because that’s really using the expertise that I felt I already had.

Schmitt: You talk about the internal policy process, about representing the CEA and the administration, and about keeping the administration up to date on what the research is saying. What role does research play across these three areas? Does it help? Does it hurt? Is it beside the point?

Black: I was really heartened by the fact that people value research—I did not know if that would be the case when I arrived. There were a number of good surprises that I discovered early on. One was that I really felt like the people working for the Obama administration genuinely wanted to help people. We may not always have agreed on what the best way to do that was, but I always felt like people were coming from a good place, which was really nice. As an outsider, I did not think that was necessarily what I was going to find. And I really liked working with them.

The other thing that was a really nice surprise was that people did value research, even when the research didn’t support the policy they wanted. They would say, “Okay, this new research may provide information about a specific policy, and it is good to know this. Do we still want to support that policy?” Policies can have some negative consequences and still be overall good policies, so you then want to try to mitigate these negative consequences. But it’s important to know what the consequences are, right? You’re always better off knowing what might happen than not knowing.

And so I really feel like the policymakers that I met and worked with seemed to really value that approach to research. I don’t know that it’s a universal quality, but it was certainly something that was gratifying as an academic and made me feel like that’s something I’d like to continue, making the link between academic research and disseminating it more broadly to policymakers.

Schmitt: Which leads to a natural question: Have you learned things here that will help in your teaching or in your research when you go back into academia?

Black: I think it definitely spills over. I mean, I can show students pictures of me with the president.

(LAUGHTER)

I think it will definitely help with my teaching, in that people like real-world examples and now I have them. Now I can say, “And then President Obama said this,” and how can you not believe that a topic is important when you know that it’s something that the president was thinking about? I think it makes the topics more relatable. And I teach undergrad econometrics, usually, which is not a super-hot topic, which makes my ability to use real-world examples even more important, highlighting the econometrics we use when making suggestions for the president.

Schmitt: Did [former president Obama] follow econometrics?

Black: He’s really smart. I’m just going to put that out there. [Former member of the CEA] Jay Shambaugh and I once sat down and talked to the president about skill-biased technological change and the academic research on that topic. It was the most amazing conversation—the president was so smart, and so informed, and so genuinely interested. When we walked out of the Oval Office, we turned to each other and said, “That was cool.” That was a really cool experience.

In terms of my research, I think that it will change. I now know a lot more about macroeconomics and the link between macro and micro, whereas before I was very micro-focused. Now that I have better big picture understanding of this relationship, I’m going to want to do more macro labor. And the questions that I’m interested in thinking about going forward are different. I want to think about topics such as worker bargaining power, and rents, and rent sharing, and where firms’ profits are going in. Those are topics that, three years ago, I probably wouldn’t have had any interest in. Now, I think they’re really important.

Schmitt: Do you have any advice for economists who are in academia now about whether they should go into the policy world? And if so, what should they do when they get there?

Black: I think it gives you really useful perspective for your research, if that’s what you’re interested in, especially if your research is empirical and you want to see how empirical research is used. I think it’s a worthwhile endeavor, certainly. It’s very humbling. You go from being the expert on your topic into an environment where you are discussing policies you don’t know very well, and some of the people around you may have been working on that specific policy or program for the last 10 years, and it is very humbling.

I also think it really does change your perspective on what’s important. I hope, going forward, that institutions such as the Washington Center for Equitable Growth can help researchers make their work more accessible because that is something that is really challenging and not something they teach you in grad school. And it is very hard, especially as an assistant professor. Even tenured faculty don’t typically have the experience and the network to make sure their research reaches the policy world.

I think as more places help facilitate the translation of academic work to the policy world, people will also want to become more involved. I think there’s too much of a disconnect right now between academia and the policy world. There are certainly academics who are very involved in policy, but that’s definitely the exception more than the rule. My hope going forward is places like your organization will help bring in academics and say, “What can we learn broadly from this research agenda?” And then you can work with the academics to help translate their work in a way that is useful to those making the policies. I think a lot of academics have a hard time making that link.

Equitable Growth in Conversation: Brad DeLong and Marshall Steinbaum

Posted on April 27, 2017April 10, 2018 by Nick Bunker

In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks to Brad DeLong of the University of California, Berkeley and Marshall Steinbaum of the Roosevelt Institute, her fellow editors of the soon-to-be-released After Piketty: The Agenda for Economics and Inequality. The three co-editors talk about the arguments in Thomas Piketty’s Capital in the Twenty-First Century, what Piketty might have missed in the book, and what work the book and the new edited volume might inspire.

Heather Boushey: I am so excited that we are here finally to discuss After Piketty. Many of the people who may be reading this column may not actually have kept a copy of Piketty on their night stand and may not remember all the ins and outs, so I want to start off our conversation by asking you, first, what are the key takeaways from Piketty about the effects of inequality on our economy and our society, and second, how does the election of Donald Trump strengthen or weaken Piketty’s analytical, political, economic case?

Brad DeLong: Well, let me just deal with the second, and let me begin by saying that I think the election of Donald Trump significantly strengthens Piketty’s case. There is the view that democratic governments are kind of rational or semirational processes in which voters have preferences and those preferences are based on the assessments of issues, and that politicians who have both ideological goals but also careerist goals find themselves pushed to hug the center so that they can get re-elected so that they can do good things, and that in a democratic republic, policy evolves forward in a rational way, very much in contact with the will of the median voter.

That just doesn’t fit the election of someone like Donald Trump at all. He just does not come out of that particular view of the world. Instead, it’s much more congenial to the view underlying Piketty, which is that when the rich have an enormous amount of wealth, they are able to broadcast their point of view through society, and that the natural state of an industrial market economy with high inequality is that inequality reinforces itself.

BOUSHEY: It’s so striking how quickly it’s changed. Marshall, do you want to take a stab at these questions?

Marshall Steinbaum: I agree with Brad that certainly the idea that the political system represents a natural check on the growth of inequality has definitely been drawn into question by the election outcome, and more generally by the recent political history in the United States. I think what the election showed is you can have an economic policy consensus that yields higher and rising inequality, but doesn’t necessarily mean that you are immunized against the sort of political backlash that we experienced with the election of Donald Trump. The consensus that has governed American economic policy for decades is sort of radically overthrown by the voters when they get the chance.

