Category: Research & Analysis

Issue brief: Alleviating financial distress and its economic consequences in the United States

Posted on by David Evans

Debt-stressed workers and consumers contribute more to U.S. economic growth when offered delayed but long-term debt write-downs instead of short-term debt relief

Overview

Financial distress is extraordinarily common in the United States. More than one-third of Americans at one time or another must deal with debt collectors, and more than 1 in 10 will file for bankruptcy protection at some point during their lives. One reason is that approximately one-quarter of U.S. households are unable to come up with $2,000 to cope with an unexpected crisis such as an accident, medical emergency, or the loss of a job in the household. As a result, there is a widespread view among lenders and policymakers alike that these households’ liquidity constraints are the most important driver of financial distress, and that debt relief will be most effective if it targets these short-run cash constraints faced by workers and consumers.

New Working Paper
Targeted debt relief and the origins of financial distress: Experimental evidence from distressed credit card borrowers

But in a recent working paper published by the Washington Center for Equitable Growth—“Targeted Debt Relief and the Origins of Financial Distress”—Princeton University economist Will Dobbie and Jae Song of the Social Security Administration find that there are no positive effects for distressed borrowers from immediate payment reductions. Instead, they find that the benefits of debt relief targeting longer-term debt write-downs enable borrowers to cope with unsustainable “debt overhangs” and significantly improve their financial health and labor market outcomes even when they do not take effect for three to five years.

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Issue brief: Alleviating financial distress and its economic consequences in the U.S.

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These findings have important implications for understanding both the growing levels of financial distress in the United States and the optimal design of debt relief programs such as those in place to avoid consumer bankruptcy filings. The co-authors’ findings also are germane to the health of the U.S. labor market and the overall U.S. economy. The reason: consumer debt relief programs that are better designed to help distressed borrowers get back on their financial feet over time help ensure that those workers are better able to contribute positively in the labor market over the long term and participate more actively in the U.S. economy as consumers and investors.

The co-authors find that debt write-downs significantly improved both financial and labor market outcomes despite not taking effect for three to five years. The most indebted borrowers who availed themselves of this option were about 12 percent more likely to finish a repayment program than the average borrower and 9 percent less likely to file for bankruptcy. They also were about 3 percent more likely to avoid debt collectors and about 2 percent more likely to remain employed. The positive effects of long-term debt write-downs were also evident to a lesser degree in these borrowers’ improved credit scores, their long-term earnings, and their retirement savings via 401(k) defined-contribution pension plans.

In sharp contrast, the authors find no positive effects for heavily indebted borrowers from minimum debt payment reductions that took effect immediately. In fact, the chances of them meeting a debt collector at their doors increased by more than 3.5 percent and having to file for bankruptcy increased by nearly 7 percent. There also were no detectable positive effects of minimum payment reductions on these borrowers’ credit scores, employment, earnings, or 401(k) contributions. In sum, there is no evidence that these borrowers benefited from minimum payment reductions; there is even some evidence that borrowers seem to have been hurt by the payment reductions.

Study design

Estimating the effects of targeted debt relief is challenging because most debt relief programs are designed to address both short- and long-run financial constraints at the same time. Consumer protection rules and regulations, for example, offer both lower minimum payments (to address short-run, cash-on-hand liquidity constraints) and generous debt write-downs (to address longer-run debt overhangs). As a result, it is very difficult for researchers to predict the effects of specific types of targeted debt relief or to understand the relative importance of addressing short- or long-run financial constraints alone.

The new working paper by Dobbie and Song overcomes these challenges by using information from an actual randomized field experiment matched to administrative tax, bankruptcy, and credit records. The experiment was designed and implemented by a large nonprofit credit counseling organization, Money Management International—the largest nonprofit credit counseling agency in the United States—in the context of an important but understudied debt relief program called the Debt Management Plan.

Each year, Money Management International administers more than 75,000 Debt Management Plans that result in the repayment of nearly $600 million in unsecured debt. Overall, Debt Management Plans enable more than 600,000 individuals to repay credit card issuers between $1.5 billion and $2.5 billion through these repayment programs each year. The debt relief program is one of the most important alternatives to consumer bankruptcy in the United States. (See sidebar.)

Sidebar

To help ensure that creditors benefit from their participation in this repayment program, the counseling agency screens potential clients to assess whether the borrower has sufficient cash flow to repay his or her debts over the three- to five-year period of the repayment program but not enough to reasonably repay his or her debts without the repayment program. In practice, potential clients who pass this screening process have similar credit scores and financial outcomes as bankruptcy filers but more adverse outcomes than the typical credit user in the United States.

The participation of the credit card issuers in a Debt Management Plan is voluntary, and card issuers may choose to participate for only a subset of those borrowers proposed by the credit counseling agencies. In principle, a credit card issuer will only participate in a repayment program if doing so increases the expected repayment rate, presumably because the borrower is less likely to default or file for bankruptcy. Consistent with this view, individuals enrolled in a Debt Management Plan are less likely to file for bankruptcy and less likely to report financial distress than observably similar individuals who are not enrolled in such a plan.

Credit card issuers also can directly refer borrowers to a credit counseling agency if the risk of default or bankruptcy is particularly high. In the study conducted by Dobbie and Song, approximately 15.5 percent of the borrowers learned about Money Management International from a credit card issuer. In comparison, 33.7 percent learned about the firm from an Internet search, 19.8 percent from a family member or friend, and 20 percent from a paid advertisement.

During the experiment, the two researchers evaluated offers by Money Management International to borrowers in both the treatment and control groups of a different repayment program. Borrowers in the control group were offered the status quo repayment program that had been offered to all borrowers prior to the randomized trial. Borrowers in the treatment groups were offered a much more generous repayment program that included a combination of two different types of targeted debt relief:

  • Immediate minimum payment reductions meant to address short-run liquidity constraints
  • Delayed debt write-downs meant to address longer-run debt overhang

The additional debt relief provided to the treatment group was substantial. The typical minimum payment reduction for the treatment group was more than $26—6.15 percent—larger per month than that in the status quo program, while the typical debt write-down in the treatment group was $1,712—49.17 percent—larger than that in the status quo program. The economic magnitudes of the payment reductions and debt write-downs in the treatment group were also relatively similar as measured by the so-called net present costs to the lender of approximately $440 for the typical borrower.

The live, randomized experiment enabled the two researchers to examine the effects on repayment, bankruptcy, collections debt, credit scores, employment, and savings for borrowers who were able to write down their debts, compared with those who were able to take immediate minimum payment reductions. The researchers find that the debt write-downs significantly improved both financial and labor market outcomes for those borrowers despite not taking effect until three to five years after the experiment. For the most indebted borrowers, the probability of:

  • Finishing a repayment program increased by 11.89 percent
  • Filing for bankruptcy decreased by 9.36 percent
  • Facing a debt collector decreased by 3.19 percent
  • Being employed increased by 2.12 percent

The estimated effects of the debt write-downs for credit scores, earnings, and 401(k) savings contributions are smaller but identifiable in the data.

In sharp contrast, the experiment found no positive effects for heavily indebted borrowers from minimum debt payment reductions that took effect immediately. In fact, for these borrowers, the probability of:

  • Filing for bankruptcy increased by 6.76 percent
  • Facing a debt collector increased by 3.56 percent

There also were no detectable positive effects for borrowers who had immediate minimum payment reductions on credit scores, employment, earnings, or 401(k) contributions for any of the borrowers in the authors’ sample.

In sum, there is no evidence that borrowers benefited from the minimum payment reductions, and even some evidence that borrowers seem to have been hurt by the payment reductions.

For further details, please see:

“Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers,” by Princeton University economist Will Dobbie and Jae Song of the Social Security Administration, in the working paper series at the Washington Center for Equitable Growth.

Issue Brief: A communications oligopoly on steroids

Posted on by Casey Schoeneberger

Strong antitrust enforcement and regulatory oversight is needed now more than ever

In a new paper for the Washington Center for Equitable Growth, “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter,” antitrust experts Gene Kimmelman and Mark Cooper use the telecommunications industry as a case study for the consequences for consumers of industry concentration and lax antitrust enforcement. They examine the effects of the 1996 Telecommunications Act and recent antitrust enforcement actions and find that strong and ongoing antitrust enforcement and regulatory oversight are necessary to ensure that anti-competitive business practices don’t become a drag on our nation’s economic growth, causing consumers to overspend on these services far beyond what is necessary to induce any increased productive investments by firms.

Key findings

  • The lack of competition in telecommunications costs the typical U.S. household more than $45 per month, or $540 per year. In aggregate, this costs U.S. consumers almost $60 billion per year, or about 25 percent of the average consumer’s monthly bill.
  • The four main U.S. telecommunications companies earn profits of between 50 percent and 90 percent, compared with a national average for all industries of just under 15 percent, on a standard financial measure of profitability.
  • The four main U.S. telecommunications companies have market concentration scores of between 2,800 and 6,600. The accepted definition of market concentration is a score of 2,500.
  • When rigorous antitrust enforcement takes place, consumers benefit: Consumers saved more than $11 billion per year as a result of the 2011 proposed merger between AT&T and T-Mobile being blocked by antitrust authorities.

Key takeaways

  • The argument that technological change and innovation have lessened the need for strong antitrust enforcement is incorrect: The same market characteristics that led the government to regulate communications firms more than a century ago are more relevant today than ever. The telecommunications industry benefits from immense economies of scale and scope that encourage concentration in the industry, making it more likely that firms will overcharge consumers. The underestimation of the persistence of these fundamental market characteristics was key to the failure of the Telecommunications Act of 1996, which opened the door to lax regulation and antitrust enforcement and in turn led to the market concentration and high consumer prices that characterize the telecommunications market today.
  • Antitrust enforcement is not enough—regulatory oversight is also necessary. Antitrust enforcement tends to be backward-looking, triggered only when abuses can be demonstrated, whereas regulation tends to be forward-looking. Regulatory action is necessary to ensure that other economic goals are met, such as ensuring equitable access to the internet, particularly in rural or low-income areas where it may not be as profitable for a private company to operate. Ensuring this equitable access is more critical than ever in our hyper-connected world.
  • Antitrust enforcement actions since 2009 show that it is possible to push back against market concentration with positive results for consumers. The U.S. Department of Justice and the Federal Communications Commission blocked two mergers, AT&T and T-Mobile and Comcast and Time Warner; jawboned the merger of Sprint and T-Mobile out of existence; and imposed extensive conditions on several mergers they did approve, including the one between Comcast and NBCUniversal. These actions broke some of the price-inflating cycle, unleashed substantial innovation in the video streaming market, and started the policing of new potential abuses of dominance in data and transmission bottlenecks.