So, to answer the first question, I would say that politics does not represent some sort of natural check on rising inequality. And that was certainly borne out with the election results. What Piketty might see as the natural operation of a capitalist economy yields ever-rising inequality, until some sort of external force comes to intervene and have some sort of crisis that destroys the accumulation of capital. I think that’s probably the most controversial aspect of Piketty’s argument. What is the economic force that yields ever-rising inequality through what Piketty would call the natural operation of capitalism, and then what form does the course correction take that ends up reducing inequality, and is that the sort of thing that is guaranteed to happen?

I think Piketty would say no. So, you have an economic system that has some sort of order to it, but that order is not a stable one because inequality continues to grow. And then you have the chaotic political phenomena that may or may not intervene in unpredictable ways.

DELONG: So, what’s wrong with simply “r is greater than g” as the thing that drives it? That the standard neoclassical economic response that r is greater than g doesn’t matter because people want to spend something like 3 percent of present discounted value of their wealth every year, doesn’t really apply to a plutocracy, or it’s very hard to spend that much money on yourself.

And so whether you do spend money, it’s because you have other purposes—political or transformational or one sort or another—in mind. And one of those other purposes might well be to continue the ability to transform society the way you want it over and over again. And then, as long as r is greater than g and as long as there is no strong consumption motive, that serves to push the rate of accumulation back below the average rate of profits. That’s Piketty’s argument, and why isn’t that a clearly complete explanation right then and there?

BOUSHEY: Both of you in your answers about Trump’s election seem to imply that many people who voted for Trump did so because they wanted to see a change in the way the economy works so that it actually benefits more working people.

DELONG: Well, the guy did lose by 3 million votes, to start with. So it’s not that bad. The guy did lose by 3 million votes.

BOUSHEY: Right.

STEINBAUM: I would say that this was just a rejection of the status quo and the establishment, and when that happens from the right, it takes the form of a racist demagogue. Trump is a new phenomenon in the United States, but it is not a new phenomenon in world history, whereby essentially a radical challenge to the political establishment rises up. And when those challenges are successful, it’s because some element of the mainstream tries to co-opt them and ally themselves in order to gain leverage in the political game that that mainstream faction has been playing.

DELONG: If you take the canonical unusual Trump voter, he’s supposed to be some kind of working-class guy in semirural Pennsylvania whose life really hadn’t turned out the way he thought it would because the unionized jobs that he thought were inevitable in the prosperous community he thought he was going to be living in kind of vanished underneath his feet. We can argue back and forth over whether that’s actually what is going on or whether that’s simply journalists grabbing for a story that sounds good, no matter how much or little empirical support it has. But for that guy, the thing that changes his life chances the most is the Affordable Care Act—something that gives someone who doesn’t have stable employment in a relatively high-wage job the access to the healthcare system that adverse selection has been blocking him out of, just at the time when he’s too young for Medicare and yet too old to be able to plausibly afford any private insurance off of his own dime.

That’s a huge distributional move. So, to the extent that you are actually changing people’s lives, the Affordable Care Act did it. And as we’ve seen over the past three weeks, when all of a sudden what [Speaker of the House] Paul Ryan thought initially was a slam-dunk—repeal of large parts of the Affordable Care Act—turned to run into a huge buzz-saw, as the exchanges had Republican constituencies. Similarly, the Medicaid expansion had beneficiaries who called Republican office holders. And Republican state governors such as John Kasich of Ohio made it clear that they valued the Affordable Care Act’s freedom to extend Medicaid to a truly remarkable degree.

So, Obama did it. Obama did it big time. And yet it did not trickle down into the gestalt of the election, or indeed, is not reflected in what people thought they were voting for.

BOUSHEY: Well, there are benefits and there are jobs. I think that the counterpoint to your argument is the way people felt about trade and manufacturing, where it still is not clear to me that they are going to get what they want, but at least they’ve gotten the president who’s gotten up many days and said that he’s created real manufacturing jobs in those communities and is elevating that. And I think that that’s an interesting distinction as well, that healthcare is a benefit versus a lot of these Trump voters also really can be focused on the job component of their standard of living.

DELONG: Ronald Reagan was absolutely awful for the manufacturing jobs of the Michigan Reagan Democrats. He pushed the dollar up by 50 percent. And lo and behold, that just sent Midwestern manufacturing a signal that it should shut down. Today, the dollar is up by 10 percent since Trump’s election, and whatever legislation rolls through Congress is likely to involve a large tax decrease for the rich, in which case we will see another bigger dollar cycle than we have now. Let the dollar go up by another 10 percent, and that’s a hit to the manufacturing employment that is much, much larger than China’s entry into the World Trade Organization or any plausible effects of the North American Free Trade Agreement.

BOUSHEY: Do we think that we know yet whether Piketty’s core argument is correct? What tweaks to Piketty’s argument need to be addressed more thoroughly, moving more thoughtfully and thoroughly moving forward?

STEINBAUM: I think the key question is basically, in Piketty terms, why does r not fall as capital is accumulated as a neoclassical model of the macroeconomy would predict? This is a very clear finding in the aggregate data that Piketty presents over this long time horizon—that the return to capital is more or less constant even as the amount of capital in the economy is not constant at all. And that’s a huge challenge to a Ricardian classical or neoclassical theories that come from it.

I don’t think that we have the definitive answer to that. I think where the research has gone, concurrently with the publication of this book and then subsequently, is essentially, why is the capital share or the profit share in the economy so high, and what are the strategies by which owners of capital have redirected the flow of rents to themselves, when supposedly competitive pressures would have been pushing down the return to capital.

I think that there’s a lot of different dimensions on which that has transpired, but the one that I think is kind of the overarching theme in what could possibly explain that phenomenon is the unification of the ownership of capital and the management of firms into one interest through various corporate structures that facilitate the increased ability of that unified ownership-management alliance to essentially operate the economy to its own benefit and to the detriment of every other stakeholder.