Next steps

Ongoing antitrust enforcement and regulation will be necessary to continue to guard against market concentration and consumer price inflation in this key industry, as well as to address emerging policy issues in the telecommunications industry. One of those issues stems from the enormous growth of the technology firms that drive today’s social networks and digital platforms. Lead author Gene Kimmelman outlined several ways forward in his statement upon the release of the paper, including the below:

We need Congress to strengthen antitrust to prevent today’s small group of internet, telecommunications, and media giants from slowing down or eliminating the growing potential competition from new internet video streaming services. By shifting the burden of proof … from the government to the parties seeking to merge, effectively creating a presumption that mergers in the most concentrated markets are harmful to competition unless the merging parties can prove otherwise, it would be possible to guarantee that emerging competition to today’s cable and broadband monopolistic markets has a better chance to survive, innovate, and drive down prices for consumers.

For more information

Please see: “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter,” by Gene Kimmelman and Mark Cooper for the Washington Center for Equitable Growth.

 

 

Issue brief: U.S. antitrust and competition policy amid the new merger wave

Posted on by David Evans

Changes in merger enforcement policy have contributed to rising concentration and reduced competition

In a new paper in the Washington Center for Equitable Growth’s ongoing series on antitrust policy and its implications for the economic well-being of U.S. workers and consumers, John E. Kwoka of Northeastern University documents the rise in concentration and examines the evidence for one possible explanation: the change in merger enforcement policy at the Federal Trade Commission, or FTC, and the Antitrust Division of the U.S. Department of Justice.

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Issue brief: U.S. antitrust and competition policy amid the new merger wave

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Key findings

Examining FTC merger enforcement data from 1996 through 2011, Kwoka finds that merger enforcement narrowed its focus to mergers at the very highest levels of concentration and adopted a substantially more permissive stance toward mergers that consolidate industries up to that point. Specifically, his examination of the data reveals the following:

  • Enforcement rates for mergers that would result in four or fewer remaining significant competitors slightly increased from 1996 through 2011.
  • Enforcement for mergers that would result in more than four remaining significant competitors literally ceased after 2007: From 1996 through 2003, enforcement actions were taken in 36 percent of FTC merger investigations with five or more remaining competitors. By the 2008–2011 time period, that percentage had fallen to zero.

These findings are all the more interesting in light of earlier research that Kwoka has done. He has examined the level of concentration at which anti-competitive outcomes become nearly certain, finding that prices rose in nearly 95 percent of instances of mergers that resulted in six or fewer remaining significant competitors. It is in precisely this range of five to seven significant competitors where enforcement policy has shifted so dramatically over the past 20 years.

Explanations for the change in enforcement rates

  • Kwoka lists several possible explanations for these observed changes in merger enforcement policy, including agency budget constraints.
  • He focuses on changes in antitrust policy’s presumptions about the competitive consequences of increases in concentration. Over the past 50 years, those presumptions shifted from a viewpoint that held that even modest increases in concentration would result in above-competitive prices and profits to one in which it was believed that tougher merger standards sacrificed cost efficiencies, which presumably would be passed along to consumers.
  • While antitrust policy has moderated somewhat from that “Chicago school” view, the FTC enforcement data from 1996 through 2011 nonetheless demonstrate that there has continued to be a shift away from merger enforcement actions in all but the most concentrated markets.

Policy implications

  • Merger guidelines should be re-examined to ensure that policy hasn’t diverged from the evidence: When considering merger proposals, the thresholds used for the number of remaining significant competitors should reflect the point at which a merger might be presumed to increase an industry’s concentration to the point that it would lessen competition.
  • Agency budgets should be expanded to ensure they have the necessary resources to vigorously pursue the merger cases that raise these concerns.

For more information

Please see “U.S. antitrust and competition policy amid the new merger wave,” by John E. Kwoka of Northeastern University for the Washington Center for Equitable Growth.

Debt ≠ deficits: Why higher state and local government debt isn’t necessarily a result of higher spending

Posted on by David Evans
Concerns about public debt play an important role in policy debates at the state and local levels because governments perceived to have excessive debt face pressure to reduce spending.

Over the past 50 years, there has been substantial growth in both public and private debt relative to U.S. gross domestic product, or GDP. The increases in federal and household debt are familiar. Less discussed is the long-term rise in state and local government debt, from less than 8 percent of GDP in the 1950s to around 18 percent today. While small relative to other sectors of the U.S. economy, this increase is not trivial. Among other things, concerns about public debt play an important role in policy debates at the state and local levels because governments perceived to have excessive debt face pressure to reduce spending.

New Working Paper
The evolution of state-local balance sheets in the US, 1953-2013

In a recently released working paper at the Washington Center for Equitable Growth, I and my co-authors Arjun Jayadev and Amanda Page-Hoongrajok use data from the U.S. Census Bureau’s Census of Governments to get a better picture of this long-term rise in state and local government debt—and of the even less discussed rise in state and local government assets. The Census Bureau data offer the most comprehensive view available on state and local government budgets and balance sheets. Our working paper is based on an accounting decomposition that explicitly incorporates all the factors contributing to changes in the debt ratio at state and local levels.