DELONG: Am I the only person who thinks the answer to this is pretty obvious—that Piketty made a mistake in calling the book Capital in the Twenty-First Century rather than Wealth in the Twenty-First Century? Because you may well believe—and in fact I firmly do believe—that the rate of return on actual useful machines and buildings declines as the proper physical capital-to-labor ratio increases.

The problem is that these marginal products of real physical capital, machines, and buildings is only a small part of the returns flowing to wealth, which are composed of monopoly rents of one sort or another, either acquired by antitrust forbearance on the one hand or by government license on the other, plus a whole bunch of other things, all the way down to the middle class and rich of the previous generation who don’t really understand that their investment advisors do not act as though they have a fiduciary duty toward them. Wealth deployed in order to maintain its own rate of return is a much easier thing to understand than how is it that if there are four machines competing for each worker, then workers are unable to drive down the price of renting any one of them.

BOUSHEY: That’s a very good point, Brad, and one of the things that I know Marshall has written about recently—the market concentration at the top of the income spectrum is a part of what that wealth is. Marshall, you’ve thought about that issue a lot recently and you’ve written on it. Do you want to speak to that?

STEINBAUM: Sure. I think that a lot of the anticompetitive behavior that we observe in the economy operates through some version of the unification of ownership and management, such that firms are increasingly run to the benefit of their shareholders/managers since they are the same, and at the expense of all the other stakeholders. So, that takes the form of classic anticompetitive behavior, higher prices than the market would otherwise bear if it were fully competitive—say because of common ownership at the shareholder level—across all the firms in an industry, giving rise to an incentive on the part of the managers of those firms not to compete very hard on price.

I think the interesting phenomenon here in the context of the corporate tax debates is why aren’t firms investing and what’s going on with these huge piles of retained earnings and profits that are not being plowed back into the firm to expand operations or engage in research and development. There’s a very interesting literature that’s growing up about essentially the rise in corporate net savings worldwide, but especially in the United States. This has a lot to do with [University of California, Berkeley economist] Gabriel Zucmans’s excellent research on tax havens, and in general the incentive to accumulate capital on the balance sheets of large incumbent corporations and/or pay it out to shareholders in the form of buybacks and dividends.

There’s an excellent new paper by German Gutierrez and Thomas Philippon [at New York University’s Stern School of Business] about trying to explain the rise of corporate net savings, and specifically the fact that corporate investment is well below what a Tobin’s q-type theory would predict. That means you’re going to need some sort of version of changing corporate governance that is going to say, well, if you want to engage in this new project, you’ll have to pass a higher bar in terms of the return on that project versus the much more present and powerful claim that the shareholders have to those earnings that you’ve gotten from past activities—and that, in many contexts, you don’t want to actually pay it out because thanks to tax havens, the corporation becomes the most effective tax shelter. So better to just earn it and keep it in an overseas subsidiary.

There’s another paper by Steven Kamin and Joseph Gruber at the Fed that more or less looks at the same phenomenon but across countries. There’s a paper by Loukas Karabarbounis [at the University of Minnesota] and Brent Neiman, and Peter Chen [at the University of Chicago] that also talks about the rise of corporate net savings. I think this is an as-yet unexplained phenomenon but definitely it has a lot to do with this unification of shareholder and management control. So, that is a totally distinct story about how you might keep r high even as capital is accumulated than the technological substitution story that Piketty tells.

BOUSHEY: How do you hope to reignite the debate with After Piketty? Brad, let’s go to you first. What do you want to accomplish with our book?

DELONG: Simply keep plugging away. All one has to do is argue a little more coherently and get a slightly better megaphone, and we can change people’s minds and actually have a huge effect on the political economy of the 21st century.

STEINBAUM: Yes, I thought that what Brad just said was interesting because he more or less didn’t talk about what I would call the mainstream frontier of the academic economics research agenda. I think Capital in the Twenty-First Century is very much intended as an economics book, and its ambivalent reception among academic economists tells you a lot about a lot of things. And one of them is that it’s doubtful that the grand solutions to our problems—if you can characterize them that way—are not going to be found in that intellectual milieu. So, I think that if you ask the average academic economists, say of my generation of people who are getting started and trying to get tenure in departments, they would tell you that Piketty has had no effect, that we are all just continuing to do what we were doing before, and essentially that’s going to be it from now on.

Whereas, I think where we started this conversation talking about high electoral politics and then the federal election of 2016, and from there down to public debate at every level in the United States, Piketty had a tremendous effect. He had a huge influence on public debate about economics and the issues before us. And that disconnect between the heights of the academic economics profession and the life that all of the people in the rest of the economy live, and certainly in the conversations about the economy that they talk about, does not bode well for the economists. I think essentially they are used to having influence that derives from a position of prestige and public trust that does not survive in the Trumpian era, or you can say survive in the Pikettian era. And so I think that’s kind of the situation where we are now.

I feel like we are shaking our book and shaking Piketty’s book in the faces of academic economists and saying, you know, pay attention. And if you weren’t paying attention before, you should be paying attention now, after Trump. Plenty of scholars that have done original work in that area have, at least on their face, pitched their work as being in opposition to Piketty’s theory of rising inequality, though whether it is in fact in opposition to it I think is much less clear. So, there is definitely new empirical research that has gotten a lot of attention, has gotten a lot of young graduate students their first job, that you could tie to Piketty’s own agenda, if not directly to Capital in the Twenty-First Century itself.

But I do think that it will be interesting to see if what might be considered the most publicly influential and ground breaking work in economics in the next 10 years emerges possibly not from academic departments.

DELONG: Well, I think it has had one important impact on mainstream economics in that mainstream economics always tends to head for aggregates of wealth and say that distribution is an interesting question and we should research it. But it’s overwhelmingly a political question, and so except for us economists reporting elasticities and offsets, we should leave it to the political scientists. And Piketty pushes us back toward a more utilitarian view, that economics is not about piling up wealth but piling up utilities, and in any world in which there is decreasing marginal utility to wealth, which economists certainly believe there is, then inequality matters a great, great deal.

STEINBAUM: Yes. I mean, I would put it less theoretically than that. I think that, you know, the best new research in economics is being done with large data sets in which inequality is just an obvious fact. And that is the main phenomenon to be explained. And so we will have lots of arguments about whether Piketty’s theory of inequality is right.