In discussions of historical changes in debt and other balance sheet variables, it is usually assumed that these changes are straightforward reflections of changes in real activity. If the debt-to-income or debt-to-GDP ratios are rising for some sector or unit, then it’s assumed that it must have been borrowing more and that it was spending more in relation to its income. The assumption that changes in debt reflect the level of borrowing, which in turn reflects spending on goods and services relative to income, is so taken for granted that it is usually not even stated. But it is not necessarily true. Debt ratios have denominators as well as numerators. And borrowing reflects a wide range of sources and uses of funds, not all of which involve real income or expenditure flows.

We know that factors other than current expenditures and income have played a central role in historical changes in debt ratios for other sectors. The behavior of U.S. federal debt relative to GDP depends at least as much on variation in interest rates relative to GDP growth rates as it does on shifts in the fiscal balance. The rise in debt-to-GDP ratios in the 1980s, in particular, is primarily due to disinflation and higher interest rates rather than anything to do with the federal budget. Conversely, the fall in debt ratios in the United States and many other countries after World War II owes more to interest rates below economic growth rates than to fiscal surpluses. And as Arjun Jayadev and I have shown in an earlier paper, the long-term rise in household debt in the United States was driven more by higher interest rates and slower income growth rates than by increased borrowing—and the deleveraging after the financial crisis was driven by higher defaults as much as by reduced borrowing.

In the new paper, we look at the full range of factors influencing state and local balance sheets. Our basic approach is a variance decomposition, in which we break down variations in debt growth across time and between states into all the factors that contribute to it—revenues and expenditures but also nominal income growth (which affects the denominator of the debt ratio) and net accumulation of financial assets, including contributions to pension funds. This last factor is not important for the federal government because pension contributions for public employees make up a small and stable fraction of federal spending, and the federal government does not hold significant financial assets outside of trust funds. But for state and local governments, both pension contributions and additions to directly held financial assets play important roles in the evolution of their finances over time.

We look first at variation over time—at what makes the difference between years in which aggregate state and local debt is rising, stable, or falling as a share of GDP. The key results of our paper show the share of the variance in annual debt ratio growth accounted for by each of the variables shown. (See Table 1.)

Table 1

We find that for the state and local sector as a whole, the most important source of variation in debt ratio growth is nominal income growth—that is, real growth plus inflation. Fifty-two percent of the variance in annual debt ratio changes is explained by the ratio’s denominator, rather than its numerator. The next most important factor is the pace of asset accumulation, explaining 33 percent of variation in debt ratio growth. Only 17 percent of variation in state and local debt ratio changes is attributable to fiscal surpluses and deficits. For state governments alone, the fiscal balance accounts for 31 percent of variance in debt ratio growth.

Despite legal balanced-budget requirements, state (though not local) governments do sometimes see significant fiscal deficits. But these are mainly financed on the asset side, not by increased borrowing. This was very clear during the Great Recession period: Between 2007 and 2010, state budgets moved from modest surpluses to deficits—reaching an aggregate deficit of 0.5 percent of GDP in 2009—while debt ratios rose significantly. Yet surprisingly, there was no direct connection between these two developments; deficits were accommodated entirely by reduced asset accumulation, with no increase in credit-market borrowing. Meanwhile, the rise in debt ratios was fully explained by the fall in nominal income.

When we turn to variations in debt growth across states, rather than over time, borrowing matters more and nominal income growth matters less because in the postwar United States, most variations in nominal income growth are shared across states. But the states that borrow more are not necessarily the ones with higher deficits. During the period of rapidly rising state debt during the 1980s, for example, more than all of the variation in debt ratio growth is explained by asset accumulation. In other words, states that increased debt more during the 1980s were actually the ones with above-average surpluses; they nonetheless borrowed more because their pension fund contributions and other asset purchases were even larger than their surpluses. So during the 1980s, the difference between states with big rises in debt ratios and those with stable or falling ratios is entirely due to the former adding assets more rapidly.

In contrast, during the 2000s, variations in state debt ratio growth are mainly accounted for by variation in state fiscal balances, just as the conventional view assumes. But it’s important to add that variations in borrowing across states are due to variation in revenues rather than in expenditures. In fact, during the Great Recession period, the states with more rapid debt growth actually had lower state spending as a share of state domestic product than the states with less debt growth. (See Table 2.)

Table 2

So what do we take from this? Why does it matter?

First, the paper offers a warning against simple morality-tale interpretations of state and municipal finances. Rising state and local debt is not a sign of fiscal profligacy. Whether we look at variations over time or across states, there is no reliable relationship between changes in the debt ratio and public spending.

Second and more broadly, it’s a warning against presuming that leverage or balance sheets reflect real activity. It’s easy to assume that rising debt equals higher borrowing equals more spending. But historically, this is often not the case. For state and local governments, as for other sectors, the evolution of balance sheet positions owes as much to purely financial and monetary factors as to shifts in real activity.

Third, we should pay more attention to the role of inflation in changes in debt ratios. During the decade of 1955 to 1964, the state and local debt ratio rose at an average of 0.4 percentage points per year. During the following 15 years, it fell at a bit over 0.1 percentage point per year. Yet borrowing was no lower in the second period than in the first. The difference between rising and stable debt ratios was entirely because inflation was higher in the late 1960s and 1970s than it was in the 1950s and early 1960s.