I mean, in fact you could say that the book is not really about a theory of why some people are rich and other people are poor, but by presenting the inequality statistics that he has spent his life putting together, he made that question and the fact that economics does not have a very convincing answer to that question front and center.

And so anybody who writes a paper about this or articulates a theory about why some people are rich and other people are poor owe something to Piketty, whether or not they want to admit that.

BOUSHEY: I’m going to stop us right there because that was a great sentence to end on. It has been a real pleasure to work on this with the two of you. Thank you both.

DELONG: Thank you very much.

STEINBAUM: Thanks.

Equitable Growth in Conversation: an interview with William A. Darity Jr. (“Sandy”) of Duke University

Posted on March 21, 2017April 10, 2018 by Emilie Openchowski

In this installment, Equitable Growth’s Research Director John Schmitt talks with economist William A. Darity Jr. (“Sandy”), the Samuel DuBois Cook Professor of Public Policy at Duke University’s Sanford School of Public Policy, about the importance of stratification economics in understanding U.S. economic growth and inequality. Read their conversation below.

John Schmitt: I have not too many questions, but hopefully we’ll have a good conversation. You are the founder of stratification economics, which you pioneered with a group that includes Darrick Hamilton, James Stewart, Gregory Price, and others. How would you describe the main features of stratification economics? And how would you differentiate them from the kind of standard, neoclassical economics that most of us were taught in graduate school or in undergraduate economics classes?

Sandy Darity: So, I think the core of stratification economics offers a structural rather than a behavioral explanation for economic inequality between socially identified groups—whether they’re racial groups, ethnic groups, gender groups, or groups that are differentiated on some other basis such as religious affiliation, for that matter. Stratification economics goes against the grain of trying to argue that the kinds of differences that we observe and economic outcomes are attributable to cultural practices or some forms of dysfunctional behavior on the part of the group that’s in the relatively inferior position.

We argue instead that economists and other social scientists have to look at social structures and policies to really explain why those differences exist. What might be unique about stratification economics is the particular way in which it offers the structural analysis of these kinds of inequalities, and that particular way is by focusing on the importance of relative group position from the standpoint of participants in our social world.

That persons compare themselves against others is based on research on happiness, which suggests that the major factor in determining whether a person reports feeling happy is actually their perception of their position in comparison with others—not their absolute position, but their relative position. What stratification economics brings on the scene is a specific view of exactly with whom individuals are comparing themselves.

Not only are folks making comparisons with individuals who they perceive as being part of their own social group, but they also are making comparisons about their group’s position.

The cross-group comparisons are made against the social groups that are “the other” for them. It’s those two sets of comparisons that drive behavior and drive people to actually act in ways that are supportive of the status of their relevant social group. I think traditional economics doesn’t pay much attention to the comparative dimension, and it certainly doesn’t pay much attention to the comparative dimension in terms of an individual’s sense of group identity or group affiliation.

I do want to add that a lot of this work is deeply collaborative. And I think it’s important that my collaborators be recognized, particularly [associate professor of economics and urban policy] Darrick Hamilton at the New School, Mark Paul, who is a postdoctoral fellow here at the Cook Center at Duke, and Khai Zaw, who is a statistical researcher at the Cook Center, who all have worked very closely with me.

And there’s a string of folks who have been involved in various dimensions of the development of stratification economics as a field, among them economists Greg Price [Morehouse College], James Stewart [Pennsylvania State University], Patrick Mason [Florida State University], Marie Mora [University of Texas at Rio Grande Valley], Alberto Dávila [University of Texas at Rio Grande Valley], Sue Stockly [Eastern New Mexico University], and Stephanie Seguino [University of Vermont].

So even though I don’t think stratification economics is sweeping the economics profession, there’s actually a significant core of folks who are embracing the approach, and, hopefully, the numbers will grow.

Schmitt: So, you make the comment about where conventional economics falls short. Can you give an example or two of a social or economic problem where you think that the tools developed in stratification economics give a better explanation for an economic or social phenomenon than the standard economics view?

Darity: One example would be the persistence of discrimination under competitive conditions. In standard economics, there’s very little room or terrain for trying to explain why we might observe sustained discriminatory practices by one group toward the other, particularly discriminatory practices that have economic content.

In stratification economics, it’s fairly straightforward to try to come up with an explanation that makes some sense. Because of the emphasis in stratification economics on what we might call tribal affiliation—or team affiliation or group affiliation—to the extent that people value those kinds of affiliations and the position of their team, group, or tribe, then they will engage in collaborative ways, whether those collaborative ways are fully conscious or whether they are implicit.

They’ll engage in collaborative ways to preserve the position of their group. And so discrimination can be something that’s sustained. And even more strongly than that, stratification economics would suggest that if the difference between the two groups narrows, the group on top will intensify its discriminatory practices. If it becomes harder to exclude the out-group because the out-group is becoming better educated or has other kinds of indicators that suggest that it is comparably productive to members of the in-group, then the in-group will intensify the degree of discrimination that it practices toward the out-group. I think that conventional economics would never actually see that phenomenon.

Schmitt: You’ve described stratification economics as combining influences from economics, sociology, and social psychology, and it’s obvious in a lot of what you just described about the persistence of discrimination. What led you to blend those things together? What are the influences or the ways that brought you to piece the various parts of this together?

Darity: You said at the outset that I was the founder of stratification economics—I think it’s maybe more accurate to say that I’m the person who gave this set of ideas a label. But I don’t think that these ideas originated with me, and I think that to a large extent, I’ve synthesized ideas from others. But I do think that these ideas from others are extremely powerful and influenced the way in which I began to think about this. I’ve long been wanting to bypass arguments for intergroup inequality that are predicated on the notion that there’s something fundamentally inferior about one of the two groups.

So from economics, for example, you could draw upon the work of the idiosyncratic early 20th century economist Thorstein Veblen, who, for example, in The Theory of the Leisure Class, talks about the significance of comparisons within your group versus comparisons vis-a-vis the group that is supposed to be outside of yours. And that translated into the forgotten theory of consumption—aggregate consumption in economics—that the late economist James Duesenberry developed, called the relative income hypothesis. People frequently discard that one when they think about theories of aggregate consumption, but that’s a body of work that influenced my way of thinking about some of these issues.

From sociology, I think that the most important contribution probably is Herbert Blumer’s 1958 essay on prejudice as a function of relative group position. He challenged the view that prejudice is something that we can identify as some sort of individual defect, arguing instead that prejudice is really something that’s functional for preserving or extending the relative position of an advantaged social group. That, to me, is very much stratification economics, without the label.

Then there’s a whole body of work about notions of individual productivity being influenced by the context in which people are performing tasks. This might include employment in a hostile workplace environment for an individual from a group that is subjected to stigma, which will affect the individual’s capacity to perform. And it’s not just the question of what educational credentials they have, or what kind of training they have, or what kind of motivation they have. It’s also a question of the atmosphere in which they are functioning. And so from social psychology, I took the phenomenon that has been developed by researchers such as Claude Steele [emeritus professor at Stanford and former vice chancellor and provost at the University of California, Berkeley] of stereotype threat as another dimension, or angle, for thinking about how individual productivity can be distorted or reduced as a consequence of the social climate that they face. In short, in the jargon we frequently use in economics, individual productivity is endogenous.

Schmitt: In a lot of your recent work, you’ve turned your attention to the issue of wealth inequality. What led you to make that a focus? And what do you think are the most important findings from that research?

Darity: My turn to the focus on wealth inequality came about for two reasons. One is because of an increasing recognition that these types of disparities are the most important indicator of differences in economic well-being. The second reason is because the work that I have begun to do on reparations kept pointing me back to the racial wealth gap as the most important manifestation of the effects of racism and discrimination over time in the United States.

Those two considerations kept directing me toward an emphasis on wealth inequality. But it is also my sense that all economic inequalities—particularly group-based economic inequalities unfortunately—have been assigned to be the purview of labor economists.

Of course, the work that labor economists do can point us toward some explanations for disparities that are associated with earnings and occupational status, but their perspective doesn’t take us very far in explaining wealth inequalities.

Stratification economics offered a relatively simple but, I think, much more powerful explanation for why we observe wealth inequality in general but also wealth inequality by race. One of the big findings that has emerged from our work, which is now being replicated in other people’s research, is a very simple but important conclusion that education in and of itself does not eliminate racial economic disparity.

There are tons of people who focus on education as the answer. I certainly think improving education for everyone is a great idea, but it’s not going to close the racial wealth gap. Thus far, it has not eliminated discriminatory differences in wages or in unemployment rates. Simply put, education is far from enough to solve the kinds of disparities that we are concerned about.

Schmitt: You did your Ph.D. at the Massachusetts Institute of Technology in the late 1970s, so you’ve been in the business for a little while. What’s your take on how the economics profession has developed, say over the past 30 years or so? Do you think that it is moving in a good direction, bad direction, indifferent? Do you think it is more or less open to some of the ideas that we’ve been talking about right now?

Darity: That’s a tough one. I don’t know that in my experience it’s been particularly open to any of these ideas. I think that there’s been a greater receptiveness or interest in these ideas from scholars in other disciplines. To be frank, I think that the economics profession has a certain anti-intellectualism. That’s a pretty strong statement, but I mean that in the sense that if you think about intellectual activity as involving wide-ranging curiosity and also wide-ranging interests in research unbounded by disciplinary lines, I think the economists are very, very inclined to be somewhat incurious and to treat every problem from the standpoint of a fixed package of ideas.

In that sense, I think there’s a certain anti-intellectualism, and therefore, very little receptiveness to ideas that go outside of the standard box. I’m not sure the conditions are a lot different now in the economics profession; I mean, there’s a sense in which I think it’s long been that way, particularly ever since the quantification revolution in economics that largely was spearheaded by one of my mentors, [the late Nobel Laureate] Paul Samuelson. The process of making economics appear to be more of a mathematical science was accompanied by driving out some of the more interesting ideas and approaches, rather than incorporating them into the process of making it a mathematical science.

Schmitt: Do you take any comfort from the rise of informational economics, or search models, or the rise of the importance of behavioral economics?

Darity: If you are talking about search models that are associated with search and employment, I’m not a real enthusiast for imperfectionism. Because the implication is that if we did not have those frictions, if we did not have those imperfections, then everything would be glorious. But it is my view that a smoothly functioning market economy would still generate high degrees of inequality, and certain kinds of inequities, because those processes pay very little attention to inherited advantages and disadvantages. I don’t necessarily see imperfectionist approaches as providing a solution. I particularly don’t like search theories of unemployment because I think what they say is people are out of work because they are looking for work, rather than people are looking for work because they are out of work.

Stratification economics actually attempts to be somewhat of a departure from behavioral economics. Behavioral economics, to my way of understanding it, suggests that people actually behave irrationally, and so it’s trying to explore and understand irrational behavior, whereas the whole historical thrust of much of economics has been oriented toward suggesting that there is rationality to people’s behavior. Stratification economics accepts the premise that there’s a rationality to behavior, but it also presumes that there is rationality to the behavior of social groups, as well as individuals. It’s a rationality that’s predicated on the notion that these groups frequently, or typically, act as if they view themselves as being in competition with one another.

Schmitt: One of the things that’s important for us at the Washington Center for Equitable Growth is to look at the rise of inequality from a high level, beginning at the end of the 1970s to an extremely high level now, based on almost any metric you want to use. Do you have a working model in your mind for what explains that big increase in inequality over this period? And do you have any guidance as to what policymakers could do to turn things around?

Darity: One of the things that I mentioned at the start of our conversation was the importance of social structures and policies. And I think that the run-up in inequality that we’ve observed in recent years is closely tied to a set of social policies that have produced virtually unlimited capacity to generate extraordinary levels of wealth. One is a form of profit sharing, which is what we call super salaries for high-level executives at the nation’s most highly resourced corporations. Another is the deregulation of the financial markets, while maintaining a moral hazard problem, in the sense that the investment bankers can anticipate that they’ll be bailed out in the event of a crisis. And a third is the reform of the tax system, where we’ve moved from having marginal tax rates for folks at the upper end of the income distribution, in the vicinity of 90 percent to less than 30 percent today. The Great Recession also contributed to a greater explosion or extension of inequality, both in wealth and in income.