This should be a consideration in discussions of monetary policy. Since 2008, inflation has fallen short of the Federal Reserve Board’s 2 percent inflation target by a cumulative 4 percentage points. This has increased public and private debt ratios, just as higher deficits would have done. In the case of state and local governments, this lower inflation is the equivalent of $150 billion in additional spending. So to the extent that debt imposes constraints—real or perceived—on the budgets of these governments, this below-target inflation translates into less money for teachers, roads, firefighters, and other public services. To avoid raising the real burden of debt, the Fed needs to overshoot its target by as much as it undershoots it.

Fourth, for state and local governments in particular, we need to pay attention to assets as well as liabilities. Over the past 50 years, state and local government assets—both in pension funds and directly held—have grown more than twice as much as debt. If we consolidate pension funds with the sponsoring governments, the state and local sector is now a substantial net creditor in financial markets, as is every individual state. Even with pensions and other trust funds excluded, the state and local sector as a whole and most individual states still own financial assets in excess of their debt.

These large asset positions among state and local governments are one important reason why we shouldn’t assume that more credit-market borrowing equals less saving. A sector or unit that is adding to its asset position can increase borrowing and increase saving simultaneously, and this has often been the case for state and local governments.

—J.W. Mason is an assistant professor of economics at John Jay College, City University of New York, and a fellow at the Roosevelt Institute. 

In conversation with Robert Solow

Posted on 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 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.

Making antitrust work for the 21st century

Posted on by David Evans

Equitable Growth’s series on antitrust, competition, and equitable growth

Mergers and acquisitions are increasing apace in the U.S. economy. This means fewer choices in many industries—from airlines and communications to manufacturing and retail— for consumers and businesses alike. But what are the consequences for economic growth and competitiveness, particularly for employment and wages and family checkbooks? In October, 2016, Equitable Growth began a conversation about the role of antitrust and competition policy in promoting more equitable economic growth. Prominent academics and practitioners offered their perspectives on the current state of antitrust enforcement and where law and regulatory practices need to head to keep pace with a rapidly changing economy.

We are continuing that conversation through a series of essays, reports, and future events that lay the groundwork for debate and informed solutions by shedding light on an under-researched area of economic policy—one with serious implications for economic growth and inequality. Together, this series will establish a direct link between antitrust enforcement and the economic well-being of American workers and consumers.

Making Antitrust Work for the 21st Century
series of events, essays and reports

Presentation: Merger Enforcement Statistics
By Michael Kades, Equitable Growth

Equitable Growth Seminar Series: Rise of Monopoly Power in the United States
November 14, 2017 (video)

Recap: Unlocking the Promise of Antitrust Enforcement
By Liz Hipple, Equitable Growth

Unlocking the Promise of Antitrust Enforcement event
October 27, 2017 (video)

New federal antitrust legislation recognizes U.S. workers are not only consumers
By Liz Hipple, Equitable Growth

Issue brief: U.S. antitrust and competition policy amid the new merger wave
By Equitable Growth

U.S. mergers & acquisitions policy amid the new merger wave
By John Kwoka, Northeastern University

Issue Brief: A communications oligopoly on steroids
By Equitable Growth

A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter
By Gene Kimmelman and Mark Cooper

Market power in the U.S. economy today
By Jonathan Baker, American University Washington College of Law

Dirksen Senate Office Building event
October 6, 2016 (video)

Explaining the “What is equitable growth?” essay series

Posted on by Nick Bunker

What is “equitable growth” and how do we measure it? This new recurring series asks economists, other researchers, and practitioners to explore these questions. Equitable growth means an economy that raises living standards for all families. We have seen decades of economic growth in the U.S.—commonly measured by GDP. Yet that success has not meant significant income growth for most American families. Clearly GDP doesn’t provide the full picture. How do we know we’re on the right track? There is little consensus around what specific of indicators are required to quantify whether the economy is growing on behalf of all Americans. Is it a matter of looking at different already existing measures? Should new data using existing concepts of income and well-being be created? Do our concepts of what’s important to measure need updating as well? A better understanding of equitable growth—and how to measure it—can improve our understanding, inform decisions and lead to better outcomes for all.

The “What is equitable growth” series of essays

Why current definitions of family income are misleading, and why this matters for measures of inequality
By Nancy Folbre, director of the program on gender and care work at the Political Economy Research Center at the University of Massachusetts, Amherst

Improving the measurement and understanding of economic inequality in the United States
By Robert Solow, professor emeritus at the Massachusetts Institute of Technology.

Why current definitions of family income are misleading, and why this matters for measures of inequality

Posted on by Nick Bunker

What is “equitable growth” and how do we measure it? The following essay, part of a series, asks economists, other researchers, and practitioners to explore these questions. Equitable growth means an economy that raises living standards for all families. We have seen decades of economic growth in the U.S.—commonly measured by GDP. Yet that success has not meant significant income growth for most American families. Clearly GDP doesn’t provide the full picture. How do we know we’re on the right track? There is little consensus around what specific of indicators are required to quantify whether the economy is growing on behalf of all Americans. Is it a matter of looking at different already existing measures? Should new data using existing concepts of income and well-being be created? Do our concepts of what’s important to measure need updating as well? A better understanding of equitable growth—and how to measure it—can improve our understanding, inform decisions and lead to better outcomes for all.