In short, I think we can look directly at a set of policies and, more recently, at the advent of the Great Recession to understand the rise in economic inequality.

Schmitt: So my last question: Do you have any advice for a young person who wants to get a Ph.D. in economics? Or a Ph.D. in a social science? In particular, do you recommend studying economics?

Darity: I definitely don’t want to forsake the economics profession. I still have hope that there will be other, younger economists who will try to bring very fresh perspectives to the way in which we conduct economic research. I would encourage folks to go into the field, but I’d want them to have their eyes open. I think that they need to be very selective about which institutions they choose to attend to try to do their work.

If graduate students have ideas that are not conventional or are unorthodox, then they need to have their eyes set on trying to identify departments that have the flexibility and open-mindedness to allow them to pursue the kind of approaches that they want to undertake. There are some, and it’s not just departments that we view as being explicitly heterodox. I think that there are some departments that are more conventional, where there are faculty members who are extremely open-minded, in comparison with other places.

A new graduate student really has to make a very careful choice about which department to go to, and once there, who they should work with in that department. I would say that’s the research that needs to be done carefully, rather than telling people they shouldn’t go into economics.

Schmitt: Thank you so much, Sandy, for your time.

Darity: Thanks for inviting me to do this. Take care.

Equitable Growth in Conversation: an interview with the OECD’s Stefano Scarpetta

Posted on November 3, 2016April 10, 2018 by Ed Paisley

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.
In this installment, Equitable Growth’s executive director and chief economist Heather Boushey talks with Stefano Scarpetta, the Director of Employment, Labour and Social Affairs at the Organisation for Economic Cooperation and Development in Paris, about how high levels of inequality are affecting economic growth in the organization’s 35 member countries and possible policy responses.

Read their conversation below

Heather Boushey: The OECD has been doing really interesting work over the past few years looking at how and whether inequality affects macroeconomic outcomes or outcomes more generally. A lot of questions are circling around the report that came out last year titled “In It Together: Why Less Inequality Benefits All.” One thing that really strikes me is that inequality isn’t a unitary phenomenon. It’s not just one thing. You can have inequality increasing at the top of the income spectrum, you can have something happening in the middle, you could have something happen in the bottom. But these are different trends and they may affect economic growth and stability in different ways because of their effects on people or on consumption or on what have you. That’s one of the things that I really enjoyed about that OECD report is that you used multiple measures of inequality; you didn’t just stick with one. So, I wondered if you could talk a little bit about that.

Stefano Scarpetta: Sure. Some indicators of income inequality, such as the Gini coefficient, of course don’t tell us exactly what’s happening with different income groups. So, much of the work we have done at the OECD is to look at the income performance of different groups along the distribution. And one of the findings that is emerging, not just in the United States but also across a wide range of advanced and emerging economies, is that income for those at the top 10 percent, and in many cases actually the top one percent, has been growing very rapidly. At the same time the income of those on the bottom—not only the bottom 10 percent but actually sometimes the bottom 40 percent—has been dragging, if not declining, in some countries.

This fairly widespread trend becomes very important when we think about policies to address inequalities, but also when you want to look at the links between inequality and economic growth. As you know, there are at least two broad strands of theory about the links between inequality and growth. A traditional theory focuses on economic incentives. Some inequality, especially in the upper part of the distribution, is needed to provide the right incentives for people to take risk, to invest, and innovate. An alternative theory instead focuses on missing opportunities associated with high inequality: it focuses more on the bottom part of the distribution, and stresses that high inequality might actually prevent those at the bottom of the distribution from investing in, say, human capital or health, thus hindering long-term growth..

We have done empirical work looking at the links between inequality and economic growth. This is very difficult, and though we have used some state-of-the-art economic techniques, we still have a number of limitations. We have looked at 30 years of data across a wide range of OECD countries. And basically, the bottom line of this analysis is that there seems to be clear evidence that when inequality basically affect the bottom 40 percent [of the income distribution], then this leads to lower economic growth. These results are fairly robust, but what’s the mechanism behind this effect? That’s what we’ve been doing as well.

Potentially there are different types of mechanisms. We have investigated one of them in particular: the reduced opportunities that people in the bottom part of income distribution have to invest in their human capital in high-unequal countries. The OECD has coordinated the Adult Skills Survey, which assesses the actual competencies of adults between the ages of 16 and 65 in 24 countries along three main foundation skills: literacy, numeracy and problem solving. Thus the survey goes beyond the qualification of individuals and allows us to link actual competencies with their labor market status. The survey actually measures what people can do over and above their qualifications. Then we looked at whether educational outcomes, not only in terms of qualifications but also actual competencies, are related to the socioeconomic backgrounds of the individuals themselves, and also whether the relationship between the socioeconomic backgrounds of individuals and the education outcomes vary depending on whether the individuals live in low- or high-inequality countries.

What emerges very clearly from the data—and these are micro data of a representative sample of 24 countries—is that there is always a significant difference or gap in the educational achievement of individuals, depending on their socioeconomic background. So individuals coming from low socioeconomic backgrounds tend to have worse outcomes whether we measure them in terms of qualifications, or even more importantly in terms of actual competencies — actual skills, if you like. The interesting result is that the gap tends to increase dramatically when we move from a low-inequality to a high-inequality country. The gap tends to be much, much bigger. The difference in the gap between those with intermediate or median socioeconomic backgrounds and those with high socioeconomic backgrounds is fairly stable across the income distribution level of inequality of these countries. But when we look at the highly unequal countries there is a drop, particularly among those coming from low socioeconomic backgrounds

One way to interpret this is that if you come from a low socioeconomic background, your chances of achieving a good level of education are lower. But if you are in a high-unequal country, the gap tends to be much, much larger compared to those coming from an intermediate or high socioeconomic background. And the reason is that in high-unequal countries it’s much more difficult for those in the bottom 10 percent —and indeed the bottom 40 percent— to invest enough in high-quality education and skills.

HB: That’s very consistent with research by [Stanford University economist] Raj Chetty and his coauthors in the United States on economic mobility, noting in U.S. parlance that the rungs of the ladder have become farther and farther apart. Would you say that these are consistent findings? One thing inequality does is it makes it harder to get to that next rung for folks at the bottom or even the mid-bottom of the ladder.

SS: Precisely, that’s exactly the point. The comparisons of the gap in educational achievements between individuals from different socio-economic backgrounds across the inequality spectrum suggest that the gap widens when you move from qualifications to actual competencies. So, basically, it’s not just a question of reaching a certain level of education, but actually the quality of the educational outcomes you get. In highly unequal countries, people have difficulty not only getting to a tertiary level of education, but also accessing the quality of the education they need, which shows very clearly in terms of what they can do in terms of literacy, numeracy and problem solving. So, yes, high inequality prevents the bottom 40 percent from investing enough in human capital, not only in terms of the number of years of education, but also in terms of acquiring the foundation skills because of the adverse selection into lower quality education institutions and training.

HB: I want to step back just for a moment. To summarize, it sounds like the research that you all have done finds that these measures of inequality are leaving behind people at the bottom and that affects growth. Is there anything in your findings that talked about those at the very top, the pulling apart of that top 1 percent or the very, very top 0.1 percent? What did your research show for those at the very top?

SS: It’s well known that the top one percent, actually the top 0.1 percent, are really having a much, much stronger rate of income growth than everybody else. This takes place in a wide range of countries, not to the same extent, but certainly it takes place.

The other descriptive finding we have is that for the first time in a fairly large range of OECD countries, we have comparable data on the distribution of wealth, not just the distribution of income. And what that shows is that there is much wider dispersion of the distribution of wealth, which actually feeds back into our discussion about investment in education because what matters is not just the level of income, but actually the wealth of different individuals and households.

Just to give you a few statistics: in the United States the top 10 percent has about 30 percent of all disposable income, but they’ve got 76 percent of the wealth. In the OECD, on average, you’re talking about going from 25 percent of income to 50 percent of wealth. So, basically, the distribution of wealth adds up to create a deep divide between those at the top and those at the bottom. The interesting thing is that there are differences in the cross-country distribution of income and wealth. Countries that are more unequal in terms of income are not necessarily more unequal in terms of distribution of wealth. The United States is certainly a country that combines both, but there are a number of European countries, such as Germany or the Netherlands, that tend to be fairly egalitarian in terms of distribution of income, but much less so when you look at distribution of wealth.

I think that going forward, research has to take the wealth dimension into account because a number of decisions made by individuals rely of course on the flows of income, but also in terms of the underlining stock of wealth that is available to them.

Going back to your question: the fact that the top 10 percent is growing much more rapidly does not necessarily have negative impact on economic growth. What really matters is the bottom 40 percent, which as I said before justifies our focus on opportunities and therefore on education. And the work we are doing now at the OECD extends our analysis to look at access to quality health services. My presumption is that individuals in the bottom 40 percent, especially in some countries, might be not as able as others to access quality health. And therefore, this also affects the link between health, productivity, labor market performance, and so on. This might also be an effect that becomes a drag on economic growth altogether.

HB: One really striking finding that really struck me in the OECD report, as an economist who focuses on policy issues, is that your analysis doesn’t conclude the policy solutions are really in the tax-and-transfer system. As you’ve already said, it’s really thinking about education, perhaps educational quality, health quality—things that might be a little bit harder to measure in terms of the effectiveness of government in some ways. After all, it’s easier to know exactly how much of a tax credit you’re giving someone versus the quality of a school or health outcome. You can certainly measure these outcomes, but it’s more challenging. It seems to me that a lot of the conclusions of this research are that it’s not enough to focus on taxes and transfers, but rather that we have to focus on these things that are harder, in the areas of education and health outcomes, focusing on people and people’s development. Would that be a fair assessment of the emphasis that this research is leading you to?

SS: To some extent, because I think both are important. Let me try to explain why. The first point is that more focus should indeed go into providing access to opportunities. And these are not just the standard indicators of how much countries spend on public and private education and health, but actually how people in different parts of the distribution have access to these services, and the quality of the services they receive. So I think the focus should be on promoting more equal access to opportunities, which means going beyond looking at access and quality of the services that individuals receive, especially those from the bottom 10 percent to the bottom 40 percent of the income distribution. This is much more difficult to measure, but I think we have to consider fundamental investment in human capital. And a lot of the policies should move toward providing more equal access to opportunities, at least in the key areas of education, health, and other key public services.

Now, the other point is that if you don’t address the inequality of outcomes then you can’t possibly address the inequality of opportunities. In countries in which the income distribution is so unequally distributed it’s difficult to think that individuals, despite public programs, can actually invest enough on their own to have access to the right opportunities. So, the two things are very much linked. By addressing some of the inequality in outcomes, you’re also able to promote better access to opportunity for individuals. So, I think it’s really working on both sides.

We are not the only ones who have been arguing for years that the redistribution effort of countries has diminished over time. It has diminished over the past three decades because of the decline in the progressivity of income taxes and because the transfer system in general has declined in terms of the overall level, even though some programs have become more targeted. But we’re not necessarily saying spend more in terms of redistribution, but spend well in terms of benefit programs. So I think the discussion becomes: Focus more on opportunities, address income inequality because this is a major factor in the lack of access to opportunities, but be very specific in what you do in terms of targeted transfer programs. In particular, focus on programs that have been evaluated and showed that they actually lead to good outcomes.

HB: I’d also like to talk about gender- and family-friendly policies. I noticed in the report that you talked a lot about the importance of reducing gender inequality on overall family inequality outcomes but also on the opportunity piece. Could you talk a little bit about the importance of these in terms of the research that you found?

SS: One of the most interesting results of our analysis in terms of the counteracting factors of the trend increase in income inequality across the wide range of OECD countries—including a number of the key emerging economies—has been the reduction in the gender gaps. The greater participation of women in the labor market has certainly helped to partially, but not totally, alleviate the trend increase in market income inequality. But as we know, there are gender gaps not only in labor market participation, but increasingly also in the quality of jobs that women have access to compared to men. Depending on the country, of course, there are large differences.