Researchers studying income distribution in the United States seem reluctant to acknowledge the family as an important unit of production and distribution. As a result, they often rely on statistics that provide a misleading picture of inequalities based on class, race or ethnicity, and especially gender.

Incomplete definitions of both family and income either obscure or render invisible transfers between and within households, including the value of housework and family care. Evidence from specialized surveys—such as the Health and Retirement Survey, the Panel Survey of Income Dynamics, the Survey of Income and Program Participation, and the American Time Use Survey—clearly demonstrate the quantitative relevance of these omissions.

Conventional measures

What, exactly, do economists mean by income, and what, exactly, is the presumed income-receiving unit? Usually, income refers to direct market income (labor earnings plus income from capital such as interest or dividends, and including, where feasible, indirect market income such as the dollar value of transfers from private pensions or government).

Many shortcomings of this measure are widely recognized. For instance, conventional estimates do not include any valuation of the flow of implicit service income from capital assets such as housing or the increase in wealth due to capital gains appreciation.1 Sources of income that take the form of in-kind benefits and/or tax expenditures such as the Earned Income Tax Credit are seldom included. These problems, however, have received more attention than those related to largely unmeasured aspects of the family economy.

Most individuals in the United States pool at least some of their income with other family members over a significant portion of their lifecycles. As a result, family income is a better indicator of material living standards than individual earnings. Family-based measures are especially relevant to the economic welfare of children, the elderly, and individuals who are sick or disabled, as well as those supporting or providing direct care for such dependents.

Many unrelated individuals live together in households without pooling income, but benefit from household public goods and economies of scale in household production. That’s why it is difficult to measure the extent to which individuals pool their income and what share of family or household income should be imputed to them. While it is often assumed that married couples equally share their market income, empirical research suggests that is not always the case. 2 The proliferation of informal partnerships such as cohabitation further complicate the story. 3

Intrafamily transfers of money and time—mediated by the public-good aspects of household consumption and economies of scale in household production—potentially affect both the size and the distribution of individual income. For instance, improvements in women’s earnings relative to those of men may be counterbalanced by a decline in intrahousehold or intrafamily transfers related to nonmarriage, loss of household economies of scale, or increases in the percentage of children maintained by women alone. 4

Defining the family in family income

Seeking a practical solution to a complex problem, the U.S. Census Bureau enforces a clear distinction between family and household. Specifically:

A family consists of two or more people (one of whom is the householder) related by birth, marriage, or adoption residing in the same housing unit. A household consists of all people who occupy a housing unit regardless of relationship. A household may consist of a person living alone or multiple unrelated individuals or families living together. 5

Note, however, that the definition of family provided here is limited to family members living in the same household. In this sense, it represents a truncated and, in some respects, misleading definition. While the U.S. Current Population Survey asks some questions relating to intrahousehold family transfers, these are largely been considered a private matter, except where they represent a traditional obligation rendered visible by child support agreements.

By contrast, the Health and Retirement Survey asks respondents to report financial help, defined as:

Giving money, helping pay bills, or covering specific types of costs such as those for medical care OR insurance, schooling, down payment for a home, rent, etc. The financial help can be considered support, a gift or a loan.

This is a much broader definition of intrafamily transfers than that in the Current Population Survey, and a recent empirical analysis of the Health and Retirement Survey finds that households with an adult between the ages of 50 and 64 transferred an average of $8,350 to family members over a two-year period between 2008 and 2010. Both the probability and the size of these transfers were positively correlated with income, and the overall likelihood of such transfers increased substantially between 1998 and 2010. 6 In other words, relatively affluent adults approaching retirement age have provided an increasingly significant economic boost to their adult children, which is not factored into conventional family-income calculations.

This analysis of the Health and Retirement Survey does not break out transfers by race or ethnicity, but other research utilizing data from the 2005 and 2007 Panel Study of Income Dynamics, as well as the Survey of Consumer Finance, shows that middle- and upper-income African Americans are more likely to provide informal financial assistance than whites with similar characteristics. 7 Not surprisingly, black families are more likely to have needy family members and friends—what might be termed a negative network effect. This difference can account for a significant portion of the racial gap in wealth.

Overall, such transfers may have an equalizing effect because they generally flow from those with more market income to those with less. But young white adults are more likely to receive transfers from relatively affluent parents, while young black adults are more likely to transfer income to those closer to the bottom of distribution.

Equivalence scales and intrafamily transfers

Comparisons of family income are often unadjusted for family household composition or are adjusted on a per-capita basis, simply divided by the number of household members. Both approaches are misleading. A family of two is much better off with an income of $50,000 than a family of six. In contrast, a family of six does not need three times as much income to be as well off as a family of two, even though it has three times as many members.

For this reason, family income is often adjusted by an equivalence scale that assigns a different weight to children and adults, and takes economies of scale into account. The U.S. poverty line and benchmarks based upon it—such as the 200 percent of the poverty line—represents an implicit equivalence scale. Another common measure divides family income by the square root of family size. 8 Such scales represent an approximation of what might be termed an intrafamily transfer. 9

Virtually all conventional equivalence scales assume that children are less costly than adults because the cost of feeding and clothing them is lower. 10 Further, virtually all applications of equivalence scales to family income in the United States apply the same scales at every point in time. Since the mid-1960s, however, children have become more costly relative to adults, and family budgets have shifted away from food and clothing toward services such as childcare and education.