In that context, I’m very glad we have been supporting the Group of 20 Australian presidency in 2014, which brought a gender target into the forum of the G-20 leaders. Now, they have committed to reducing the gender gap in labor force participation by 25 percent by 2025. It’s only one step into the process, but I think it’s an important signal. We at the OECD also have the “Gender Recommendation,” a specific set of policy principles that all OECD countries have engaged in, with a fairly ambitious agenda on gender equality, focusing on education, labor markets, and also entrepreneurship.

Ensuring greater participation of women in the labor market remains a very important objective, but looking more into the quality of jobs that women have access to, and making sure that policy can facilitate women entering the labor market and also having a career is very important. And also allowing women to reconcile work responsibility with family responsibility. In that context, what we are doing perhaps more than in the past is looking not only at what women should be doing or have to do, but also at what men can do and should do. At the OECD, for example, we are looking specifically at paternity leave, because many of the decisions at the household level are taken jointly by the father and the mother. And I think while we have made some progress in changing the behavior of mothers, much remains to be done to also change the behavior of fathers.

We are looking at some of the interesting policies that a number of countries are implementing to promote paternity leave, for example by reserving part of the parental leave only to the father. Either the father takes the leave or it is not given to the household. And there are a number of interesting results. Some countries, such as Germany, have reserved part of the parental leave going to the father and have been able to increase the number of fathers who take parental leave by a significant proportion. Again, the focus should certainly be on all the different dimensions of inequality, including gender inequality, in the labor market, but also look at the interactions of individual behaviors of men and women and those of the companies in which they work. We are doing interesting research in the case of two countries that have very generous paternity leave, Japan and South Korea: 52 weeks. Yet, only 3 percent of the fathers take paternity leave. For male workers in these countries, absence from work because of family reasons is perceived to be a lack of commitment to the firm and employer and thus may have a negative impact on their careers; not surprisingly only a few men actually take paternity leave.

HB: One thing I know from my own research is that United States, of course, is different in that we tie in the states that have family leave, such as California, New Jersey, and Rhode Island, with New York soon implementing it, to our federal unpaid family and medical leave, which is 12 weeks of unpaid leave and which covers about 60 percent of the labor force. At both the state and federal level, the leave is tied to the worker. So, we already have a “use it or lose it” policy in place. So for children who are born to parents California, both the mother and the father have an equal amount of leave, but if dad doesn’t take it then the family doesn’t get it.

We’ve seen from research that once the leave was paid; men are increasingly taking it up. If the OECD hasn’t been looking at this in a cross-national comparative way, it might be an interesting case study or research project that I’ll just put out there in terms of how the United States has done. That’s the only thing that we’ve done right on paid leave vis-a-vis other OECD countries.

My last question here. Going back to the beginning of our conversation, the OECD research found that the rise of inequality between 1985 and 2005 in 19 countries knocked 4.7 percentage points off of cumulative economic growth between 1990 and 2010. That’s a big deal. The policy issues that we’ve been talking about are wide-ranging and possibly expensive, but also very important, it seems, for economic growth.

From where you sit in Paris at the OECD, are you seeing policymakers both at the OECD but also in member countries that you work with, really taking this research seriously? And are there any big questions that you think an organization like the Washington Center for Equitable Growth should be asking in our research to help show people what the evidence says? Are there sort of big questions that policymakers say, “Oh, I’ve seen this report, Stefano, but I don’t believe this piece of it.” Are there any avenues that you think we need to pursue where people are perhaps a little bit more skeptical if they’re not taking it as seriously as this research implies?

SS: These are all extremely relevant and very good questions, Heather. Let me start with the first point you raised; over a 30-year period, and across a wide range of OECD countries, high and increasing inequality has knocked down economic growth. Obviously this is not the last word and further research is needed. As we discussed, the identification of the effect and the links are not straightforward. We have used what we think is the best state-of-the-art economic techniques, but of course it’s not the last word. It would certainly help to work along these lines with a number of researchers to gather more evidence.

But it also is important for researchers to look at the channels through which increasing high levels of inequality might be detrimental for growth: namely by under-investment in broadly-defined human capital of the bottom 40 percent and therefore long-term economic growth. I think this is certainly an area in which there is a lot of scope for doing more work. In particular, there’s a lot of space for doing serious micro-based analysis looking at the extent to which individuals with low socioeconomic backgrounds actually have difficulties investing in quality education, quality human capital, and other areas.

Now, in terms of the work we have done— and the work that was done also by the International Monetary Fund and others— I think we are contributing somewhat to changing the narrative about inequality. For decades, there was a field of research on the economics of inequality, but this was largely confined to addressing inequality for social cohesion —for social reasons. We hope that now we have brought the issue of growing inequality toward the center of policymaking because inequality might be detrimental to economic growth, per se. So, even if you just want to pursue economic growth, you might want to be careful about increasing income inequality in your country.

We are not there yet, but I think there are a number of signals that indicate growing dissatisfaction in many countries, at least in part be driven by the fact that people don’t see the benefits [of economic growth] even amid a recovery. One of the more clear signals is that now the issue of inequality is discussed more openly in our meetings with colleagues from the fianance and economy ministries. In fact, the broad economic framework we’re now using at the OECD is inclusive growth. I would say that these are not things that would have been possible a decade ago. There is now a fairly consistent narrative around the need to pursue inclusive growth. And there is a strong focus on employment and social protection, and on investments in human capital.

I think the research community really needs to feed this discourse. There might be still some temptation as soon as economic growth resumes to revert back to traditional economic growth focus. And because there are a lot of fears and concerns about secular stagnation, the thinking could focus on growth because we need growth back, and we will deal with the distribution of the benefits of growth at a later stage. But, we should really have a comprehensive strategy that fosters a process of economic growth that is sustainable and deals with some of the underlining drivers of inequality.

HB: Thank you. And I will note our very first interview for this series “Equitable Growth in Conversation” was with Larry Summers, who actually talked about the importance of attending to inequality if we want to address secular stagnation.

SS: Exactly.

HB: This has been so enormously helpful and so interesting. We here at Equitable Growth really appreciate the work that you all are doing at the OECD and find it incredibly illuminating. Thank you so much for taking the time to talk to us today.

SS: Thank you, Heather. Thank you very much. It’s been a pleasure.

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