A major factor behind increased childcare costs is the significant increase in the labor-force participation of mothers between 1975 and the mid-1990s. Another is the steady climb in the percentage of children living in families maintained by a mother alone, since mothers are required to engage in paid employment in order to even qualify for public assistance.

While longitudinal data are scarce, a recent Census Bureau report based on the Survey of Income and Program Participation estimates that overall expenditures on childcare doubled between 1985 and 2011, from $84 to $143 per week in constant dollars. In the most recent year, families with incomes below the federal poverty line spent about 30 percent of their income on childcare, compared to 8 percent for families not in poverty. 11

Parental spending on higher education has also increased, the combined result of increasing college enrollments (despite relatively stagnant graduation rates) and significant increases in tuition and fees, particularly over the past 15 years. 12 Research also shows that home buyers and renters pay a significant premium for houses in high-quality school districts, indirectly increasing the cost of children. 13

These factors have important implications for considering the distribution of adjusted family income today. Whites in general are less likely than African Americans or Hispanics to live in households with children, and college-educated women are significantly less likely than other women to become single parents. Current equivalence scales significantly understate the economic significance of these demographic differences. Yet many dual-earner families with children sit squarely in the middle of the (conventionally measured) family-income distribution.

In current economic parlance, disposable income is typically defined as income after taxes. One could conceptualize “adult disposable income” as the net of taxes and benefits and transfers to children and other dependents. Instead, current assumptions treat spending on children or other needy family members merely as another form of consumption, no different than spending on restaurant meals or automobiles.

The value of nonmarket work

Housework and family care are now widely recognized as forms of work that yield economic benefits. Recent data from the American Time Use Survey show that productive activities that someone else could, in principle, be paid to perform constitute roughly half of all time devoted to work in the United States. 14

A number of studies impute a market value to this work on the aggregate level, simply multiplying the number of hours by an estimate of quality-adjusted replacement cost. This exercise suggests that the contribution of nonmarket work to an expanded definition of Gross Domestic Product in the United States lies somewhere between 30 percent and 40 percent. 15 Yet, with a few notable exceptions, the value of nonmarket work is largely ignored in estimates of family income on the microeconomic level. 16

Consider two family households of identical composition consisting of two adults and two children under the age of 5, both with a family income of $50,000 (ignoring both taxes and benefits, for the sake of simplicity). Conventional measures would place both of these families at exactly the same place in the distribution of income. But what if the first family includes two wage-earners, both working 40 hours per week and earning $25,000 per year, and the second family includes one wage-earner, working 40 hours per week and earning $50,000 per year, along with one stay-at-home parent who prepares meals, does shopping, and provides childcare.

Surely the second family is significantly better off than the first, if only because it does not incur the childcare costs alluded to in the section above.

What effect does imputation of the value of nonmarket work have on estimates of the distribution of family income in the United States? Empirical work today suggests that it has an equalizing effect in the cross-section, not because low-income families devote more time to it, on average, but because any imputation of the value of that work represents a larger percentage of their market income. 17

The implications for trends over time are quite different. The equalizing effect of valuing nonmarket work was almost certainly greater in the 1960s, when a relatively large percentage of married women were full-time homemakers. As women entered wage employment and substituted market employment for at least some of their nonmarket work, this equalizing effect diminished. Inequality in women’s earnings is also far greater today than it was in the 1960s, with high-earning women likely to marry high-earning men. 18

Whatever the gender implications of the traditional breadwinner/homemaker family, it may well have mitigated some aspects of class inequality among whites (it was never widespread among blacks). But most studies of the impact of women’s increased labor-force participation on income inequality completely ignore the value of nonmarket work, essentially assigning homemakers a contribution of “zero” in their empirical analysis. 19

Implications

Changes in the family economy of the United States have probably had only small effects on the relative income of the top 1 percent or the top 5 percent. They have larger implications for both the reality and the perception of relative income among households with divergent patterns of female labor-force participation and family responsibility.

Many public benefits in the United States—from the Supplemental Nutrition Assistance Program to financial aid for college—are conditioned on conventional measures of family income. Because these measures provide an incomplete and misleading picture of relative well-being of families, reliance on them may breed frustration and resentment. 20

Many of the policy proposals emerging from both political parties speak to concerns about the costs of family care: increased public provision of care and education, as well as child and dependent care tax credits. The potentially equalizing effect of such policies deserves serious consideration. In principle, many of the data sources cited above offer the potential to enlarge appreciation of the family in family income.

—Nancy Folbre is the director of the program on gender and care work at the Political Economy Research Center at the University of Massachusetts, Amherst.

Improving the measurement and understanding of economic inequality in the United States

Posted on by Nick Bunker

What is “equitable growth” and how do we measure it? The following essay, part of a series, asks economists, other researchers, and practitioners to explore these questions. Equitable growth means an economy that raises living standards for all families. We have seen decades of economic growth in the U.S.—commonly measured by GDP. Yet that success has not meant significant income growth for most American families. Clearly GDP doesn’t provide the full picture. How do we know we’re on the right track? There is little consensus around what specific of indicators are required to quantify whether the economy is growing on behalf of all Americans. Is it a matter of looking at different already existing measures? Should new data using existing concepts of income and well-being be created? Do our concepts of what’s important to measure need updating as well? A better understanding of equitable growth—and how to measure it—can improve our understanding, inform decisions and lead to better outcomes for all.

There has long been interest in extending and improving the National Income and Product Accounts, or NIPA, to turn it into a better indicator of general economic welfare and its progress. The accounts, and the summary Gross Domestic Product number, were not initially intended as an indicator of welfare, but rather as a measure of economic activity—even misdirected activity such as the production of cigarettes. Even on that basis, there is room for improvement: Perhaps the most commonly suggested extension has been the explicit inclusion of environmental degradation and improvement, along with other instances of resource depletion. I would certainly be in favor.

Nevertheless, I want to begin with a retrograde suggestion. Whatever is eventually done with NIPA and GDP, I hope it is done in such a way that it will always be possible easily to extract from the new NIPA most of the components of the old NIPA. (It will not be possible to extend the new NIPA back in time very far because the basic data will never have been collected.) For those of us who want to go beyond measurement to understand macroeconomic behavior and policy, having a fairly consistent quarterly time series going back to 1949 is a wonderful thing. Even with those data, it is a hard problem—without them, it would be hopeless. Another 65 years of compatible data would be more than welcome.

From the very beginning of national accounting, it has been understood that the focus on gross investment and gross product is a standing temptation to error. If GDP increases from one year to the next only because there is a bigger charge for depreciation of fixed capital, it is obvious that nothing has really gotten better. Taking account of depreciation to yield net product—and correspondingly net national income—would provide a better measure of productive economic activity. The prominence given to gross investment and GDP derived from the realization that measures of depreciation taken from business accounts would be not only inaccurate but also biased in odd ways. The practice of depreciation accounting was too badly infected by tax incentives and cosmetic considerations; it was thought better to sidestep the resulting not-even-random errors.

I am told that the situation has not improved, so my second suggestion would be to devote more resources to the improvement of depreciation (and depletion) accounting. If we could move in the future to a focus on net output and net income, NIPA would be a small step closer to providing better elementary building blocks for the measurement of welfare and its changes through time.

These suggestions amount only to shifting or not shifting deck chairs. A useful and substantial extension of the standard statistical picture of the economy would be the regular publication of distributional information. I would want to go well beyond the familiar Gini coefficient, which hides more than it reveals. For starters, I would urge the regular calculation of the distribution of personal income by size, say by income deciles. (The usual quintile distribution is a lot better than nothing but still too rough.) It would be very informative to have such distributions for both market incomes—before taxes and transfers, and after taxes and transfers. It would be especially nice if regular official publications could familiarize the interested public with the Lorenz curve, which is probably the best graphic way of grasping shifts in inequality. The choice between quarterly and annual publication is a trade-off. A year is a long time to wait for news if you care about changes in income inequality, but for an individual or group of individuals, shifts in the interquarterly timing of income may be essentially meaningless. Only experience will clarify the pros and cons.

It would also be useful, in a different way, to have a serious accounting of the assets and liabilities of the public sector at all levels of government. Governments own land, buildings, vehicles, and other equipment. They invest in these objects and undergo depreciation. Even if we do not adequately measure their contribution to output, we should at least take account of their existence. It is a familiar plaint that infrastructure in the United States—bridges, roads, port facilities—is badly decayed and in need of repair and replacement. Regular measurement might lead to more rational decision-making.

There is another, more speculative reason to want better wealth accounting in the public sector. A common cause for alarm these days is the threatened advance of the robots and the possibility that human labor may become all but obsolete. If the threat is real—who knows?—one significant policy response might be the establishment of large sovereign wealth funds that would indirectly own some of those hypothetical robots, and thus provide a source of income to replace the missing wages and salaries. It would then be an advantage to have a tradition of accounting for public-owned wealth and its productivity.

It hardly needs to be added that better and more complete tracking of the distribution of private wealth would also contribute to our understanding of economic welfare. A lot has been accomplished by a group of scholars making use of tax data here and elsewhere. The tax files necessarily miss quite a lot of private wealth, and even apart from that, the development of further sources of information could provide a much-needed check on information and disinformation gleaned from tax returns. Both measurement and understanding would be improved.

Finally, sticking close to familiar economic indicators, I would urge a major effort to collect more longitudinal data, especially on employment status, earnings, and income. Of course, many scholars have used the Panel Survey of Income Dynamics and other surveys for this purpose. I am hoping for a larger, more systematically designed effort aimed specifically at producing the transition frequencies that could serve as the basis for an understanding of the random process that generates lifetime incomes.

(Personal history: When I was writing my Ph.D. thesis in 1949, I came upon transition matrices for covered earnings that the Social Security Administration had compiled for three or four years in the late 1930s. They made the basis for an excellent chapter. Coverage is much broader now, so there’s the possibility for a fresh start with large enough numbers to take account of age and other personal characteristics.)

It is obvious that my wish list has steered away from other vital indicators of social and economic welfare that have often been proposed. I have not mentioned such important issues as health status, access to education and training, exposure to crime, and subjective feelings of security in general. All of these and others are part of a complete picture of average well-being and its distribution in society. I have omitted them not out of abject ignorance or indifference, but out of respect for the principle of comparative advantage.

—Robert Solow is a Nobel Laureate and professor emeritus at the Massachusetts Institute of Technology.